Introduction: Hunt brings forward fiscal announcements to calm marketsGood morning, and welcome to our rolling coverage of business, the world economy and the financial markets.
The financial markets will give their verdict on Liz Truss’s government today as the PM clings onto power in the face of growing pressure to quit.
And in an attempt to reassure investors about Britain’s financial stability, new chancellor Jeremy Hunt is to announce some tax and spending plans today – the latest in a series of u-turns from the government.
In a surprise move, the Treasury has announced that the Chancellor will make a statement later today, which will “bring forward measures from the Medium-Term Fiscal Plan that will support fiscal sustainability”.
Hunt will also give a statement to parliament on the plan.
By announcing these tax and spending measures a fortnight earlier than expected, Hunt is trying to reassure jittery markets and turn around a loss of confidence in the government’s fiscal plans.
Over the weekend, Hunt unceremoniously chucked Truss and Kwarteng’s disastrous mini-budget under the bus.
Instead of unfunded tax cuts to spur growth, Hunt warned that some taxes will rise and spending will be squeezed in an attempt to persuade international investors Britain is a reliable, responsible country.
Not the easiest task, given the hammering which recent events have dealt to confidence.
“I want to do the right thing for the British people”
Newly-appointed Chancellor Jeremy Hunt says his new government position is an “honour” and adds that there are “very difficult decisions on spending and tax” ahead
Latest 👉 t.co/sX9oqE2Kqz
📺 Sky 501 and YouTube pic.twitter.com/8R3rA0rgat
— Sky News (@SkyNews) October 15, 2022 With the plan to cut corporation tax already scrapped, Hunt could delay plans to cut a penny off income tax by a year, or demand even more ‘efficiency savings’ from government departments, despite there being little to trim in, say, health or education.
The medium-term fiscal plan, to show how the UK plans to balance the books, is scheduled for 31 October, when we’ll also get the Office for Budget Responsibility’s forecasts.
While the chancellor tries to calm nerves, the government bond market no longer has the safety net provided by the Bank of England. Its emergency pledge to buy up long-dated gilts ended on Friday afternoon, as planned, after giving pension funds the opportunity to extricate themselves from the ‘doom loop’ of falling bond prices after the mini-budget.
UK gilts will resume trading at 8am this morning, when the London stock market also opens. If borrowing costs push higher, it could intensify calls for more change in Downing Street, or even spur the BoE into fresh action.
Analysts have warned that we could face another week of turbulent markets.
UK assets have been badly hit by the British government’s loss of credibility, as we saw on Friday afternoon.
Bond prices had been recovering on Friday morning, but lurched lower after Truss’s unimpressive press conference – announcing the exit of Kwasi Kwarteng – didn’t offer much reassurance of how the UK’s fiscal black hole – thought to exceed £70bn – will be filled.
And in Westminster, the beleaguered prime minister will attempt to shore up her crumbling support by gathering her cabinet ministers at No 10 tonight.
But some MPs went public yesterday calling Truss to quit, including backbencher Jamie Wallis — who has confirmed to the Guardian that he had submitted a no confidence letter — and veteran Tory MP Crispin Blunt.
The agenda 8am BST: China publishes FDI (foreign direct investment) figures for September
9am BST: Italian inflation rate for September
11am BST: Jeremy Hunt expected to announce tax and spending plans
11am BST: German Bundesbank’s monthly report
1.30pm BST: Empire State manufacturing survey of New York factories
Key events
By calming the market today, Jeremy Hunt could succeed in reducing the estimated size of the fiscal black hole he needs to fill in the medium-term fiscal plan due on 31 October:
Economics journalist and author Duncan Weldon explains:
The more the Chancellor successfully calms markets now, the easier his job will be on the 31st October.
The OBR forecasts will be based on market expectations of Bank Rate and gilt yields in the week before the 31st (round 5 of the forecast). 1/2 pic.twitter.com/iXYz9YvmlB
— Duncan Weldon (@DuncanWeldon) October 17, 2022 OBR ready reckoners (Oct 2021 ones below) give some sense of how big a difference that could make.
EG: Expectations of Bank Rate being 0.5 percentage points lower & one percentage point off gilt yields would lower debt interest by over £10bn at the end of the period.
2/2 pic.twitter.com/Ro3oDzH9tT
— Duncan Weldon (@DuncanWeldon) October 17, 2022 The unravelling of the mini-budget means UK interest rates may not rise quite as sharply as the markets had previously expected.
The money markets are now pricing in the Bank of England raises rates to around 5.25% by next May.
Earlier this month, rates were seen hitting 6% by next summer, with the Bank expected to tighten policy aggressively to cool inflation.
Rates are currently 2.25%, with the BoE signalling to expect a significant rise at its meeting next month.
As accountancy professor Lord Prem Sikka points out, higher rates will eat into mortgage-holders’ disposable income, push down prices, and create more financial distress:
UK interest rate likely to double soon.
Will lead to higher mortgage, rents, loan/overdraft cost, reduce disposable income.
More home repossessions, negative equity.
Higher personal/business bankruptcies.
Poor already paying 155% interest at pawnshops. What future?
— Prem Sikka (@premnsikka) October 17, 2022 UK stock market higherLondon’s stock market has opened higher, on optimism that Trussonomics is being ditched by the new chancellor.
The blue-chip FTSE 100 index, which hit a two-year low last week, has gained 0.6% this morning (up 44 points at 6,903 points).
