Market digests UK budget, Payrolls expectations and Microsoft cracks the AI narrative

Financial markets continue to digest the details of the UK’s budget, and the news is not good. UK Gilt yields have risen at the open, and the 10-year yield is now up more than 3 basis points The UK’s budget has fallen like a lead balloon. This was one of the largest increases in tax, spending and borrowing in the UK’s budget history, only for the OBR to revise down their long-term growth forecasts. For a government that planned to boost growth, they have fallen spectacularly at the first hurdle. £142bn of extra borrowing over 5 years for a scant 1.6% GDP rate in 2029, is it worth it, Rachel?

This Budget has also annoyed millions of people including business owners and pensioners. The government may have been planning for the long term in this Budget, yet it does nothing to guarantee their re-election in the years to come. UK bonds are sinking, as the OBR also revised up their expectations for inflation and interest rates for the long term. The increase in the UK’s yield differential is helping the pound to stabilize around $1.30 vs. the USD. The pound is the second-best performer in the G10 FX space on Thursday, behind the yen, as the dollar pares back gains as jitters hit the Trump trade as we move towards next week’s US election.

Big tech felled after Microsoft’s results

There is a general risk off tone to markets, Europe is a sea of red, and US stocks also closed lower on Wednesday. Earnings season has been a mixed bag this week. Microsoft’s stock is set to open down 3% later today, although it reported earnings that were stronger than expected. Revenues came in at $65.58bn, vs. expectations of $64.50bn. Net income was $24.6bn, vs. expectations of $23.25bn.  Investors were disappointed by its Azure cloud computing growth outlook. The reaction to the earnings report was not completely fair to Microsoft. It is worth noting that the company invested aggressively in capex to the tune of $20bn last quarter, and still managed to produce EPS of $3.3, and a gross profit margin of 69.4%. Added to this, Azure sales growth of 34% last quarter is impressive and shows that demand is strong for its AI-powered products. However, when it comes to AI, the market wants to see stellar growth rates, and there is some concern about a slowdown in Microsoft’s generative AI business. This is casting a shadow over the big tech sector, Amazon is lower by 1.17%, Nvidia is down by 1.8%, and Apple is down by 0.1% ahead of its earnings report this evening. Google is also expected to open down more than 1% even after its earnings report was well received earlier this week. Overall, big tech is sensitive to any cracks in the AI narrative and is ripe for a sell off are a strong performance in recent weeks.

Shell’s focus on debt reduction and buybacks boosts growth

In the UK, Shell’s share price is higher by more than 1%, after it reported a stronger revenues from its gas unit. Profit was lower by 3.1% YoY, however, it managed to reduce debt last quarter and at $35.23bn, debt was 8% lower QoQ. This contrasts with BP, where debt levels rose. The market was also cheered by the $3.5bn share buyback programme. Share buybacks, rather than growth prospects are driving the share prices of legacy oil companies these days, which is the opposite of what is driving the likes of Microsoft and Apple.

It's natural for the market to readjust and profit to be taken ahead of a major election like the US Presidential election next week. Thus, we could see a mild risk off tone to markets in the coming days. Economic data is also key for markets this week. In the US we get the payrolls report on Friday and today we get PCE for September, the Fed’s preferred inflation measure. Personal income and personal spending are all expected to rise in September vs. August. The market is expecting a sharp decline in payrolls for October, at 101k, vs. 254k for September. We think that this print is vital for the future direction of the Federal Reserve. There is a near certain chance of a rate cut from the Fed next week, and there are nearly 5 cuts priced in through to the end of next year. However, another strong payrolls report could see a further recalibration of US rate cut expectations, with the potential for rate cuts to be priced out of the market if payrolls are stronger than expected next week.

Ther euro is also in focus this morning as we wait for the Eurozone’s CPI estimate for5 October. The market expects the annual rate top pick up to 1.9% from 1.7%, But for core to fall back slightly to 2.6% from 2.7%.