Liz Truss’s spokesman: we don’t comment on market moves
Liz Truss’s spokesman has declined to comment on today’s market moves, following the hammering given to UK government bonds this morning, and the pound’s slide to a record low overnight.
The spokesman said (via Reuters):
“The chancellor has made clear that he doesn’t comment on the movements around the market and that goes the same for the prime minister.”
The spokesman added there are no plans to make any changes to the measures set out in the so-called ‘mini-budget’ by chancellor Kwasi Kwarteng on Friday.
That may disappoint investors who were alarmed by the scale of the tax cuts in the mini-budget, and the surge in borrowing needed to pay for them (as Mohamed El-Erian explained this morning).
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Elsewhere in the markets, oil has hit a nine-month low on fears that a global downturn will hit demand.
Brent crude has fallen to $85.75 per barrel, the lowest since January, and down from over $120/barrel this summer.
That would mean motorists could look forward to cheaper petrol… but the pound’s weakness has wiped out some of those gains.
Sterling has now risen by around five cents since hitting its record low in Asia-Pacific trading.
That’s a welcome recovery (helped by expectations that the Bank of England will step in).
But, that level of volalility is still alarming, and shows how the loss of confidence in UK assets in recent days is causing market volatility.
The price of UK five-year government bonds is now below both Italy and Greecea decade after the eurozone debt crisis was gripping markets.
UK gilt prices have fallen more than Italy’s government bonds today too, despite the far-right Brothers of Italy party winning the most votes in Sunday’s election.
Thomas Pugh, economist at audit, tax and consulting firm RSM UK says the Bank of England is likely to intervene to try to stabilise the market with an emergency rate hike.
Pugh reckons the MPC will probably want to give financial markets a little time to settle, especially as the pound has already rebounded from its all-time low.
It will also want to give the government time to come out with a statement on how it intends to manage the public finances in the medium term, to calm investors.
Pugh adds
As such, we’re likely to see MPC members and Governor Bailey making lots of public statements over the next few days emphasising the MPC’s commitment to 2% inflation and that it intends to raise interest rates sharply over the rest of this year. If combined with a sensible government plan for managing the public finances, that could be enough to halt the drop in the pound.
However, the next scheduled MPC meeting isn’t until 3rd November, which feels like a very long way off. Unless the pound rebounds sharply over the coming days, an emergency meeting is likely.
Precisely when this would come is anyone’s guess, but it could be as early as today or as late as next week. An emergency meeting would probably result in a super-sized rate hike of 100bps or more and a lot of hawkish rhetoric.
Kwasi Kwarteng has declined to comment on the turmoil in the markets.
The BBC spoke with the chancellor in Whitehall, where he said only that:
I’m not going to make any comment now, thank you.
The ‘now’ could suggest there’s a statement coming at some point…..
The pound has now risen back above its closing levels on Friday, recovering from its historic slump overnight.
But at $1.09 it’s still desperately weak against the US dollar, down 19% so far this year.
A penny (or a cent, there’s little difference tbh) for the thoughts of Tom Scholar, who was fired as the Treasury’s top civil servant barely two weeks ago.
The highly experienced, well respected Scholar was removed because the government wanted ‘new leadership’ to push through their plan of stimulating growth through tax cuts.
But Scholar’s experience through the financial crisis, and the pandemic, could be valuable today, as the markets give their verdict to the mini-budget.
As Nick Macphersonanother former Permanent Treasury secretary points out:
Could the sterling crisis result in a vote of no confidence in Liz Truss?
Analysts at RBC Capital Markets suggest this is one possible scenario, especially if the poudn fell through dollar parity, telling clients:
Vote of no-confidence in Truss? Seems likely eventually, though Tory backbenchers probably have to be squeezed harder (the Telegraph suggested cable [the £/$ rate] below parity could be the trigger).
RBC add that “the government-supporting press greeted Friday’s event with fawning coverage” (surely not?!), and that Truss has pushed out those who didn’t support her:
A few analysts noted when Truss announced her cabinet that she had made no effort to build bridges – she promoted her allies, pushed out everyone else.
