Gilt Yields Rise - A Tale of Two Spikes

In the past 24 hours, UK gilt yields have surged to a five-month high. This spike follows the announcement of Chancellor Rachel Reeves' Autumn Budget, which has been described as the largest tax increase in over thirty years. The 10-year gilt yield closed 3.5 basis points higher on Wednesday, reversing an earlier fall as markets adjusted to higher borrowing figures than anticipated, and now sits at 4.41%.

Why the Budget is Impacting Gilt Yields

The Budget revealed plans for significant increases in government borrowing to fund infrastructure spending. This has led to uncertainty among investors, who are now demanding higher returns to compensate for the perceived increase in risk. The rise in gilt yields indicates that investors are concerned about the UK's fiscal health and the potential for higher inflation and weaker currency.

Why This is Bad News

 

Higher Borrowing Costs: As gilt yields rise, the cost for the government to borrow money increases. This means that more of the government's budget will be spent on interest payments, leaving less money available for public services and investment.

 

Impact on Businesses: Higher borrowing costs can lead to higher interest rates for businesses, making it more expensive for them to finance their operations and investments. This can slow down economic growth and lead to job losses.

 

Effect on Consumers: Higher interest rates can also affect consumers, making it more expensive to borrow money for things like mortgages and car loans. This can reduce consumer spending and further slow down the economy.

 

Market Volatility: The rise in gilt yields can lead to increased volatility in financial markets, as investors react to the changing economic outlook. This can create uncertainty and make it harder for businesses and consumers to plan for the future.

In summary the rise in gilt yields highlights the challenges and risks associated with higher borrowing and spending. It remains to be seen how the government will manage these risks and whether they can reassure investors and stabilise the market.

Labour blamed Truss for spiking the gilt market when she was PM.

Yet, here we are with a Labour government and gilts are at 4.41%. This is in fact higher than the Truss spike.

I wonder what Kwasi is thinking?

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Summary of The Budget

In a historic move, Chancellor Rachel Reeves has unveiled Labour's first budget in 14 years, marking it as the biggest tax-raising fiscal event since 1993. The Autumn Budget 2024 has increased taxes by £40BN, and comes at a steep cost to taxpayers.

Key Tax Increases

Employers' National Insurance Contributions: One of the most significant changes is the increase in employers' National Insurance contributions. The rate will rise from 13.8% to 15% starting April 2025, with the threshold for payments lowered from £9,100 to £5,000. This move is expected to generate an additional £25 billion. Employers will pass this on to workers via lower wages, cutting jobs and increases in prices.

Capital Gains Tax: The lower rate for capital gains tax will increase from 10% to 18%, and the higher rate will go from 20% to 24%. This change is aimed at raising substantial revenue from those who profit from the sale of assets.

VAT on Private School Fees: Starting January 2025, VAT will be introduced on private school fees. This measure is expected to generate significant revenue but has sparked controversy among private education advocates.

Inheritance Tax: The inheritance tax thresholds will be frozen for an additional two years until 2030. This freeze means more estates will be liable for the tax as property values rise. Pensioin pots will be included in assets liable for IHT as from 2027.

Tobacco and Vaping Duties: The budget also includes a renewal of the tobacco duty escalator at RPI +2% and a 10% increase in duty on hand-rolled tobacco. Additionally, a flat-rate duty on all vaping liquid will be introduced in 2026.

Air Passenger Duty: The rate of air passenger duty for private jets will increase by 50%. This measure targets the wealthier segment of society, aiming to raise additional funds while promoting environmental responsibility.

Impact on the Public

The budget's tax increases are expected to have a broad impact on the British public. Employers will face higher costs due to the increased National Insurance contributions, which will be passed on to employees in the form of lower wages or reduced hiring. The changes to capital gains tax and inheritance tax will affect those with significant assets, potentially leading to higher tax bills for many families.

The introduction of VAT on private school fees will likely increase the cost of private education, making it less accessible for some families. The increases in tobacco and vaping duties will hit smokers and vapers, while the higher air passenger duty will affect those who frequently travel by private jet.

