Closing summary
That’s all for today. Time for a quick recap.
The pound has rallied back over $1.13 after Liz Truss announced she is resigning as prime minister, teeing up a short battle to replace her.
The London stock market has also closed higher, while some UK bond prices have strengthened a little today, lowering the cost of long-term borrowing a tad.
Analysts see Rishi Sunak and Penny Mordaunt as the front-runners, with the winner due to be named a week on Friday.
The end of Truss’s brief, calamitous, stint in Downing Street will also likely end the push for Trussonomics, following the frenzied market reaction to her unfunded tax cuts paid for by higher borrowing.
Analysts say a shift to more orthodox conservative economic policy could stabilise market, and remove the so-called ‘moron risk premium’ which hit UK assets.
As Paul Dales of Capital Economics put it earlier:
“Overall, the resignation of Truss is a step that needed to happen for the UK government to move further along the path towards restoring credibility in the eyes of the financial market.
“But more needs to be done and the new prime minister and their Chancellor have a big task to navigate the economy through the cost of living crisis, cost of borrowing crisis and the cost of credibility crisis. The situation is clearly going to evolve very quickly.”
Business leaders have demanded that Truss’s successor acts rapidly to stabilise the crisis-hit economy.
Our Politics Liveblog has all the action:
In other news…
A Bank of England deputy governor has predicted that interest rates may not rise as high as the markets expect.
Investors now believe the Bank is likely to raise interest rates by three-quarters of a point in November, not the full percentage-point increase expected recently.
More UK firms are running short of cash, and suffering a drop in business, according to the latest weekly data from the ONS.
The cost of living crisis is forcing millions of people to skip meals, new research from Which? has found….
… while Waitrose customers have been turning to spam, pilchards, and fish heads to cut their spending.
Trade from the UK to the EU is down 16% on the levels anticipated had Brexit not happened, a new report has found.
While UK hospitality firms are suffering the biggest downturn since the pandemic lockdowns of 2021.
National Grid has significantly increased its financial incentive for households that shift their power usage away from peak times as part of a renewed effort to prevent rolling power cuts.
A National Grid director has explained how the plan will reward homes and businesses for using energy outside of peak hours:
In other energy news, the gas and electricity supplier Ovo has revived its interest in snapping up nationalised rival Bulb.
Asset managers have said they are navigating tough investment conditions in the UK, as economic turmoil reduced the value of their portfolios and persuaded customers to pull and divert their cash.
Jupiter Fund Management said the macroencomic backdrop was worsening, while Schroders reported a drop in sssets under management, including a £20bn decline in its “solutions” division, which covers funds focused on liability driven investing, or LDI.
And National Express has reported a further rebound in passengers and a rise in revenues after it stepped up services during rail strikes and helped shuttle police during the Queen’s funeral.
In other news tonight, the gas and electricity supplier Ovo has revived its interest in snapping up nationalised rival Bulb, potentially gazumping a bid by Octopus Energy.
Ovo has written to Bulb’s special administrator to inform it that it is again considering a purchase. Ovo originally submitted an offer to buy Bulb shortly after it collapsed in November last year, but later pulled out of the auction, during which several bidders have fallen away.
Discussions between government officials and Octopus have dragged on for months. Industry sources told Sky News, which first reported Ovo’s renewed interest, that its proposals would not require additional taxpayer funding, unlike those of Octopus.
Richard Partington: Mini-budget broke Britain, and Truss
Britain has been through the wringer since September’s mini-budget, our economics correspondent Richard Partington writes.
Not only was Kwasi Kwarteng’s not-so-mini plan the trigger for a domestic financial crisis and raising mortgage costs for millions, it lit the blue touchpaper for his political downfall and that of his close friend, Liz Truss.
It was all supposed to be so different. Truss had spent the summer promising to cancel the rise in national insurance and corporation tax in the Conservative leadership race. Those pledges, plus the popular energy price freeze, would have been plenty for the new government to announce in the supposedly stripped-back tax and spending event.
Instead, it was a bumper, ideologically driven occasion that left Truss’s defeated political rival, Rishi Sunak, vindicated. As he had warned, there was indeed a run on sterling, gilt market freefall and spooked global investors. Even the International Monetary Fund (IMF) intervened with a stunning public rebuke.
