UK Budget Release Stirs Volatile Reaction

STOCK INDEX FUTURES

The indexes are higher, extending gains from Tuesday. Weekly initial jobless claims came in just below forecasts at 216,000 claims. Meanwhile, durable goods orders in September rose 0.5% on the month, in line with forecasts.

The indexes were firmly higher on Tuesday as markets evaluated the outlook for AI and a Fed rate cut in December. Communication services, healthcare, and materials led gains, while the broader tech complex lagged, though Alphabet climbed roughly 1.3%, and Meta rose over 2.5% after reports that Meta is exploring a multibillion-dollar deal for Google’s AI chips. Nvidia fell more than 3.5%, dragging down the Nasdaq with it. Oracle slipped over 2%, and AMD dropped north of 7%. Investors also digested mixed US data, with retail sales missing expectations and the ADP report showing average weekly private payroll losses of 13,500 in the four weeks through November 8, while producer prices firmed in September. The Consumer Confidence Index sharply decreased in November, with the headline figure dropping to 88.7, the second lowest level since April. Forecasts expected a slight decline to 93.4 from 95.5 in October (revised from 94.6). Several key indices declined over the month.

CURRENCY FUTURES

US DOLLAR: The USD index is higher, paring some of yesterday’s losses. The dollar finished lower on Tuesday as markets have increasingly upped bets on a December rate cut from the Fed following a slate of dovish commentary from Fed officials, notably NY Fed President John Williams, who is considered an ally of Fed Chair Powell. Williams noted that there was room to lower rates given that a faltering labor market presents more downside risks to the economy than rising inflation does. Also pressuring the dollar was news that Kevin Hassett, White House director of the National Economic Council and close Trump ally, is the front runner for the new Fed Chair position. Hassett has been outspoken about current interest rate levels being too high and would likely urge members of the FOMC to lower rates further. Fed Funds futures are pricing over an 85% chance of a cut next month.

EURO: The euro is lower, under pressure from a stronger dollar. The euro got a nice boost against the dollar yesterday as diverging policy signals between the European Central Bank and Fed provided underlying support to the currency. Expectations that the ECB will continue to hold rates steady will provide structural support against the dollar in the near term given that policy signals out of the Fed remain dovish. Markets will look ahead to Germany’s GfK consumer climate due on Thursday, alongside consumer and business confidence surveys from Italy and the eurozone. French consumer spending data for October and the ECB’s consumer expectations survey will be released Friday. Initial inflation data for November from France, Spain, Italy, and Germany are also due on Friday, alongside German unemployment figures.

BRITISH POUND: The pound is off to a volatile start this morning following the release of Finance Minister Rachel Reeves’s autumn budget, which avoided income tax raises and sees new forecasts expecting higher inflation than previous estimates. The pound dropped before Reeves’ speech after the Office for Budget Responsibility accidentally released budget figures ahead of time, which showed a larger-than-expected fiscal buffer of £22 billion vs. an expected £17 billion. However, the pound has bounced off session lows as markets have digested the report. The OBR cut its medium-term productivity forecast to 1.0% from a previous 1.3% guidance in March. Tax changes regarding the new budget leave out any increases on income taxes and national insurance thresholds – until 2030. Instead, gambling duties, properties over £2 million, and a 2-point rise in dividend taxes all face tax increases. Tax revenues are projected to rise by £26.1bn by 2029–30, pushing the tax burden to a record 38% of GDP. Elsewhere on its forecasts, the OBR expects GDP to average a 1.5% growth over the next five years. Inflation is now forecast to hit 3.5% this year, slightly above the March projection of 3.2%, with next year’s estimate lifted from 2.1% to 2.5%. Markets still see around an 80% chance of a 25 bp rate cut from the Bank of England in December.

JAPANESE YEN: The yen fell, paring some of yesterday’s gains despite signals that the Bank of Japan could move to hike interest rates at its December meeting. The inflationary impact of a weaker yen is a cause of concern for the BoJ, which has reportedly been having internal discussions about the issue. Governor Ueda has also said that the weakening of the yen would likely lead to inflationary impacts on the economy, more so than in years past. As a result, Japan’s 10-year bond yield climbed as high as 1.84% overnight, near 17-year highs, before falling back down to 1.81%. Markets also remain on watch for any signals of intervention from the government, as the currency approaches levels that previously brought intervention. The 158-162 level likely brings a greater chance of official buying from Tokyo based on previous intervention levels. Currently, the yen is trading at 156.49. Thanksgiving could offer government officials a window to step in. Looking ahead, BoJ member Asahi Noguchi will speak on Thursday; his comments will be closely watched as markets look for hints on when the next rate hike will come. Tokyo’s November consumer-price index excluding fresh food is expected to rise 2.7% from a year earlier on Friday, slightly softer than October’s 2.8% reading. Consumer inflation in Tokyo is considered an early indicator of nationwide trends.

AUSTRALIAN DOLLAR: The Aussie is higher after the country’s first full monthly CPI report showed that annual inflation rose to 3.8% in October from September’s reading of 3.6%. Electricity prices led the charge in inflation as an expiration of government rebates took effect, while prices across most sectors of goods saw modest increases. Trimmed mean CPI, a key gauge of inflation for the Reserve Bank of Australia, rose to 3.3% on the year, well above forecasts of a reading of 3.0%. Still, the RBA may not put too much weight on these readings as the country transitions to a monthly series vs. what has been a reliable quarterly series. Instead, focus will remain on prices in housing and market services to get a better gauge on inflation trends. However, the readings do indicate that the RBA is likely done with its easing cycle as economic conditions remain robust, with consumer activity appearing to reflect little regard to higher interest rates and as inflation has evidently picked up across various sectors of the economy.

INTEREST RATE MARKET FUTURES

Futures are lower across the board as money shifts into the equities ahead of today’s $44 billion seven-year note auction. Kevin Hassett, director of the NEC for the White House, is appearing to come out as the front-runner for the new Fed Chair position. Treasury Secretary Scott Bessent said on Tuesday there was a very good chance President Trump would announce a new chairman before Christmas. Traders on prediction markets are pricing a 54% chance that Hassett will be named as Powell’s replacement, 36% higher than the second favorite, Governor Waller. Hassett has been outspoken about the Fed’s need to lower rates and will likely urge policymakers at the FOMC to continue easing policy.

San Francisco Fed President Daly said she supports lowering interest rates at the bank’s meeting next month, as she sees a deterioration in the job market being harder to contain than an increase in inflation. Meanwhile, Fed Governor Waller reiterated his support for a December cut but was reluctant to comment on what the outlook for the Fed is after December. The comments follow NY Fed President Williams’s comments on Friday that had spurred markets to increase bets on a December rate cut. The Fed’s Beige Book, or summary of current economic conditions, is also due later in the afternoon.

The spread between the two- and 10-year yields rose to 53.40 bps from 52.60 bps on Tuesday, while the two-year yield, which reflects short-term interest rate expectations, is little changed at 3.487%.

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