Market report: Caution high ahead of UK Budget with consumers losing confidence
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “The FTSE 100 is in a holding patten at the end of the week, as the UK Budget looms and investors remain highly cautious. The index has opened lower, with little to ignite overall investor sentiment. However, buoyant results from NatWest, as it joined the banking results party, did provide some cheer with the stock more than 3% higher in early trade.
As the guessing game continues about what chancellor Rachel Reeves will include in her first Budget, it’s dented consumer confidence in the UK. A closely watched survey from GfK indicates that a despondent mood has taken hold ahead of revelation of the government’s tax and spending plans with concerns about the UK economy rising. GfK’s consumer confidence survey fell one point to -21 in October from -20 in September. This is the lowest since March, when the former Conservative Chancellor Jeremy Hunt delivered his last Budget. However, with fresh interest rate cuts expected optimism around consumers’ finances and confidence about making major purchases ticked up. This will provide hope that once the government’s financial plan becomes clear, uncertainty may ease off and overall consumer confidence may rebound.
Rachel Reeves has also gone public with one of the government’s worst kept secrets – that there will be a change to self-imposed borrowing rules. While the detail is still not clear, it looks like the wider measure of Public Sector Financial Net Liabilities will be used instead of Public Sector Net Debt, which includes all financial assets and liabilities recognised in the National Accounts. This would enable more money to be borrowed to spend on infrastructure in the UK, a course of action recommended by the International Monetary Fund. This level of endorsement to these changes will have helped contain bond market reaction and avoid a big strop-out. Government borrowing costs eased off a little but at 4.21% 10-year gilt yields are still hovering near 16-week highs. However, they haven’t hit levels seen after the ‘Trussenomics’ mini-Budget, and are below October 2023 levels, when high interest rates looked set to bed in. It looks less like nervousness about holding government debt, which is behind these market moves. It’s likely to be due to expectations that big spending on infrastructure could raises concerns about inflation and slow the Bank of England’s interest rate cuts.
Oil prices have shifted higher, with Brent Crude heading towards $75 a barrel, on track for a gain for the week as concerns about the Middle East stay in focus. Although negotiations over a ceasefire and hostage release are set to resume, the intensity of attacks from Israel is still highly troubling. It’s kept concerns about potential supply issues bubbling. However, there are still expectations of lower global demand going forward, with sluggish economic data coming through from the Eurozone and no quick fix looking likely for China’s troubles.’’
NatWest joins the party with a big profit beat
Matt Britzman, senior equity analyst, Hargreaves Lansdown: “NatWest marks the third major UK bank to report better than expected results this week, but this time it’s not driven by impairments. Better income and costs drove the beat today, offset by higher impairments than expected, which does buck the trend we saw from Lloyds and Barclays. That said, default levels remain low at NatWest and that bodes well for performance over the medium term.
NatWest is also the third bank this week to mention easing deposit migration, and that’s the key reason it posted a decent beat on net interest margin. We’ll need to wait for more information on whether that beat was due to one-offs or sustainable changes, but either way, the full-year consensus for 2.16% looks too low now.
After Barclays raised net interest income guidance yesterday, NatWest was expected to follow suit, given that it also had too many rate cuts in projections – it hasn’t disappointed. Income guidance has now been bumped up to a level higher than both previous guidance and what analyst consensus had built in. That should be enough to force analysts to revise numbers higher and give investors something to smile about.
Looking ahead, the start of an interest rate-cutting cycle has relieved pressure on deposits and mortgages. All the while, the anticipated economic pain of higher rates never really came to pass – or at least hasn’t yet. That leaves NatWest in a nice spot to benefit from improving trends and lean on the structural hedge which will act as a strong driver of medium-term earnings.’’