The Two Weeks That Will Be (16th November 2025)

1. The UK
There is still one more forecast round to come from the OBR ahead of the Budget itself on Wednesday 26 November, meaning that there is a further interminable wait until Friday 21 November to assess whether the politically more palatable “smorgasbord” approach without income tax hikes really does mean the Chancellor meets her fiscal rules. If not, then there would be a u-turn upon a u-turn of a policy that hasn’t even been announced yet, let alone implemented. As Robert Colvile put it in the Sunday Times, this isn’t a budget that blew up after launch or on the launchpad, it has “blown up before they even put the fuel in”. 

Worse, the market now knows this. Reeves already had the last forecast round on Monday 10 November when she chose to tell the BBC that “it would be possible” to keep the manifesto pledge “But that would require deep cuts to capital spending“. Mysteriously three days later, the pledge can be kept because of *waves hands* forecasted higher wage increases and better tax receipts. Which were unlikely to have appeared within those three days. The poor old OBR appears to be the only one managing to respect purdah rules, issuing a formal statement to explain they took two different ten working day periods for market parameters: up to 10 October for the “economy forecast” and up to 21 October for the “fiscal forecast”. Their explanation for this difference was “the time between the closure of the pre-measures economy forecast and the publication of our EFO” even though the time period this year is almost identical to that of last year’s Budget (seven weeks). This smacks of an independent body being put under political pressure.

That is because the politicians themselves are under pressure. Starmer bottled it. He knows the political cost of breaking a manifesto pledge. Whether Reeves led him down that path to assuage markets or if it were just a Plan A to provide a rabbit out of the hat Plan B on Budget Day, we will never know. Because their credibility has now disappeared. They cannot come back from this. 

Worse, the market now knows at what Gilt price the government unravels, courtesy of the two windows for market parameters used by the OBR:

• In window one, the fiscal gap is so large that it must be filled by raising one of the big taxes and breaking a manifesto pledge;
• In window two, the government can get away with a softer “smorgasbord” of many smaller tax rises plus a threshold freeze. 
• But Reeves and Starmer have now admitted they are too politically weak to enforce the conslidation required in window one
  • And they can’t turn to reducing government spending rather than tax rises, given the summertime failure to pass welfare reforms

This embeds convexity into the market and we now know where it kicks in: when UK 10 year Gilt yields break above 4.70%. Above there we flip from window two to window one – the point where Starmer and Reeves are powerless to provide the fiscal consolidation the market requires. And so above there we lurch into a Truss-style political and economic meltdown where ever higher yields require ever more fiscal restraint that lies ever further from the reach of the government.

Or, more specifically, lies beyond the reach of Starmer and Reeves. They have proved they cannot deliver what is required. They never had a mandate for spending cuts and income tax rises and they have never made – nor sold – a coherent argument to do so. This is unsustainable. The market will force a change of leadership. The next leader must then gain a mandate to enable fiscal measures to pass. 

Nobody has yet moved, fearful of tearing apart the Labour party in a long and painful process, scarred by the Corbyn years. They are also worried of being tainted by the same brush as the chaotic Conservative Party. But they are now in government. There will be pressure from the country as well as the markets for a speedy resolution. Although the Labour Party rulebook states that ‘The sitting Leader… shall not be required to seek nominations in the event of a challenge‘ from 20% of MPs nominating an alternative, that doesn’t mean Starmer would automatically be on the ballot. If several cabinet ministers resign over his leadership, the markets plummet and any residual public support evaporates, it is simply not credible for the PM to fight on. If he were to make himself (or others made him) what the rulebook terms “permanently unavailable“, then ‘the Cabinet shall, in consultation with the NEC, appoint one of its members to serve as Party leader until a ballot… can be carried out‘. Several Cabinet ministers would surely be delighted to take over on an interim basis. Certainly many are already in backroom discussions to find supporters for the inevitable changing of the guard. 

With the markets poised on a knife edge, any mishap could set off the chain of dominoes. There are two gilt auctions coming up, a 10yr on Wednesday and a 5yr on Tuesday 25th November. There’s an update on the public finances with PSNBR data on Friday. The OBR are valiantly attempting to take a snapshot of the economy but the Chancellor’s finely crafted headroom could be gone before she even reaches the despatch box. In last October’s Budget, the OBR had to note that ‘the full extent of discretionary fiscal easing in this Budget is unlikely to have been anticipated by market participants at this time, so we have raised Bank Rate and gilt yields by a ¼ percentage point across the forecast‘. Perhaps this time round they’ll include an estimate of the political risk premium with a Chancellor and Prime Minister unlikely to be around to see the finance bill pass its way through parliament. 

2. The US
With the government reopened, a slew of outdated data will hit the market all at once, causing confusion and failing to provide much clarity. The shutdown itself will reduce the ability to infer anything useful from the data, leaving the market none the wiser about where the US economy is at the moment. Not that it particularly matters for the Fed, where the splits are becoming more pronounced now that the Chair can no longer act as a centrifugal force. Powell is yesterday’s man and therefore unable to bridge the divide between the agitating doves and patient hawks. The latter had better be confident they won’t be accused of being “Too Late” given that it will be some months before they can effectively read the runes on the labour market slowdown. Fed Vice Chair Jefferson is yet to declare his hand – he speaks on Monday and Friday. Fed Minutes will shed some light on Wednesday. 

3. Japan
The Bank of Japan had thought they were paving a clear path forward to rate hikes but the arrival of quasi-Abenomics 2.0 in PM Takaichi has stopped them in their tracks. At least so far. They will closely be following the data: Q3 GDP is released Sunday,trade data on Tuesday and inflation on Thursday. Whilst Takaichi has told parliament “I strongly hope the BOJ conducts policy appropriately so it… achieves its 2% inflation target not through cost-push factors, but by wage gains”, she has opened the door for the BOJ to make the argument that one leads to the other. Koeda speaks on Thursday and Noguchi on Thursday 27th November. The latter is of course the Thanksgivingholiday, giving rise to the potential for wobbles in Japan to impact wider market liquidity. 

4. Earnings
But the real bellwether for markets right now is real earnings from real companies doing real things, rather than central banks deploying peashooter monetary policy in the face of glaring fiscal policy challenges. And the big daddy of the MAG7, the AI behemoth that kicked off the circular boost upon boost to valuations, is about to release earnings – Nvidia reports on Wednesday.

Gamma is still in positive territory but the sheer size of the MAG7 means that when one of the tech stocks has a big move, delta hedgers drive another in the opposite direction. At some stage, when all are hit by a risk that applies across the sector, this will change. The VIX has been creeping higher as instability under the surface spreads.

The NY Fed recently convened a meeting on the sidelines of the annual Treasury market conference to discuss with banks the standing repo facility. We are heading into the year-end bank balance sheet window-dressing just as the UK, France and Germany face budget deadlines and the US goes into the Thanksgiving holiday. After another astonishingly good year for equity markets, the temptation to book profits will be high. We continue to monitor the 25 level in the VIX for the point at which broader volatility rises significantly and political risk can be fully priced in.