Wednesday is doing a lot of work. Chancellor John Healey delivers the first Budget under Prime Minister Andy Burnham today, following Prime Minister’s Questions at approximately 12:30pm in London. The FOMC rate decision follows at 2:00pm ET, which is 6pm in London. That means traders tracking sterling and gilts in the morning will be swivelling to dollar positioning by mid-afternoon. The asset that connects both events is the gilt curve, and the 30-year is where the real verdict lands.
The View From Here
Gilt yields are still historically very high and Healey has about half the headroom his predecessor had, with the war in Iran pushing up energy prices and borrowing costs. A global bond selloff briefly pushed the 30-year gilt yield above 6% in early October. Economists have put the available fiscal headroom in a wide range, and the consensus in pre-Budget dealer polls settled closer to £15bn. As soon as the Chancellor sits down, the Office for Budget Responsibility publishes its five-year Economic and fiscal outlook, and that document, not the rhetoric, will tell the gilt market whether the consolidation path is credible.
What Actually Moved
UK bank share prices have fallen in October and could come under further pressure. The selling has been surgical: NatWest and Lloyds, which derive the bulk of their earnings from British operations, stand most exposed, while Barclays earns a large share of profits abroad and HSBC generates most of its earnings overseas. Investors have been pre-pricing what is widely expected to be the Budget’s central revenue measure.
Why It Happened
Healey is reportedly considering raising the bank surcharge from 3% to 8%, lifting the headline tax rate on bank profits above the current level and raising around £2bn a year. This would reverse the change announced by Rishi Sunak that reduced the banking surcharge from 8% to 3% from April 2023. Goldman Sachs has estimated that an 8% surcharge would reduce net profit by about 2% to 3% for Barclays and 6% to 7% for Lloyds and NatWest.
What the Market May Be Missing
The surcharge debate has consumed the sector conversation, but the gilt supply profile may matter more for rates. Issuance plans for long-dated government bonds have been pushed down sharply in recent years as the Debt Management Office has leaned more toward shorter maturities. A cut to the long-end share could partly offset a poorly-received speech for 30-year holders. If Healey’s numbers disappoint but the DMO tilts further toward shorter maturities, the long end could rally even as the headlines look grim. That divergence is the move most equity-focused traders will miss.
Where It Shows Up
LLOY and NWG carry the sharpest surcharge exposure. Lloyds reports Thursday before the UK open, with consensus adjusted EPS at 2.6p. As the most domestically focused of the big lenders, it is the most exposed to a higher surcharge. NatWest reports Friday before the open, with adjusted EPS expectations around 19p. Like Lloyds, most of its profit comes from the UK, so a higher surcharge would bite harder, and the shares have dropped over the past month. BARC and HSBA are relative shelters here, though neither is immune to the sector re-rating that follows if earnings multiples are reset downward across the board.
Risks and Counterpoints
Sentiment has shifted sharply in recent weeks, as speculation that Healey might leave bank taxes unchanged gave way to growing conviction that a hike was coming, suggesting some of the downside risk is now embedded in current prices. Analysts at Citi said the budget could act as a clearing event, resolving uncertainty among lenders. On the fiscal side, a bad headroom number is the worst case for sterling: yields rise because investors doubt the government, and the pound falls with them, rather than rising on higher rates.
What to Watch Next
Markets broadly expect the Federal Reserve to hold its target range at 3.75% to 4.00% on October 28. The Fed’s most recently published minutes were for its September 15 to 16 meeting, so the statement and press conference matter more than the headline decision alone. Watch the 30-year gilt at 12:30pm in London for the Budget read, then watch it again after the Fed decision at 2:00pm ET. If both land without incident, the relief trade is probably short-dated UK paper and sterling. If either surprises hawkish, the long end is where the pain arrives first.