Conclusion

The significant tax increases will undoubtedly place a heavier burden on taxpayers. As the public and businesses adjust to these changes, the true impact of the budget will become clearer in the coming months. Additonally, the OBR do not see any material imporvement on GDP over the next 5 years and the Bank of Engkland may well hold off further interest rate cuts, as yields are increasing.

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The Budget Live

 

Watch the budget live at 12:30 via this link Budget

Good luck!

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Longer Mortgage Terms Risk Retirement Debt Crisis, Warn Bank of England Staff

 

Introduction

In a recent blog post on Bank Underground, analysts at the Bank of England have raised concerns about the increasing trend of homeowners borrowing on mortgages later in life.

This trend, they warn, could trigger a retirement debt crisis, posing significant risks to financial stability.

Rising Trend of Ultra-Long Mortgages

The Bank of England's data shows a sharp rise in the share of new mortgage lending extending beyond the state pension age of 67.

During the first three months of 2024, this share surged to 42%, up from around a quarter before the COVID-19 pandemic. This increase is driven by spiralling house prices and stagnating incomes, pushing borrowers to take on ever-longer mortgages.

Financial Stability Risks

The analysts argue that longer mortgage terms could affect financial stability by pushing debt repayments beyond retirement, where incomes are less certain.

This reliance on less predictable pension incomes to meet repayments could undermine the financial system over time. Borrowers on longer-term mortgages pay more interest over the life of their loans, and they have fewer options if they find themselves in financial difficulties.

Impact on Younger Generations

The surge in ultra-long mortgages is most prevalent among younger borrowers and first-time buyers.

Home ownership rates among those in their mid-20s to mid-30s have fallen by 20 percentage points since the turn of the millennium to 39%. Soaring rents and living costs have made it more difficult to save for a deposit, with nearly two-thirds of first-time buyers in the past five years relying on the "bank of Mum and Dad".

Short-Term Benefits vs. Long-Term Consequences

While longer mortgage terms lower monthly repayments, making them more affordable in the short term, they come with longer-term consequences.

Borrowers end up paying more interest over the life of their loans and take longer to pay back their mortgages. This could lead to greater debt persistence and financial challenges in retirement.

Regulatory Measures and Lender Policies

The Bank of England's staff noted that tight lending criteria and responsible lending rules likely limit the overall risks to the financial system.

Many lenders have their own rules on lending into old age, and the Financial Conduct Authority (FCA) requires banks to take into account likely changes in income due to retirement. These measures help mitigate some of the risks associated with longer-term mortgages.

Conclusion

The Bank of England's warning highlights the need for careful consideration of mortgage terms and their long-term implications. While longer mortgage terms may provide short-term relief, they could lead to significant financial challenges in retirement. Policymakers and lenders must work together to ensure that borrowing practices do not undermine financial stability and leave homeowners vulnerable in their later years.

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ECB Cuts Rates by 25bp as Expected

 

Today, the European Central Bank (ECB) announced a 25 basis point cut in interest rates, bringing the deposit rate down to 3.25%. This decision comes as a response to recent economic data indicating a slowdown in growth and persistently low inflation within the Euro Area

Reasons for the Rate Cut

The ECB's decision to cut rates is driven by several factors: 

1 Economic Slowdown: Recent activity data, particularly the Purchasing Managers' Index (PMI), has shown signs of stagnation or even contraction in some sectors

This has raised concerns about the overall health of the Euro Area economy

2 Low Inflation: Despite previous efforts to boost inflation, the Euro Area has struggled to reach its target of close to 2% 

The latest inflation figures have remained below this target, prompting the ECB to take further actiion

3 Global Economic Uncertainty: The ongoing trade tensions and geopolitical risks have added to the economic uncertainty, making it necessary for the ECB to adopt a more accommodative monetary policy stance.

