James Lynch, investment manager at Aegon Asset Management, has shared his comments following the Spring Statement.
“For Gilts today, there were three big events. CPI in the morning, which can always be a market mover, came in slightly lower than economist feared at 2.8% versus their expectations of 3.0% but was actually in line with the BoE’s own forecast. Services inflation still looks uncomfortably high at 5.0%. After that excitement, it was onto Rachel Reeves to deliver the Spring Statement. These events have become more market moving then they should be. Usually these statements should happen in the background for gilts, but since September 2022 it has never been the same.
“The Chancellor hit the number she would have wanted to, which is a fiscal headroom restored at the end of the forecast period of £10bn (same as October 24). It did take a few cuts to previous spending announcements to get there but also some OBR assumptions. The change to relax planning laws has added 0.2% of GDP for each year, this makes up at least a third of the headroom that has been restored. Also the OBR assume the GDP of the economy by 2030 will be larger than they had forecast in October, that is after slashing GDP this year from 2% to 1%.
“Then onto the DMO, the remit for 2025/2026 came in at £299bn, which is just slightly less than market expected at £302bn. However given the revisions lower to growth this year and the fact the borrowing numbers keep coming higher than expected including last week then it is easy to see this £299bn figure being revised higher even as soon as next month.
“For now though, these UK-centric events are over and Gilts have come through relatively unscathed. They should now take their lead from US Treasuries and German Bunds. However today is another reminder of how sensitive the UK fiscal position is to moves in yields and changes in GDP assumptions and if it does not get any better by October then the Chancellor will have to do something more drastic.”
