UK Budget: Hammond gets it right, and markets like it

There were two major market-moving events from this report, the first was the sharp downgrade to the UK growth forecasts, the second was the £44bn increase in capital funding, loans and guarantees over the next 5 years to deliver 300,000 more homes on average by the mid 2020's, which managed to eclipse the bad news on the economy.

Is the OBR too pessimistic?

The growth forecasts were much lower than expected, with 2017 growth reduced to 1.5% from 2%, 1.3% vs. 1.7% for next year and 1.3% vs. 1.9% for 2019. Although GDP was expected to be revised lower, forecasts were not expected to be slashed to this extent. The initial market reaction was lower, however, the pound has since clawed back all of the losses incurred during Hammond's speech as the market ponders the accuracy of the OBR forecasts. They are significantly below the BOE growth forecasts, which has led to the market to view them with suspicion, perhaps the bar is being set too low so that the Chancellor can exceed them easily in the coming years? The market will not be fooled, and the pound is higher on the day.

Hammond's German-style deficit targets

Regardless of which way you cut it, the UK economy is unlikely to fire on all cylinders in the coming years, while the government concentrates on cutting its debt load. The deficit is only expected to be a mere 1.3% of GDP by 2021, which is a German-style in its ambition to save the country money. However, if Hammond does this at the expense of growth then it is hard to see how this Budget is good news for the pound in the long term, even though it has received a boost today.

The Budget checklist

The Chancellor ticked most of the boxes: more money for the NHS, no booze duty part from some ciders, plans for wage rises for nurses, an increase to the minimum wage of an inflation-busting 4.4%, investment in technology and driverless cars and measures to tax older diesel vehicles. However, the set piece of this Budget was always going to be extending home ownership, the £44bn package over 5-years was much larger than expected and has boosted the FTSE 100, however the actual homebuilders, Barratt and Persimmon are lower after the Budget.

Why are homebuilders lower after the amazing Budget giveaway?

Could the market have wrong-footed this move, as it is hard to see how the large homebuilders won't benefit from the massive £44bn investment, even if initial schemes such as capital funding, loans and guarantees may not directly benefit them in the short term. This is a boon to the smaller housebuilders such as CrestNicholson and its share price is higher post the Budget. This is also good news for the construction sector and the eradication of stamp duty for homes of £300k or less should please the UK's estate agents, as well as purchasers, particularly those outside of London.

Hammond saves his own tail, the market breathes easy

The pound has now made fresh highs on the day post the Hammond speech. The reason for this could be relief at his generally good performance and overall weakness in the opposition response from Jeremy Corbyn. As we mentioned ahead of this Budget, the Chancellor's job was on the line as Brexiteers were circling to get their hands on the Treasury. Overall, he did a good job and managed to pull a couple of rabbits out of his hat that increases the image of his competent leadership of the UK Treasury, even with the lower GDP forecasts. This could keep the Brexiteers at bay in the short-term, and Theresa May's cabinet may stay as it is for another week at least. The UK's Gilt market clearly liked the news about debt reduction as bond yields are lower, and the longer end of the curve is falling at a faster rate than the shorter end. This is also a sign that the market is pleased with ‘Fiscal Phil', who ended up not being that fiscal after all, and managed to pull off the impossible: boost spending, while also maintaining the UK's debt reduction plans and shifting the market attention away from the horrible GDP forecasts.