Rarely has a budget caused such political and economic damage. Not even George Osborne’s “omnishambles” budget, when he was forced in 2012 to back down from the pasty tax, comes close.
UK business leaders call for economic stability after Truss exit
Business leaders have responded with anger and dismay to the UK’s political crisis, saying that Liz Truss’s replacement must act rapidly to stabilise the crisis-hit economy.
Paul Drechsler, the chief executive of BusinessLDN, a group representing companies in London, said the UK was in the grips of an “unmitigated political and economic crisis” and the government would need a “rock solid” cabinet as well as a new leader.
However, he argued against an immediate general election, which could add to the government’s paralysis for several weeks.
“We don’t need more Cirque du Soleil. We don’t want any more circus, any more theatre, any more shenanigans. Just do your job.”
More here:
London stock market closes higher
Shares in London have closed higher tonight, on hopes that the UK’s political turmoil could ease, soon.
Following Liz Truss’s resignation, the blue-chip FTSE 100 index closed 19 points higher at 6943, up 0.27%.
Some UK companies were among the top risers, including Lloyds Banking Group (+3.5%), commercial property firm Land Securities (+3%), property portal Rightmove (+2.8%), warehouse operator Segro (+2.8%) and housebuilder Barratt (2.6%).
The smaller FTSE 250 index, which is a better gauge of the domestic economy, jumped 141 points or 0.8% to finish at 17,388.
Analysts said a change of PM might calm the markets – depending who it is.
Viraj Patel, global macro strategist at Vanda Research, says:
“Initially, this is likely to take an uncertainty premium out of the market but it depends who takes over. You need a steady hand at the top.
Philip Shaw of Investec wins a small prize for the title of his analyst note on today’s political turmoil:
Britannia Untrussed – Britain heads for third PM this year
Following a chaos-strewn 45 days as Prime Minister, PM Liz Truss stood down today, stating that she could not deliver the mandate on which she was elected by Conservative Party members. Indeed even the past week has been filled with turmoil, starting with the sacking of Chancellor Kwasi Kwarteng last Friday and culminating yesterday in the departure of Home Secretary Suella Braverman and total confusion among Tory MPs in the House of Commons over a vote on fracking.
By contrast with the political situation, conditions in markets have calmed down over the past week or so. At the time of writing, ten-year gilt yields are 43bps points are lower since last week’s close and 30-year yields down 81bps (helped by the Bank of England stating that for now, it will not sell gilts of more than 20 years’ maturity in its Quantitative Tightening operations, which it plans to start from 1 November). Sterling is also a touch higher [now $1.131].
The critical point here is that new Chancellor Jeremy Hunt acted quickly to reassure markets on Monday morning, making it clear that he would jettison almost all of Kwarteng’s unfunded tax cuts, saving £32bn per annum. He also announced that Truss’s plan to freeze the domestic energy price cap at £2,500 would be curtailed from two years to six months, with a (yet to be decided) more targeted scheme to replace it in April next year. Furthermore Hunt stated that additional painful decisions need to be made both in terms of taxation and public spending.
The Budget on 31 October has therefore become a critical event. Interest rate markets have rallied to price in a lower peak in the Bank rate, from 6.25% in late September to a touch above 5.00% now, but after the events of the past month and a half, the reputation of the UK remains on the line. While credibility is easily lost, it can take a very long time for it to be regained. In this respect markets will consider it essential for the Chancellor to be able to carry through his plans to bring the UK back on course to meet its fiscal rules.
Eurasia: Sunak and Mordaunt the front-runners
Mujtaba Rahman, managing director for Europe at Eurasia Group, thinks Rishi Sunak is the most likely candidate to replace Liz Truss, followed by Penny Mordaunt (who came third in the MP’s ballot last time).
Rahman also sees a 10% chance of a general election:
Some senior Tories will now urge contenders to reach agreement on a “coronation”. But for now, both Sunak and Mordaunt appear unwilling to stand aside for each other. Braverman might also insist on her right to stand. If she secured a place in a run-off among the members, the election of Truss this summer suggests that Braverman would have a chance of winning. But we suspect the final two in this scenario would be Sunak and Mordaunt.
Sunak would start as the front-runner, due to his greater experience than Mordaunt, but he has enemies among MPs loyal to Johnson and Truss, who might try to scupper his bid.
