Budget taken in stride by market but big reservations remain

The Autumn Budget release was taken in stride by market participants, perhaps because much of the content had already been carefully drip-fed over the past couple of weeks. Investors were also comforted by the size of the government’s fiscal headroom (£22bn vs. the previous £9.9bn), which should limit the likelihood of additional tax hikes down the road.

We have three big reservations, however: a) the backloaded nature of the tax hikes, notably the freeze to the income tax thresholds, b) the lack of growth in the budget, and c) Labour’s less than truthful account on the size of the hole in the public finances.

For now, the threat to the gilt market seems to have dissipated, and the removal of the budget uncertainty could provide room for a rebound in the pound into year-end. That said, pressure on Chancellor Reeves’ position means that this is unlikely to be plain sailing, and suggestions of government deception and market manipulation won’t go away any time soon.

There isn't much on tap this week, so focus already shifts to the 18th December Bank of England rate decision, with another cut now almost fully priced in by swap markets.