The Budget brought relief for consumer stocks, banks, and bond markets as investors welcomed balanced fiscal plans, which include tax hikes to fund growth without upsetting gilt yields. Strategic tax adjustments, business rate changes, and controlled debt increases bolstered optimism, lifting UK-focused stocks and easing market tensions.
Susannah Streeter, head of money and markets, Hargreaves Lansdown gives us her take on the announcements: “Rachel Reeves has managed to perform the tricky balancing act of increasing borrowing to fund growth projects, without rattling investors who buy government debt. There was optimism that she would pull this off, with gilt yields already dipping back earlier, and as quiet confidence in her plans spread, bond markets have steadied further. Raising £40 billion through tax rises, to stop more borrowing for day-to-day spending has calmed nerves, helping push gilt yields down from 4.31% earlier today to 4.22%, while the Chancellor was still on her feet.
The big bazooka of investment had largely been priced into share prices, and given the FTSE 100 is more internationally focused the Budget hasn’t budged it out of the red. However, the domestically focused FTSE 250 has crept into the green, with consumer discretionary stocks climbing higher as the Budget was angled to put more money in payslips.
We’ve been used to previous Chancellors pulling rabbits out of hats, and Rachel Reeves had a few up her sleeve – the biggest being the upcoming change to income tax thresholds. By 2029 fewer people will drift into higher tax bands now that thresholds will be uprated with inflation once again. This tax tweak, coupled with the rise in the minimum wage, will eventually put more money into consumers’ pockets. The retailers Ocado and Sainsbury’s and the value chain B&M have all gained ground amid hopes for higher spending ahead. Pub chains Mitchells and Butlers and J D Wetherspoon were also buoyed amid hopes for higher spending from punters, and the announced cut in beer duty.
Bank shares have risen on a wave of relief given that there were no plans announced for a bigger levy on profits made in the sector. Barclays, Lloyds and NatWest all gained ground as the Chancellor spoke.
Although air passenger duty is set to rise by up to £2, airline stocks have headed on a higher trajectory, as the small rise is unlikely to seriously dent appeal for flights. While private jet users who will be hit by a 50% hike are hardly likely to opt for bargain bucket seats, there is an expectation the pent-up demand for travel in the mass market is set to continue.
The Chancellor had been expected to increase the windfall tax on profits of oil and gas firms and the energy profits levy will rise from 35% to 38%. However, rather than being an open-ended levy, the extension is limited and for now, the plan is to keep it in place for another year to 2030. Harbour Energy lifted 5% as investors assessed the Budget could have delivered worse news for the sector.
Overall, there is clearly relief that this Budget has not been accompanied by volatile moves on bond markets, which has helped keep sentiment calm. There will be a keen eye trailed on exactly what this swelled Budget will be spent on, in the months and years to come and so the Chancellor will stay under pressure to maintain a reputation for prudence and responsibility.
The investment plans might increase inflationary pressures slightly with the OBR upgrading the UK’s growth and inflation forecasts, given that more money set to wash through the economy. But this is unlikely to cause a significant impact on interest rates. Increasing the NICs paid by employers may limit wage increases down the line. Hawkish members of the MPC have cited strong wage growth as one of the reasons they are advocating a cautious approach to interest rate cuts. With the prospect of employers restricting pay increases, it could possibly encourage a faster flurry of rate cuts next year.
The pound is still trading around $1.30 as investors assess the Budget and the likelihood that the Bank of England will move more quickly than the US Federal reserve is cutting interest rates. The resilience of the American economy and the prospects of an inflationary Trump presidency have led to expectations of rates staying higher for longer.’’
