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Pound dips back from two-week high as Kwarteng insists debt-cutting plan still due on 23rd November – business live | Business

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Kwarteng: fiscal plan still due on November 23rd

The pound has slipped back from this morning’s two-week high above $1.14, as Kwasi Kwarteng insists that he will deliver his medium-term debt reduction plan towards the end of next month, not earlier as had been expected.

Chancellor Kwasi Kwarteng has told GB News in an interview that his medium-term fiscal plan will be published on November 23rd as planned, not being brought forward.

Q: You said that you are going to bring forward the fiscal assessment in conjunction with the Office for Budget Responsibility. You said in your speech yesterday that will happen shortly – is shortly before the 23rd of November?

Kwarteng replies that shortly means the 23rd – and that people have been ‘reading the runes’.

Q: So you’re not bringing that fiscal plan forward?

It’s going to be the 23rd of November.

Sterling has now eased back to around $1.134, slightly higher on the day, with investors disappointed that they could be waiting weeks to hear Kwarteng’s plan to cut debt.

Kwarteng gave Bank of England permission for £100bn of bond buying

Kwasi Kwarteng gave the Bank of England permission for an even larger intervention in the bond market than the £65bn launched last week, it has emerged.

The chancellor signed off on £100bn of bond buying by the Bank of England as the market fell into turmoil last week, according to a letter sent to Treasury committee chair Mel Stride.

Kwarteng explained:

“The Bank has requested an extension to the maximum size of the APF by £100 billion to £966 billion.

“There was a special urgency to incur this liability.”

[The AFP is the Bank’s Asset Purchase Facility]

That shows the level of concern among officials about volatility in the gilt markets, and the size of the intervention that they thought might be needed.

But as flagged in the previous post, the Bank has actually only bought less than £4bn of long-dated yilts so far, shy of its maximum of £5bn per day – which was still enough to have brought yields down.

The Bank of England’s emergency intervention last week appears to be working.

The yield (interest rate) on UK 30-year bonds is hovering around 3.9% today, close to its levels just before the mini-budget.

They had surged to 5.1% last week, prompting the BoE to pledge to buy £5bn of those long-dated gilts each day until the end of next week.

The BoE’s move has pushed up prices, lowering yields. And best of all, the Bank hasn’t had to spend all its firepower at all, meaning it shouldn’t hit the maximum of £65bn of gilt purchases.

30y Gilts now back to pre mini-budget levels

Very good return on investment for the Bank of England who have spent £3.6bn in 4 days.. (they announced they could buy up to £5bn a day) pic.twitter.com/15gleFi2mo

— Joumanna Bercetche 🇱🇧 (@CNBCJou) October 4, 2022

This shows the power of such interventions – investors can be wary of fighting central bankers once they pledge to take action, meaning less action is actually required.

It also shows that the Bank certainly won’t be losing £65bn on these purchases. In fact, the bonds it bought last week have risen in value since…

The number of people in my timeline telling the world the Bank has “spent” or “lost” £65 billion … Get a grip. It’s a financial intervention. They are slowly buying that much gilt with that much money. The Bank hasn’t lost the cash

It’s been a fiasco, but not in that way

— Giles Wilkes (@Gilesyb) October 4, 2022

Bloomberg: Shell CEO says governments need to tax energy firms to help poor

The boss of Shell has said that governments need to tax energy producers to help the poorest people deal with the soaring cost of fuel, Bloomberg reports.

“One way or another there needs to be government intervention,” Shell Chief Executive Officer Ben van Beurden said at the Energy Intelligence Forum, a major conference for oil and gas producers in London on Tuesday.

Van Beurden explained:

“Protecting the poorest, that probably may then mean that governments need to tax people in this room to pay for it.”

Here’s the full story.

Shell CEO tells London Energy Forum higher taxes probably needed to fix energy crisis. Thoughts @Jacob_Rees_Mogg?

— Andy Critchlow (@baldersdale) October 4, 2022

Van Beurden, who steps down as Shell boss at the end of the year, also argued that European governments should not intervene in gas markets to cap prices, but should focus on protecting the weaker parts of society from high energy costs.

He argued that capping wholesale gas prices, as many EU countries are pushing for, would deter producers from bringing more supplies to Europe.

“Can we make a meaningful intervention in gas markets here in Europe? That is a much more challenging prospect.”

In the UK, Liz Truss has resisted calls for new windfall taxes on energy companies to fund her two-year freeze on the unit cost of energy which began this month.

Labour, though, proposed a beefed-up £8bn tax on excess profits made due to soaring oil and gas prices.

