Commenting on the Chancellor’s emergency statement, Chris Arcari, Head of Capital Markets, Hymans Robertson, says:

“Today’s update from the Chancellor should, to some extent, improve the market’s view as to credibility of the government's fiscal plans, but political instability is not a favourable backdrop and gilt market volatility may remain high. We have seen 30 year yields down over 40Bps and sterling up close to 1% versus dollar, although given the ever-changing market conditions we are cautious about the longer term comfort today’s statement will bring. The rolling back of unfunded tax cuts to stimulate an economy with already high inflation may take a degree of pressure off the Bank of England, but inflation at a headline and core level remain at extremely elevated levels, and labour markets are tight. Indeed, a scaling back of the energy support package may mean headline inflation rises more than recent forecasts suggest. As a result we still expect a series of large interest rate rises from the Bank of England in November and December, though this is at least fully priced in to the front of the gilt market already.

“As we have previously said yields have risen, following global moves, to reflect fundamental developments in the wake of the pandemic and Russia’s invasion of Ukraine, but they have also faced upwards pressure from strong technical headwinds. The Chancellor’s announcements this morning should reduce some of this pressure, however, the near-term technical picture is not a positive one: even in its reduced form, the UK’s energy support package will require a large increase in gilt issuance; the BoE are set to begin active gilt sales at the end of October; and, the de-leveraging of UK defined benefit (DB) pension scheme’s interest-rate and inflation hedging programmes will weigh on gilt demand – even if yields stop rising, or fall, schemes are still in the process of de-leveraging as they, and their LDI managers, adopt more prudent targets.”