By Naomi Rovnick, Samuel Indyk, Lucy Raitano and Harry Robertson
LONDON (Reuters) – Britain’s finance minister on Wednesday announced a raft of measures aimed at reviving the sluggish economy without upsetting markets, but a degree of caution over the outlook for borrowing and inflation rattled bonds and sterling.
Nerves about cuts to social security payments were minor. Traders had feared a broader set of hard-to-fund giveaways.
Sharply lower growth forecasts for 2024 kept sentiment on sterling tepid, while some pockets of the stock market got a fillip from business investment and tax relief measures.
This was Hunt’s second Autumn Statement since he replaced Kwasi Kwarteng, who was fired last year in the wake of a mini-budget packed with under-funded tax cuts that unleashed UK market turmoil.
Investors cautioned that tax breaks would not be sufficient to raise business investment while UK interest rates stayed high.
“The country needs massive investment and the only way you are going to get that is if financing costs become much cheaper,” said Leigh Himsworth, UK portfolio manager at Fidelity International.
BUSINESS BOOST
UK investors went into this budget concerned about a government doing badly in the polls seeking to raise its popularity with heavy spending that could increase inflation and ultimately interest rates – already at a 15-year high of 5.25%.
There was “a risk of reduced tax rates that would stimulate the consumer again at a time where the Bank of England has only just broken the back of services inflation,” Monex Europe head of FX analysis Simon Harvey said.
But Wednesday, equity markets focused on Hunt’s business boosts, such as a move to make full expensing on investment permanent. Shares in BT which is investing in a huge new fibre network, were 4.1% higher on the day.
The UK’s domestically-focused FTSE 250 index on Wednesday was last up 0.7% and comfortably outperforming the large-cap FTSE 100. “Full expensing should be a major lift to UK industry and to the longer term-macro outlook where improving the UK’s woeful pace of productivity growth is critical,” said Philip Shaw, chief economist, UK at Investec. UK stock markets have underperformed their European and U.S. peers in 2023. The FTSE 100 index 12-month forward price-to-earnings ratio is around 10.7, about half that of U.S. stocks, with Hunt’s budget unlikely to move the dial too far.
“Ultimately, the budget does not change our view that the UK economy faces a high risk of stagflation, which keeps us cautious and highly selective on UK domestic stocks,” said Thomas McGarrity, head of equities at RBC Wealth Management.
BREWERS FIZZ, BUILDERS FLAT
Hunt also froze alcohol duties until August 1 2024. Shares in brewer Fuller, Smith & Turner rose 2.2% after the announcement, with pub operator Marston’s, up 2.1%.
But the budget failed to provide a bazooka that would give Britain’s homebuilders a boost, instead introducing smaller measures to unlock bottlenecks in the planning system.
“This doesn’t feel like it’s the sort of thing that’s going to move the needle,” said Oli Creasey, property equity analyst at Quilter Cheviot.
“It’s not planning that’s stopping them from selling homes right now, it’s affordability.”
Britain’s homebuilding stocks, which have underperformed since the BoE began raising rates in 2021, closed down 0.5%, having been up around 1.6% before the budget.
GILTS PRESSURED
British bond yields rose after Hunt’s statement, as investors reacted to a much smaller cut than expected to gilt issuance plans.
The Debt Management Office said on Wednesday it planned to sell 237.3 billion pounds ($295.7 billion) of gilts in 2023-24. In a Reuters poll, bond market participants had predicted the remit would be 222.8 billion pounds.
Britain’s 10-year gilt yield finished up 6.8 basis points on the day at 4.175%, above a session low of 4.052%.
It hit a 15-year high of 4.755% in August, but has since dropped along with yields around the world as global growth and inflation data has cooled. Yields move inversely to prices.
STERLING SOGGY
The pound struggled to gain any traction on the back of Hunt’s budget. It fell by as much as 0.7% against the dollar after data suggested greater strength in the U.S. economy and was lower against the euro.
“Markets are still pricing in a 50% chance of a (UK) rate cut by June (which) suggests investors are not concerned about any inflationary implications on the back of today’s announcements,” OANDA strategist Craig Erlam said.
Goldman Sachs strategists had warned ahead of Hunt’s statement that “a more substantial fiscal loosening at this stage would risk raising inflation.”
($1 = 0.8025 pounds)
(Reporting by Naomi Rovnick, Samuel Indyk, Lucy Raitano, Amanda Cooper and Harry Robertson in London. Editing by Angus MacSwan)