Producer prices across the eurozone rose at a record pace in August, as the inflationary squeeze in Europe worsened.

Producer prices, which measures the costs of goods and raw materials, soared by 43.3% year-on-year in August, up from 38% in July.

The surge in PPI was primarily driven by higher energy costs, which jumped by 116% year-on-year.

But that wasn’t the only factor. Intermediate goods, used to make final products for sale, cost 19.9% more than a year ago, while non-durable consumer goods cost 14.4% more.

These price increases are likely to feed through to retailers, pushing up eurozone consumer price inflation even higher.

Sterling is on track for its sixth daily rise in a row, as it continues to recover from last Monday’s record lows.

Harry Adams, chief executive officer at Argentex Group, says the pound is “beginning to find a secure footing after a week of volatility” provoked by Kwasi Kwarteng’s mini-budget.

But Adams also warns this week’s Conservative Party conference could drive further volatility in the pound.

“We anticipate sterling to remain highly responsive to the notion of any further changes in government policy.

There is no realistic scenario whereby sterling enjoys a straightforward recovery.”

Market expectations for UK interest rates drop

The markets have dialled down their forecast for how high UK interest rates will surge by next year.

The Bank of England is now expected to lift base rate to around 5.35% by next May.

That’s still a very shap increase (Bank Rate is currently 2.25%), but less steep than feared last week.

Markets expectations for UK @bankofengland interest rate moves down again this morning.
Now expected to peak below 5.5% next year (was 6.1% late last week).
Still a very steep increase nonetheless: up by at least 1 percentage point next month, and 4% or over by Christmas. pic.twitter.com/wRbVo5HOGJ

— Ed Conway (@EdConwaySky) October 4, 2022

The UK has successfully raised money in the bond markets today, but demand was soft and investors demanded a higher interest rate, as Reuters explains:

Britain sold £2.5bn of a 40-year benchmark gilt maturing in 2061 at an average yield of 3.371% on Tuesday, the highest yield for any gilt sold at auction since 2014, though below the yield for a 30-year green bond syndicated last week.

Tuesday’s auction for the 0.5% 2061 gilt drew bids worth 1.97 times the volume on offer – the lowest bid-to-cover ratio since March – and had a 4 basis point yield tail, the longest since November 2018.

The bid-to-cover ratio measures how much demand there was in the auction. If demand is weak, the government can end up accepting higher yields to get the bond sold.

Andy Bruce of Reuters has some good insights here:

Not the greatest of gilt auctions this morning – sale of 0.5% 2061 conventional gilt covered 1.97 times (lowest since March).

Notably the longest yield tail since Nov 2018 at 4 bps – a clear indication the DMO had to accept a lot of lowball bids to shift these bonds. pic.twitter.com/MEMQawXWlR

— Andy Bruce (@BruceReuters) October 4, 2022

Still, maybe in the current environment the DMO will view that as not too bad

— Andy Bruce (@BruceReuters) October 4, 2022

Politics Live: Liz Truss refuses to say if benefits will rise in line with inflation

Liz Truss has refused to rule out real-terms benefit cuts to help pay for her government’s plans, despite warnings that this would hurt struggling households.

She told BBC Radio 4’s Today programme that there is a need to be “fiscally responsible” amid suggestions benefits will not rise in line with inflation.

She said:

We are going to have to make decisions about how we bring down debt as a proportion of GDP in the medium term.

I am very committed to supporting the most vulnerable, in fact in addition to the energy price guarantee we’re also providing an extra £1,200 to the poorest households. So we have to look at these issues in the round, we have to be fiscally responsible.

As flagged earlier, though, some MPs are threatening of further rebellions over reductions in public spending.

Our Politics Live blog has all the latest developments:

But as Sarah O’Connor of the FT shows here, most of Britain’s welfare spending for working age people is spent on topping up low pay, or housing benefit (for those on low pay), or help for those unable to work due to illness or disability.

The best way to get tough on welfare spending is to get tough on the causes of welfare spending. Three quarters of the bill is spent on one of three things: income top-ups for low earners, housing benefit to help pay rent, and incapacity & disability payments for the unwell. pic.twitter.com/MXvNpfaUCP

— Sarah O’Connor (@sarahoconnor_) October 4, 2022

In other words, Britain’s benefit bill is the consequence of its deep rooted problems with low pay, high housing costs and ill health. They are hard problems but we are not powerless to tackle them.