Impact on Interest Rates

The rate cut is expected to have several implications for interest rates:

1 Lower Borrowing Costs: The reduction in interest rates will lead to lower borrowing costs for businesses and consumers, potentially stimulating investment and spending

2 Weaker Euro: The rate cut is likely to weaken the euro against other major currencies, making Euro Area exports more competitive

3 Future Rate Cuts: Market analysts are already pricing in further rate cuts, with expectations of additional reductions in the coming months

The ECB's tone in its communications will be closely watched for any hints of more aggressive rate cuts

Economic Implications

The rate cut is expected to have a mixed impact on the economy:

1 Boost to Growth: Lower interest rates can help boost economic growth by making borrowing cheaper and encouraging spending

2 Challenges for Savers: On the flip side, lower interest rates can hurt savers, as they will receive lower returns on their deposits.

3 Inflation Concerns: While the rate cut aims to boost inflation, there is a risk that it could lead to higher inflationary pressures if not managed carefully.

Conclusion

The ECB's decision to cut rates by 25 basis points is a strategic move aimed at addressing the current economic challenges facing the Euro Area. While it is expected to provide some relief to businesses and consumers, the long-term impact will depend on how the broader economic conditions evolve. The ECB will need to carefully monitor the situation and be ready to adjust its policy stance as needed.

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Inflation at 1.7% Beats Expectations

 

Today, the Office for National Statistics (ONS) released inflation figures that have pleasantly surprised analysts and policymakers alike. The Consumer Prices Index (CPI) inflation rate fell to 1.7% in the year to September, down from 2.2% in August. This marks the first time inflation has dipped below the Bank of England's target of 2% since April 2021

Main Reasons for the Drop in Inflation

The significant drop in inflation can be attributed to two main factors: lower airfares and reduced petrol prices

These reductions have had a substantial impact on the overall inflation rate, bringing it down more than expected. Analysts had predicted a fall to 1.9%, but the actual figure of 1.7% exceeded these expectations

Impact on Interest Rates

The better-than-expected inflation figures have increased the likelihood of further interest rate cuts by the Bank of England

The central bank has been working to bring inflation down to its target by keeping interest rates higher. However, with inflation now below the target, there is growing speculation that the Bank of England may consider reducing interest rates further to stimulate economic growth

Economic Implications

The drop in inflation is welcome news for millions of families, as it means the cost of living is rising more slowly

However, it also has broader economic implications. Lower inflation can lead to increased consumer spending power, as people have more disposable income. This, in turn, can boost economic growth and help businesses thrive.

On the flip side, lower inflation can also mean that benefits and pensions may rise less than expected next year

The inflation figure for September is typically used to set the increase in benefits for the following year, and a lower inflation rate could result in smaller increases

Conclusion

Today's inflation figures are a positive sign for the UK economy, indicating that efforts to control inflation are bearing fruit

However, the Bank of England will need to carefully balance interest rate decisions to ensure that economic growth is sustained without reigniting inflationary pressures. As we move forward, it will be crucial to monitor these economic indicators closely to navigate the path to a stable and prosperous economy.

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Rip Out Bureaucracy, But Register Your Chickens!

 

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FCA’s Remote Working Policy: A Step Backwards in Financial Regulation

The Financial Conduct Authority (FCA) has recently announced an extension of its remote working policy, allowing 60% of its staff to work from home until at least 2026

This decision is not only baffling but also raises serious concerns about the effectiveness and accountability of the UK’s financial regulator.

At a time when major financial institutions on Wall Street are calling their staff back to the office, the FCA’s move seems out of touch with the realities of the financial sector

The regulator’s role is to oversee and ensure the stability of the financial markets, a task that requires rigorous oversight and close collaboration. How can this be achieved when a significant portion of its workforce is operating remotely?

The FCA’s decision undermines the very essence of regulatory oversight. The financial sector is complex and dynamic, requiring real-time monitoring and swift decision-making. Remote working, while beneficial in certain contexts, can lead to delays and miscommunications that could have serious repercussions for the market and consumers.

Moreover, this policy extension sends a troubling message about the FCA’s priorities. Instead of focusing on enhancing its regulatory capabilities and ensuring robust oversight, the FCA appears more concerned with accommodating the preferences of its staff. This is a dangerous precedent that could erode public trust in the regulator’s ability to effectively oversee the financial sector.

