BETA filters Key Events (11) United Kingdom (12) Kwasi Kwarteng (10) Bank of England (7) USA (5) S&P Global Market Intelligence (4) The UK Debt Management Office is increasing its plans to issue debt for the current financial year by £72.4bn, to £234.1bn, to cover the cost of unfunded tax cuts in today’s mini budget . The DMO will need to issue an additional £62.4 billion of gold – bringing the total to £193.9 billion – plus another additional £10 billion of short-term Treasuries (to cover debt management needs). This is fueling a sell-off in government bonds, as investors will demand a higher rate of return to buy this debt.
The pound falls below $1.11 to a new 37-year low
Sterling falls further as financial markets give their verdict on the raft of unfunded tax cuts announced by Kwasi Kwarteng this morning. The pound has fallen below $1.11 against the US dollar for the first time since 1985, as investors reject the huge extra borrowing needed to finance today’s plans. There were times before where there was a loss of confidence in the pound. The pandemic £/$ 1.145 The start of war 🇷🇺 / 🇺🇦 1.14Confidence is now even lower as we sink to 1.11 in the dollar. pic.twitter.com/ZFdrqUL3vX — Simon Dalling #FBPE #ResistOrganise 🐟🇺🇦🌻🇪🇺🌱 (@SimonDalling) September 23, 2022 Rachel Winter, Partner and Investment Manager at Killik & Co, says the recent weakness in sterling shows a lack of confidence in the government’s plans. The pound has fallen 15% against the dollar over the past six months and this morning’s budget has further weakened it. This chart shows how UK bonds are falling (pushing yields) while other government debt prices are much more stable: UK government bonds have been hit by worries about the extra borrowing needed to fund Chancellor Kwarteng’s massive tax cuts. The yield, or interest rate, on two-year UK bunds is rising, reaching the highest level since the 2008 financial crisis. Two-year gold yields have jumped 37 basis points, a huge one-day move, to over 3.8%. Benchmark 10-year gold has also weakened, pushing its yield to the highest level since 2011. Two-year gold government borrowing rates have jumped 30 basis points to 3.9%.. less than 3.5 this morning.. a huge move today. it was 3.1 on Tuesday, it was 1.7 when Truss took the lead over Sunak in August pic.twitter.com/6bSM9x20GZ — Faisal Islam (@faisalislam) September 23, 2022 RLAM’s head of Multi Asset, Trevor Greetham, says Kwarteng’s package would have made more sense after the 2008 financial crisis – than today. “Action to help struggling households and businesses pay their heating bills this winter was necessary, but the scale of the tax cuts and spending increases in this announcement is breathtaking. Arguably, a major, unfunded fiscal stimulus package like this would have made economic sense after the deflationary global financial crisis, when borrowing costs were low and private sector balance sheets were deleveraging. Now with overcapacity non-existent, inflation at a forty-year high and the Bank of England trying to ease things, we are likely to see a policy tug-of-war reminiscent of the 1970s. Investors should be prepared for a bumpy course”.
Kwarteng scraps the top 45% income tax rate – in the biggest package in half a century
In Parliament, Kwasi Kwarteng announced a stunning series of tax changes – in what looks to be the biggest tax event since the early 1970s. The chancellor has pulled a huge rabbit out of his hat – scrapping the 45% top rate of income tax altogether and reducing the basic rate from April 2023 from 20% to 19%. Kwarteng also scrapped next year’s rise in corporation tax from 19% to 25%, scrapped planned increases in duty rates on beer, wine and cider, scrapped stamp duty under £250,000 – and £435,000 for first-time buyers time – and abolishes the Office of Tax Simplification (OTS). REIMBURSEMENT OF TAX REDUCTIONS Income tax: Top rate cut – 45p to 40pBasic rate cut – 20p to 19p National insurance: Reverse rise Stamp Duty: Abolished under £250k Abolished under £435k for first time buyers Big biz: Corporation tax hike scrapped No cap on bankers’ bonuses #minibudget — Paul Brand (@PaulBrandITV) September 23, 2022 The chancellor confirms that almost 40 investment zones will be created with tax breaks for businesses, the bankers’ bonus cap will be scrapped and measures to streamline regulations and scrap EU-sourced laws will be pushed through. He also announced that the government would legislate to prevent “militant unions” from shutting down essential infrastructure through strikes. The laws will require unions to put pay offers to a vote of members, to ensure strikes can only be called when pay talks have effectively broken down. Here are all the key points: Updated at 10.41 BST
Business gloomiest since May 2020.