— Sarah O’Connor (@sarahoconnor_) October 4, 2022

Sterling rally may not be vote of confidence in Truss and Kwarteng

Sterling’s rally today is not necessarily a vote of confidence in government, says Seema Shah, chief global strategist at Principal Global Investors:

“A number of Trussenomics enthusiasts within the Conservative party have pointed to the fact that the pound has risen against the dollar to the levels it was before the “fiscal event” as evidence that financial markets will warm to the Government’s strategy.

It is true that sterling has had a mini-rally but, firstly, this was from historically weak levels to begin with and, secondly, the new value of sterling prices in steep rate rises which have been made necessary by the chaotic market response to the Chancellor’s growth plan. To be back where we were – but with a potential mortgage crisis now baked into the cake – is hardly a triumph.

Shah suggests that the markets may be pricing in further changes of policy, or even a shake-up in Downing Street….

“Indeed, in light of the humiliating and rapid U-turn on the decision to scrap the 45pc highest tax rate, further sterling rises might in fact be telling us that investors believe that the Truss/Kwarteng axis can be brought in line with more orthodox economic thinking by MPs who have not been shy to make their scepticism public and threatened to vote against their own party – quite the opposite of markets “believing” the Government’s vision.

It could even indicate investor opinion that the odds of either – or both – the PM and Chancellor leaving their respective posts earlier than planned are rising.

What looks on the surface like a cautious vote of confidence in the currency markets could, in fact, be anything but.”

A YouGov poll published last Friday (so before the 45p tax rate u-turn) showed considerable dissatisfaction with Liz Truss and Kwasi Kwarteng:

We still face the risk of more financial market turbulence, even though investors now expect interest rates to rise less sharply than they did last week.

Economist Richard Ramsay explains:

On financial markets the scaling back of interest rate expectations continues. Markets looking at peak UK Bank Rate of 5.25% -5.5% by May next year. It was over 6% last week. A 100bps hike priced in for 3 November. It was 150bps last week. £ up v US dollar $1.139 & v € at €1.15

— Richard Ramsey (@Ramseconomics) October 4, 2022

Cost of government borrowing easing too. 10-Yr Gilts now 3.87% down from a peak of 4.5% last week. Still up ~40bps from pre-Mini Budgets. U-turns clearly positive for sterling markets. Last night we had news that the OBR forecast will be brought forward from 23rd November

— Richard Ramsey (@Ramseconomics) October 4, 2022

So things are looking ‘less bad’ for mortgage rate rises. While the spotlight has been on UK, economic conditions deteriorating elsewhere. Many economies still face recessions. Further global financial market turbulence is expected. New era of higher rates will be a bumpy ride. pic.twitter.com/cnIyFsyafC

— Richard Ramsey (@Ramseconomics) October 4, 2022

Shares rally as calm returns to markets

London’s stock market is firmly higher this morning, as shares recover a little of their recent slump.

The blue-chip FTSE 100 index has clambered back over the 7,000 point mark, up 1.5 % or 105 points at 7,014. Yesterday it hit the lowest level since March, as anxiety over a global downturn continued to hit markets.

After gains in Asia-Pacific markets overnight, a risk-on mood has returned to the City.

It’s helped by Legal & General (now up 5%) reassuring investors over its financial health following the pensions panic last week (see earlier post). Australia’s smaller-than-expected interest rate rise could also be calming the bond markets.

European markets are also pushing higher, with Germany’s DAX and France’s CAC both up over 2%.

Danni Hewson, financial analyst at AJ Bell, says:

“Stocks are up, the Vix volatility index is easing back, and US and UK government bond yields are falling. It’s as if everyone has forgotten about the gloomy outlook and instead regained an appetite for risk.

How long this party lasts is another matter as we’re about to enter the next earnings season and there is a fear that market expectations for sales and profits are too high, which means many companies could shock when they report.

Gains in Japan, pound back at $1.14, Australia’s best day on the stock market for 2 yrs, Asian markets did well over night .. less doom today huraaah 👍 #business

— Richard Robert Payne (@TheBusinessBod) October 4, 2022

The smaller FTSE 250 index, which tracks the UK economy, has jumped 2% – away from the 22-month low hit last week.

High street bakery chain Greggs is leading the FTSE 250 risers, up over 9% after its latest results reassured the City.

Greggs, known for its sausage rolls, steak bakes, vegan snacks and sweet treats, grew total sales by 14.6% in the last 13 weeks despite the cost of living squeeze.

It reported:

“Greggs continues to trade well in an environment where cost pressures are significant.

https://www.theguardian.com/business/live/2022/oct/04/pound-chancellor-kwasi-kwarteng-debt-cutting-fiscal-plan-inflation-stock-markets-business-live Pound dips back from two-week high as Kwarteng insists debt-cutting plan still due on 23rd November – business live | Business

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