The Autumn Statement was largely in line with expectations based on lots of pointed guidance from Chancellor of the Exchequer Philip Hammond over the last few weeks.
There was only one aspect that can be described as reasonably surprising.
That was the launch of a new national fund targeting productivity and infrastructure, with £23bn in fire power for investments. The initiative aims to tackle two broad needs that precede Brexit and which will become more acute after March 2017.
The move shows that the Chancellor is thinking ahead towards growth during the ‘recovery period’ following the UK’s exit from the European Union.
The announcement has just as much of a political dimension for the current government as other initiatives reflecting pledges to support low earners and first-time homebuyers.
The Chancellor’s confirmation of the previous government’s goal of raising the taxation allowance, additional stimulus for affordable home building and the £500 a year rise in the minimum wage, are of course very welcome, particularly given that the consumer segment of the economy continues to suggest that it will be the growth engine during in-between years after Brexit.
However, these plans can all be financed at the margin of the government’s prior total spending goals.
The increase in government borrowing announced is very modest, projecting 3.5% of GDP this year from 2.9% foreseen at the last Budget.
We think the slightly more than static fiscal picture leaves lots of slack in the system for now, enabling the government to crank up borrowings to extend investment plans further if necessary.
The Office for Budget Responsibility’s first definitive forecast of (essentially) the impact of Brexit on economic growth was admittedly at the more pessimistic end of expectations, foreseeing a 2.4 percentage point hit over the entire forecast period.
This, coupled with increased gilt issuance should extend the recent rising trend of UK yields over the medium term.
However, there were no outright negative shocks in the Statement, not least for markets, and I expect UK bond prices to enjoy a little more underlying support in the wake of Hammond’s comments.
Sterling has notably held up rather well against an unrelated surge of the U.S. dollar this afternoon, moving just 20 price points lower between midday and now, possibly reflecting profit taking after a 30 pip advance in between.
This has been a largely immaterial mini-budget for sterling. The currency ambled some 37 points higher between midday and 1 pm, including the real meat of the Chancellor’s statement.
However all those gains and then some were lost as battered bulls took profits quickly.
Cable’s latest down leg from an hourly perspective in fact began during the early hours of Tuesday and the rate has bottomed in the same support zone (1.2350-$1.2373) that has cushioned declines all week.
For now, the main point of interest for sterling bulls against the dollar remains $1.2515 resistance, around and above which significant stops remain.
Unless cable can surpass $1.248 and the higher resistance, its story looks set to be a range bound and vulnerable one.
So long as the support zone mentioned above continues to absorb selling, further support implied by an extension of the decline from immediate post-Trump high at $1.2673 to 127.2% ($1.2295) is unlikely to be tested.
Bulls will be watching closely whether cable can exceed its highest reach off this week’s lows at $1.2442 to gauge its likely direction into the end of the week.
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