Housebuilders such as Barratt Development and Taylor Wimpey are up over 2%, having been hit by the surge in borrowing costs following the mini-budget.
The domestically-focused FTSE 250 index of medium-sized firms has gained 0.9%.
Pound is appreciating
Gilt yields mostly lower / bond prices higher
Banks, utilities, housebuilders up
UK exporters down on pound strength
Overall an upbeat market reaction across FX, bonds and equities to the new UK Chancellor and his expedited fiscal timeline
— Victoria Scholar (@VictoriaS_ii) October 17, 2022 UK long-dated government bonds have basically recovered their losses from Friday after Liz Truss’s brief press conference disappointed the City, points out Andy Bruce of Reuters.
Here’s the 20-year gilt yield – essentially move (so far) this morning gets us back to Thursday’s levels, before Truss’s statement on Friday went down like a lead balloon in the market. pic.twitter.com/7MBwQP8Dq8
— Andy Bruce (@BruceReuters) October 17, 2022 Truss spent that eight-minute appearance trying to dodge responsibility and blame for the UK financial crisis, and only took four questions from reporters.
As As my colleague Andrew Sparrow explained at the time, it did little or nothing to persuade her MPs, or anyone else, that she will, or even should, survive as PM.
More early reaction to the drop in UK borrowing costs this morning:
UK 10y bond yields tumbled by 24bps to 4.1% ahead of a planned statement from new FinMin Jeremy Hunt laying out budget plans ahead of Oct31 medium-term plan. Hunt also gave series of interviews over weekend & is expected to eliminate most of other tax cuts laid out in mini budget pic.twitter.com/Sbz1jvNzHR
— Holger Zschaepitz (@Schuldensuehner) October 17, 2022 Shorter-dated UK government bonds are also rallying in early trading.
With price rising, the interest rate on two-year UK bonds has dropped. They’re now trading at a yield of 3.68%, down from 3.9% on Friday night.
The yield, or interest rate, on 2-year UK bonds Photograph: RefinitivThe markets are reacting positively to Hunt’s expedited timeline, which alleviates some of the fiscal uncertainty haunting the UK.
Victoria Scholar, head of investment at interactive investor, explains:
It is the first day of trade for the UK gilt market after the end of the Bank of England’s emergency bond-buying intervention. Out of the gates, UK gilt yields are trading mostly lower as bond prices push higher, suggesting that the sacking of Kwasi Kwarteng and the appointment of Jeremy Hunt have helped to stabilise the market to some extent, reinstating some confidence in the UK government borrowing market.
She adds, though, that international investors remain cautious towards the UK:
Gilts and the pound are still grappling with below normal trader appetite amid the fiscal uncertainty.
Despite this early rally in the bond market, UK borrowing costs are still rather higher than a month ago, before the mini-budget.
This chart shows how 30-year government bonds were trading at a yield (interest rate) of below 3.5% in mid-September.
The yields, or interest rate, on 30-year UK bonds Photograph: RefinitivThey then surged to 5% after Kwasi Kwarteng’s announcement, forcing the Bank of England to temporarily intervene.
Gilt market has opened – so far yields have come down, though it takes a while to establish a clear direction.
— Alice Ross (@aliceemross) October 17, 2022 UK government borrowing costs fall as trading beginsThe bond market is open…… and UK government borrowing costs are falling.
That suggests the City is welcoming Jeremy Hunt’s push to unravel the mini-budget with new tax and spending plans.
The yield, or interest rate, on 30-year government bonds (or gilts) has dropped sharply to 4.55%, down from 4.77% on Friday night.
Yields measure the cost of government borrowing, and fall when bond prices rise (and vice versa).
UK 10-year gilts are also rallying, pushing down the yield to 4.13% from 4.3% at the end of last week.
This should reassure the Treasury, as Sky News’s Paul Kelso explains:
New: markets open UK 10 year gilt yields first move is … down… That’s what @hmtreasury wanted to see in response to its pre-dawn announcement
— Paul Kelso (@pkelso) October 17, 2022 The Bank of England adds that liquidity is still available to banks through its new “Temporary Expanded Collateral Repo Facility”.
TECRF was created last week to help banks ease liquidity pressures facing their client funds caught up in the recent market turmoil which threatened pension funds.
The Bank of England has released a statement, confirming that it ended its temporary and targeted purchases of long-dated UK government bonds on Friday afternoon.
The Bank says that the programme helped pension funds which had used liability-driven investment (LDI) strategies (who came under stress when UK bond prices tumbled last month).
The BoE says:
At the outset of the intervention, the Bank said that it would carry out temporary purchases on whatever scale was necessary to restore orderly market conditions. The purpose of the operations was to provide time for LDI funds to address risks to their resilience from volatility in the gilt market, not to provide a permanent backstop.
As previously announced, the Bank terminated these operations and ceased all bond purchases on Friday 14 October. As intended, these operations have enabled a significant increase in the resilience of the sector.
Labour: Ministers are terrified of the marketsShadow treasury chief secretary Pat McFadden says Chancellor Jeremy Hunt’s decision to bring forward tax and spending measures is evidence of the panic in the government.
It also shows how much damage has been caused by the mini-budget,McFadden told BBC Breakfast.
Ministers are terrified about what happens when the markets open this morning.
That is testament to just how much chaos has been caused by Liz Truss since she became prime minister.