Sterling flounders ahead of UK Mini-Budget

Biggest fiscal event in 30 years

That’s how the chancellor’s Mini-Budget is being described as analysts anticipate wide-ranging tax cuts. An IFS-Citi report argues the Kwasi-Budget is unsustainable with too much borrowing just as rates go up. The widening trade deficit, which rose to almost an all-time high £27bn in the three months to July, is one half of a twin deficit that leaves traders bearish on the pound. And all these tax cuts won’t help the other half of the UK’s twin deficit – the budget deficit - and it could lead to further re-pricing for sterling. Citi: “Fiscal and external risks are now, in our view, a first-order concern … Further cross-market cheapening seems likely,” and: “It is not at all clear in our view the external picture will be sustainable without some more extensive price adjustments.”

Bond market stress

Bond markets went into convulsions yesterday, the yield on the benchmark US 10yr Treasury note jumping from 3.5% to above 3.7%, whilst 2s surged through 4.16%. At one point the gap between 2-year and 10-year Treasury yields was the most inverted since 1981. US mortgage rates leapt to 6.3%, the highest since 2008. Gilts were in paroxysms as the Bank of England raised rates to the highest since 2008 and investors looked ahead to this mini-Budget and what it will mean for borrowing. The 10yr gilt yield topped 3.5% for the first time since 2011 after the chancellor announced the government would reverse the national insurance increase. Spreads with European neighbours widened, the gap between UK and German debt its largest since 2015.

Bank of England hikes

Still too slow, still complacent. Andrew Bailey’s tenure at the Bank of England has been marked by a lethargy and complacency that whilst at least consistent with peers at the outset, is now looking worryingly out of step. True, the MPC voted to raise rates by 50bps to a 14-year high. But equally true is that the 2.25% Bank rate vs 9.9% CPI inflation is just not credible. Other central banks – with the notable exception of the Bank of Japan for reasons all of its own – have come out swinging with 75bps hikes. The BoE was among the first to tighten but it is yet to shrug off its patient, gradual approach and adopt a more forceful stance. There is clearly pain to come, better to get it out of the way quickly as the Fed is doing. GBPUSD took a fresh 37-year low with a 1.11 handle this morning.

Stocks lower

European stock markets traded just a little lower in early trading on Friday. The FTSE 100 dipped to the 7,100 area and the DAX fell under 12,450. Wall Street closed lower, led by tech/growth as yields surged. The Nasdaq closed down almost 1.4%, with the S&P 500 0.84% lower for the session at 3,758 with a sharp downturn into the close highlighting the bulls are nowhere to be seen.

Tesla recall

Tesla sunk 4% as it was ordered to recall almost 1.1m vehicles in the US over windows in all four models closing too quickly.