Market Talk: Difficult to see UK budget 'as a positive' | REUTERS

Key Concepts

• UK Jobs Market Weakening: Evidence suggests a slowdown in hiring and an increase in unemployment.
• Unemployment Rate: Rose to 5%, the highest since the pandemic.
• Employment Rate: Fell, indicating fewer people are employed.
• Wage Growth: Decelerated, with both regular and total wage growth showing a downward trend.
• Bank of England (BOE): Potentially considering interest rate cuts in December due to easing inflation and a weakening economy.
• Inflation: While still above the 2% target, it is showing signs of moving in the right direction.
• Retail Sales: Declined in October, with consumers holding back spending.
• UK Budget: Anticipated fiscal tightening measures (tax increases, spending cuts) are expected to impact households and the economy.
• Consumer Behavior: Characterized by caution and a "wait and see" approach due to economic uncertainty and tight household budgets.
• Sterling (GBP): Trading at multi-month lows against the dollar and multi-year lows against the euro, with potential for further weakening.
• Market Expectations: Traders are pricing in an 80% chance of a BOE rate cut in December.
• Fiscal Tightening: Refers to government policies aimed at reducing budget deficits, often through tax hikes and spending cuts.
• Disinflation: A slowdown in the rate of inflation.

UK Jobs Market Hit and Potential Interest Rate Thaw

The UK jobs market has experienced a significant downturn, with the unemployment rate rising to 5%, its highest level since the COVID-19 pandemic. This follows a period of weak hiring and provides further evidence of the economy losing momentum. Consequently, financial traders are anticipating a potential move by the Bank of England (BOE) to lower interest rates in December. While Governor Andrew Bailey maintained current rates, he indicated a readiness to cut them next month if inflation continues to ease.

Signs of Weakness in the Labor Market

Fiona Sinata, Senior Market Analyst at City Index, confirmed the observable signs of weakness in the labor market. She highlighted:

• Increased Unemployment Rate: Ticked higher.
• Decreased Employment Rate: Fell, indicating a reduction in the number of employed individuals.
• Dipped Wage Growth:
  • Wage growth (excluding bonuses): Fell to 4.6% from 4.7%.
  • Total wage growth: Slipped from 5% to 4.8%.

While acknowledging that wage growth remains "sticky" and not yet consistent with the BOE's 2% inflation target, Sinata noted that it is moving in the "right direction."

Retail Sales and Consumer Caution Ahead of the Budget

Additional data from the British Retail Consortium (BRC) indicated a slip in retail sales during October. This decline is attributed to shoppers holding back their spending in anticipation of the upcoming government budget. The economy appears to be in a "wait and see" mode, with significant speculation surrounding the budget's contents since September.

Sinata suggested that uncertainty regarding the budget's impact on households, coupled with tight budgets, is leading consumers to postpone purchases, even for events like Thanksgiving and Black Friday sales. Potential increases in income tax or broader fiscal tightening measures are expected to further strain household finances, which are already struggling with the cost of living crisis and persistently high food inflation. This cautious consumer behavior is a clear indicator of the prevailing economic sentiment.

Market Reaction to the Upcoming Budget

Regarding the market's reaction to the budget, Sinata expressed skepticism about a positive outcome. While acknowledging that much of the negative sentiment might already be "priced in," she emphasized the persistent uncertainty surrounding the exact nature of the anticipated fiscal tightening.

Key areas of focus for market participants will be:

• Extent of Fiscal Tightening: The magnitude of tax increases and spending cuts.
• Impact on Sterling: Potential for further weakening of the pound, which is currently trading at multi-month lows against the dollar and multi-year lows against the euro.

Sinata stated that tax increases and spending cuts are expected to slow down the economy. This slowdown, combined with the BOE's potential consideration of rate cuts, could be exacerbated by such fiscal measures.

BOE Rate Cut Expectations

Following the release of the morning's economic data, markets are now pricing in an 80% probability of a BOE interest rate cut in December. Sinata believes this data strongly supports this view. She referenced the narrow 5-4 vote split in the November BOE meeting, where Governor Bailey cast the deciding vote. Bailey's previous statements indicated his willingness to cut rates in December if the disinflationary process continued. The recent economic figures, including the jobs data and retail sales, suggest this disinflationary trend is indeed progressing, thereby bolstering the case for a December cut.

Outlook for 2026 and Further Rate Cuts

Looking ahead to 2026, Sinata expressed a less optimistic outlook for the UK economy, anticipating potential further deterioration. This outlook is particularly influenced by the prospect of fiscal tightening in the upcoming budget. Such measures are likely to support further interest rate cuts by the Bank of England in the first couple of quarters of next year.

The discussion featured Fiona Sinata from City Index. Further content is available on reuters.com.