Brown Brothers Harriman’s (BBH) Elias Haddad highlights that the sell-off in gilts and British Pound (GBP) has stabilized after Prime Minister Andy Burnham appointed John Healey as Chancellor and pledged to stick to fiscal rules. However, fiscal policy details may not be known until the October budget, and Haddad expects this uncertainty, alongside ongoing labor market slack, to limit relief rallies in gilts and GBP and prompt dovish Bank of England (BoE) repricing.

Fiscal stance and labor slack weigh

"The sell-off in gilts and GBP stabilized after Prime Minister Andy Burnham picked John Healey – former Defense Secretary - as his Chancellor of the Exchequer. In parallel, Burnham stressed yesterday he will “stick to the fiscal rules…and use obviously any flexibility within them.”"

"Attention now turns to how Burnham plans to use that “flexibility” to fund spending. The details may not emerge until the October budget. Until then, we expect fiscal policy uncertainty to limit relief rallies in gilts and GBP."

"UK May labor market data was largely in line with consensus. The unemployment rate was unchanged at 4.9% for a second straight month in May and the vacancies-to-unemployment ratio remained stuck at 0.4, below its estimated equilibrium level of 0.50. That is indicative of ongoing labor market slack."

"The swaps curve price in a full 25bps BoE rate hike to 4.00% in November and a total of 60bps of tightening in the next twelve months. That would leave the policy rate above the BoE’s estimated neutral range (2.00%-4.00%)."

"Restrictive monetary policy when the UK economy is operating well below potential raises the likelihood of a downward adjustment to BoE rate expectations against GBP."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)