Gilts, sterling shrug off Spending Review

Not a lot ultimately to get markets too excited, in fact markets took the Spending Review in their stride. Gilt markets shrugged off the Chancellor’s set-piece despite a massive splurge in borrowing that produced some heady numbers that really we have never seen before in this country – it’s fair to say the bond vigilantes are conspicuous by their absence these days.

The UK is forecast to borrow a total of £394bn this year, which is equivalent to 19% of GDP and a record amount. No mention of the inevitable tax raid that is coming…but it is undoubtedly is coming. The Bank of England has foursquare got the government’s back these days (not quite outright financing but as good as) and the global bond market is so squashed by central banks that these eyewatering borrowing numbers can be shrugged off by the market.

UK 2-year gilts were down at -0.039% and 10-year yields at 0.307%. Yields are actually lower on the day, which is probably due lack of momentum today in the reflation trade (n.b. pro-cyclical equity rotation without reflation has been killer for gold but as per prev. notes the inflation will start to show in CPI prints in US and lead gold higher), and the curve remains negative out to four years with real rates still deeply negative.

GBPUSD moved a little lower to 1.3340 area but bounced on this support and the pair remains well off the day’s lows. US data crossing showing higher-than-expected initial and continuing jobless claims whipped the cross back to 1.3360 at the bottom of the hour before coming down. US durable goods were strong at +1.3% vs 1% expected, with core durable goods at 1.3% vs 0.5% expected.

The package unearths some very substantial near-term problems for the UK economy. The economy will contract by 11.3% this year and growth next year has been slashed to just 5.5% from 8.7% expected in July. Economic output will not return to pre-pandemic levels until the end of 2022. Unemployment will rise to 7.5% in Q2 2021 – it’s always darkest before the dawn. Vaccines emerging in the second half of next year will start to see this trend reverse, it is hoped.

Elsewhere ahead of the US open the Dow is set to open 40-50pts lower at a whisker under 30,000. FTSE 100 also steady at -0.6% just under 6,400.

Chart: GBPUSD not fussed much