Doesn’t set her up well for surviving long but 20 days is a bit premature, even in a post-Brexit world where the UK is rotating PMs as fast as Italy.
There are already talk that some MPs could be putting in letters of no confidence, calling for a new leadership election, as our political correspondent Aubrey Allegretti explains:
The best scenario, RBC add, would be a joint appearance from Bank of England governor Andrew Bailey chancellor Kwasi Kwartengdelivering an emergency hike and a message that they are on the same page rather than pulling in opposite directions.
However, this is unlikely, they say, as the government is “clearly not in crisis mode’…..
Nomura: Pound to fall below dollar parity, as hope is not a strategy….
Analysts at bank Nomura have slashed their forecasts for the value of the pound.
They now expect sterling to hit parity with the US dollar by the end of November, and fall further by the end of the year to $0.975.
Further losses are expected early next year, with the pound hitting a fresh record low of 0.95% in the first quarter of 2023.
Nomura warn that the UK is facing a “a fundamental balance of payments crisis, with politicians hoping it will eventually just calm down”.
And in a blunt warning to the Truss government, they write:
Hope is not a strategyand markets are reflecting that.
Nomura says there are three key pillars which could help the pound recover, in order of likelihood and timeliness:
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in the short term, the potential for a surprise rate hike from the Bank of England; (will this work? we explain why probably not in the full text below)
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Conservative backbenchers force a government U-turn (but how soon?); and
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A recovery of medium-term global growth expectations.
Markets are pricing in a roughly 75 basis-point increase in Bank Rate before the end of the week, reports economist Sam Tombs of Pantheon Macroeconomics.
The Bank of England may be reluctant to intervene in the markets though – in case it backfires. Memories of Black Wednesday – when speculators forced the pound out of the ERM – remain tender.
Brad Bechtel of investment bank Jefferies explains:
There is a growing chorus of market participants calling for the Bank of England to do something like an emergency rate hike. The risk with that strategy is that it may actually backfire and cause a further run on the GBP as the market prices in a further hit to growth and potential reaction from the new government to try to ease fiscal policy even more.
The BoE was also burned already trying to support the GBP back in 1992 and likely has very little appetite to try again. Also, a vote to hike by the BoE is sort of a vote of no confidence in the new UK government’s policy.
So I would not be surprised if they stand down for now and let things play out a little further.
The surge in UK borrowing costs in recent months (and indeed, recent days), is quite staggering, and equally alarming:
Shadow chancellor Rachel Reeves has warned the Labour conference that prices in the shops, and the cost of borrowing, will both rise due to the market reaction to the mini-budget.
Our Politcs liveblogger, Andrew Sparrow, has the details:
Rachel Reevesthe shadow chancellor, started with an attack on Kwasi Kwarteng for the mini-budget announced on Friday.
She says the message from financial markets was clear on Friday. Today that message is “even more stark”.
The fall in the value of sterling means prices will go up.
It means the cost of borrowing for government will go up.
And the cost of borrowing for families will go up too, she says.
All for what? For tax cuts for the wealthiest, she says.
Reeves also said she would raise the minimum wage at a level that reflects the real cost of living, and reinstate the 45% top rate tax band, to hire more NHS staff
Our full coverage of the Labour party conference is here:
The only previous time the pound was this weak against the dollar was in 1985.
And back then, it took intentational government intervention to stem the rampant dollar, through the Plaza Accord.
AJ Bell investment director Russ Mould reminds us:
“The G5 – as they were then – agreed at a meeting in New York to devalue the dollar against the Japanese yen, German deutschmark, French franc and the pound, and with the Bank of Japan already intervening in the foreign exchange markets [last week] it will be interesting to see if we get any co-ordinated action this time around.
That agreement was made at the New York Plaza Hotel. Finance ministers agreed that the US dollar should depreciate, after the greenback surged following interest rate hikes to cool US inflation (as we’re also seeing today).
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