Markets Barely React to Autumn Budget

Chancellor Hunt's release of the Autumn Budget went smoother than his predecessors, as he vowed to cut spending and raise taxes.

Calming the waters

In the hours ahead of the Autumn Budget, key bits were leaked to the press, giving the markets time to adjust. The FTSE 100 was already trending lower, under pressure from Burberry's earnings. The budget has come within the market's expectations, lifting some uncertainty around critical points, but did not move the markets much, with the pound and UK’s 100 index remaining relatively unchanged due to a lack of surprises.

The Chancellor had the unenviable task of finding £55B in spending cuts (£25B) and increased taxes (£35B), with the new budget appearing to have satisfied the OBR. The main issue for the markets, beyond potential debates over particular measures, is the effect on inflation. The government will keep spending more, just not as much as initially anticipated. That is seen as generally anti-inflationary, and so is the increase in tax burden. However, some other measures are likely to contribute to inflation.

Impact and outlook

The government announced it will keep the "triple lock" in place until at least 2023. This, along with other measures, could be considered inflationary as pensions rise with prices, the minimum wage is expected to increase next year, and energy companies will be subject to a new windfall tax. On the other hand, the threshold for the highest tax rates was lowered.

The OBR confirmed that the UK was in a recession and predicted that the UK economy would shrink by 1.4% next year. The inflation rate was also forecast to remain elevated in 2023, at 7.4%, well above the BOE's 2% target. Unemployment was also assessed to rise over the next two years. The projections from the OBR matched the outlook seen from the BOE, which helped the market maintain its expectations for monetary policy for the near term. The focus now shifts to the December 15 monetary policy decision.

FTSE Upside Limited by Falling Peaks

UK’s 100 index appears to roll over very slowly after reaching a lower peak at 7580 and a lower trough at 6700. The final peak near the 7500 area, where the falling trendline is projected to meet prices, might offer a reversal.

If prices break the short-term supports at 7300 (s1) and 7200 (s2), it will be up to 7100 (S1) and 6700 (S2) to determine the next path for the index. But if the trendline gives in, 7580 (R1) and the high of 7650 (R2) will be back in focus. 7400 (r1) must retreat in the interim in either case.

Key takeaways

The UK’s Chancellor released the new budget, which includes €55B in spending cuts and increased taxes. The budget is generally seen as anti-inflationary, but it appears to have come within the market’s expectations. With the UK in recession and inflation expected to remain elevated due to pensions and wages, the market maintains its expectations for near-term monetary policy.