The FCA must reconsider this ill-advised policy and align itself with the broader industry trend of returning to the office. The integrity and stability of the UK’s financial markets depend on it.

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Labour Is Fucking Up The Economy

Labour’s ceaseless Britain-bashing and their relentless “doom and gloom” script have pushed the panic button on the economy. Talk of a “painful” budget has businesses running for cover. A staggering 71% surge in mergers and acquisitions—business owners are frantically selling up ahead of Labour’s capital gains tax raid. Start-ups are being strangled by Labour’s crackdown on innovation tax credits. And now 9,500 millionaires set to flee the UK in 2024…

The drip-feed of pessimism from Labour’s economic doomsayers is doing its damage. Investors are voting with their feet, with £666 million drained from UK-focused funds in September alone. Equity income funds shed £416 million. Edward Glyn, head of global markets at Calastone, said:

“The new government’s rather pessimistic commentary about the UK economy appears to have put a stop to the nascent revival in interest in domestic equities that we first detected in trading data in July. UK-focused funds seem to be off the menu for investors for the time being.”

The figure of £666M is truly biblical!

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The Global Consequences of The USA Port Strike

Members of the International Longshoremen Association (ILA) went on strike from 12:01am on 1 October paralysing container ports on the US East and Gulf Coasts. Last ditch talks failed to avert the strike at ports from Maine to Texas, for the first time since 1977.

The strike has sent ripples through the global economy, threatening to disrupt supply chains and economic stability worldwide. 

Reasons Behind the Port Strike

The port strike primarily stems from unresolved labour disputes between dockworkers and port authorities. Key issues include:

1. Wages and Benefits: Dockworkers are demanding higher wages and better benefits to keep pace with inflation and the rising cost of living. The cost of living in many port cities has surged, making it difficult for workers to maintain their standard of living without corresponding wage increases.

2. Working Conditions: There are significant concerns over working conditions, including safety measures and the physical demands of the job. Dockworkers often face hazardous conditions, and there is a push for better safety protocols and equipment to protect them from injuries.

3. Automation: The increasing automation of port operations threatens job security for many dockworkers. While automation can improve efficiency, it also reduces the need for human labour, leading to fears of job losses and a pushback against further technological advancements.

4. Contract Negotiations: Prolonged and contentious contract negotiations have exacerbated tensions. Both sides have struggled to reach a satisfactory agreement, with disputes over contract terms, job security, and future employment conditions.

Potential Serious Consequences for the Global Economy and Supply Chains

The strike's impact extends far beyond U.S. borders, with several significant consequences:

1. Supply Chain Disruptions: U.S. ports handle a substantial portion of global trade. A prolonged strike could lead to severe delays in the shipment of goods, creating bottlenecks and backlogs. This can affect industries ranging from electronics to automotive, as components and finished products are delayed.

2. Economic Costs: The strike could cost the U.S. economy up to $5 billion per day, affecting everything from consumer goods to industrial supplies. The economic ripple effect can lead to reduced productivity and increased costs for businesses relying on timely deliveries.

3. Inflation: Disruptions in the supply chain can lead to shortages of essential goods, driving up prices and contributing to inflation. Consumers may face higher prices for everyday items, from groceries to electronics, as supply dwindles and demand remains high.

4. Global Trade: Countries reliant on U.S. imports and exports will face significant challenges, potentially leading to a slowdown in global trade. Nations that export raw materials to the U.S. or import American goods will experience delays and increased costs.

5.Holiday Season Impact: With the strike coinciding with the busy holiday shopping season, retailers may struggle to stock shelves, leading to disappointed consumers and lost sales. This can have a cascading effect on the retail sector, affecting everything from small businesses to large chains.

Conclusion

The U.S. port strike is a complex issue with far-reaching implications. Resolving the underlying labour disputes is crucial to mitigating its impact on the global economy and ensuring the smooth functioning of supply chains. 

Biden could, under the 1947 Taft-Hartley Act, seek a court order for an 80-day cooling-off period. This would suspend the strike. However, despite this strike will play merry hell with the election chances for Harris, Biden is sitting on his hands and doing nothing.

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