The first Labour budget in 14 years saw a substantial fiscal easing, with current and capital expenditure increases only partially offset by tax increases focused on employer NICs. Chancellor Reeves announced an expansionary package to the tune of c.£32bn per year on average (c.1% of GDP). This loosening in fiscal policy supports our view that the Bank of England will not step up the pace of monetary loosening – but it should not stop a 25bp rate cut at next week’s November meeting. Despite a smaller rise in gilt issuance than we had expected, gilts sold off as the remit and deficit forecasts were digested. Gilt issuance was raised by less than we thought – by around £19bn with £3bn of the extra deficit being financed by T-bills. Planned gilt sales for this year (2024-25) are now just under £298bn vs our view of £315bn and a previous total of just under £278bn. The average uplift to issuance (most likely coming from gilts) over that five-year period is around £28.5bn per year. Financial markets were calm during the Chancellor’s speech, but there was a marked selloff in 10Y rates as the OBR’s report and DMO remit were digested. Since budget, 10yr UK gilt yields are up by 15 bps. On GBP itself, we believe the budget gives some support. We expect UK yields marginally higher (and steeper) and support GBP through the rates channel. +ve view on GBP might be played through EURGBP as it is a low beta trade wrt UST yields. We expect EURGBP to grind gradually lower towards .80 from CMP of .8380 because of the broad macro and rates divergence between the UK and Euro area economies.