Another worrying sign – UK business optimism for the coming year has hit its lowest level since the start of the pandemic in May 2020. Bosses are increasingly concerned about declining business and rising costs. Dr John Glen, Chief Economist at CIPS, explains why they are so concerned: “Business activity in the UK private sector fell at the fastest pace since January 2021 in September, with the headline index posting in contraction territory for the second consecutive month. Nerves about the strength of the UK economy weighed on new customer wins as customers affected by cost-of-living pressures cut spending. Costs and prices charged remained high, and even with rates of inflation easing since August, were among the highest since the survey began in 1998. And with interest rates at a 14-year high of 2.25%, there isn’t much to get businesses excited about. The highest rate rise in 14 years also means borrowing costs are now the highest since 2008, so there are very few reserves to make private sector businesses look on the bright side as fears of a UK recession grow ». The UK recession is likely to intensify as we head into winter, adds Chris Williamson of S&P Global Market Intelligence, as the Bank of England continues to raise interest rates as Britain slips into recession.
The UK recession deepens as companies struggle with rising costs and falling demand
Britain’s private sector is shrinking at the fastest pace since the Covid-19 lockdowns in January 2021, newly released figures show. The Flash UK PMI Composite Output Index, which tracks activity across the economy, has fallen to 48.4 this month, a 20-month low. That’s down from 49.6 in August – any reading below 50 indicates the economy contracted. It is another sign that the UK economy is in recession. The report shows that cost pressures remain high and demand has weakened. Services sector companies contracted this month for the first time since February 2021, while manufacturing continued to contract. Chris Williamson, chief economist at S&P Global Market Intelligence, explains: The UK’s economic woes deepened in September as a drop in business activity suggests the economy is likely in recession. Companies say the rising cost of living, linked to the energy crisis, and growing worries about the outlook are dampening demand and hitting output levels to a degree not seen since 2009, barring pandemic lockdowns and the initial shock of the 2016 Brexit referendum. UK flash Manufacturing PMI Act Sep: 48.5, exp: 47.5; preceding 47.3 UK flash Services PMI Act: 49.2, exp: 50, prev 50.9 — Michael Hewson 🇬🇧 (@mhewson_CMC) September 23, 2022 Businesses were hit by the fastest decline in new jobs in 20 months (again, since the 2021 winter lockdowns). Export orders fell at a “sharp and accelerating pace.” Goods producers suffered the biggest drop in foreign demand in 28 months and services firms were hit by the first decline since December 2021. The PMI survey also shows that inflationary pressures are stronger than at any time in the survey’s history, before the pandemic. These cost pressures are being driven by the weaker pound – which is driving up the cost of imports, as well as ongoing supply chain issues and rising energy prices. With UK consumer confidence at record lows and the pound at its weakest since 1985, the economic outlook is darkening almost hourly…. Updated at 09.51 BST
Follow the mini budget live here
Kwasi Kwarteng is set to deliver the mini budget – my colleague Andew Sparrow is live streaming all the details here: Sterling continues to make new lows against the dollar (which is also strengthening against other currencies this morning). The pound is now down a cent this morning at $1.1165. Steve Clayton, fund manager at HL Select, explains: The US dollar continues to rise as investors look to the safe haven of the world’s most liquid asset during a period of economic and political turmoil. The flip side of this is weakness in other currencies. This morning one euro buys you just USc 98, a decisive break below parity with the dollar. Brits considering transatlantic travel may want to do the numbers again, because a pound sterling now buys just $1.12, almost 20% less than a year ago.” Sterling at a new 37 year low against the dollar, now below $1.12 – at $1.116… along with the rise in gold lending rates yesterday, not the most welcoming setting for a fiscal statement pic.twitter.com/qhg3i4bJVn — Faisal Islam (@faisalislam) September 23, 2022 The recession in the wider eurozone has also deepened this month as price pressures intensify. Business activity in the eurozone contracted for a third consecutive month, S&P Global’s flash PMI survey shows. They warn: Although only moderate, the rate of decline accelerated to a rate that, barring pandemic lockdowns, was the steepest since 2013. Forward-looking indicators such as new order inflows, job backlogs and future production expectations point to the decline gaining further momentum in the coming months.