We assign a 35% chance of Sunak becoming PM; 30% for Mordaunt; 15% for Braverman; 15% Badenoch and 5% for Johnson. We continue to think a general election is unlikely but raise the odds from 5% to 10% due to fears, shared by some ministers, that the party’s mutinous MPs have become “ungovernable.”
Steven Swinford of The Times, though, says there are questions about whether the fiscal event will have to be delayed beyond 31 October, given the leadership contest.
EXCLUSIVE:
— Steven Swinford (@Steven_Swinford) October 20, 2022
There are questions about whether Oct 31 fiscal event will be delayed given leadership contest
Treasury still working to date - OBR forecasts seen as key to Bank interest rate decision on Nov 3
But decisions will define whoever wins contesthttps://t.co/SuApE3RmIr
Fiscal plan announcement still scheduled for 31 October
The Treasury has confirmed the government will push ahead with plans for holding a debt-cutting announcement on 31 October as planned, although any final decision to proceed will be the responsibility of the incoming prime minister.
Jeremy Hunt has indicated he will not run for prime minister.
The chancellor is expected to announce cuts to public spending, after U-turning on almost all of Liz Truss’ unfunded tax cuts contained in last month’s ill-fated mini budget.
What a tricky spot the BOE are in. They are supposed to make a huge interest rate decision on Nov3- unclear what fiscal plans will be & who will be Chancellor (if indeed Hunt stays on) + how new gov may address energy plans which are due to expire April (=bump for inflation)
— Joumanna Bercetche 🇱🇧 (@CNBCJou) October 20, 2022
Another leadership contest!
— Joumanna Bercetche 🇱🇧 (@CNBCJou) October 20, 2022
Worth noting that since Chancellor Hunt's comments on Monday 30y gilts are almost 100bps lower (!)
Incoming government will inherit a pile of U-turns to deliver on, but also have the tall task of restoring credibility $GBP
Pound rises over $1.13
The pound has now rallied higher, up one cent to $1.132 against the US dollar.
Sterling pushed higher amid reports that former chancellor Rishi Sunak, who warned against Liz Truss’s tax-cutting plans, is ‘certain’ to stand in the leadership battle, according to the Telegraph.
* RPT-RISHI SUNAK "CERTAIN" TO STAND IN CONTEST TO REPLACE UK PM LIZ TRUSS - TELEGRAPH@Reuters #UK
— Carl Quintanilla (@carlquintanilla) October 20, 2022
Updated
BlueBay: Electing Sunak could help erase UK's 'risk premium'
Electing Rishi Sunak as prime minister would be the best way to remove the ‘risk premium’ that is hurting UK bonds, and the pound.
So explains Neil Mehta, portfolio manager at asset manager BlueBay
A political reset would continue to erase the risk-premium embedded in UK assets after the ill-fated Truss/Kwarteng mini-budget.
Particularly if front-runner Rishi Sunak becomes PM and implements more orthodox conservative economic policy. With Jeremy Hunt as chancellor, we could see a more meaningful shift towards a more centrist government, with more focus on the economy rather than populist areas such as migration and Brexit.
This will likely embolden Gilts and the pound, but the longer terms challenges facing the UK economy on cost of living and inflation will unlikely abate – with a Labour government in the waiting.
After the last few weeks of complete chaos and dysfunctional government, UK firms are pleading for some calm, and actual help to get them through the tough winter.
Martin McTague, National Chair of the Federation of Small Businesses, says Liz Truss’s successor needs to secure economic growth and improve the economy:
“It is incumbent upon the next Conservative Party leader to show they can provide stability and take the necessary steps to secure economic growth in the face of significant recessionary pressures.
Businesses are crying out for an end to the political turmoil and a focus on remedying the economy, supporting small firms through the hard winter ahead.
“Whoever becomes Prime Minister must knuckle down, see through the delivery of the energy support package for small businesses - as already approved by Parliament - and the reversal of the hike in National Insurance.
“Beyond that there must be a focus on securing prosperity for the longer term, making sure we have the right support for improving broadband, housebuilding, labour supply, and the tax and regulatory framework – so we can build our way out of the increasingly negative economic climate.”
The pound is slightly higher against the euro today, up 0.1% at €1.1484.
It had fallen to €1.142, before starting to rally this afternoon even before the official announcement:
EUR/GBP only slightly lower after UK PM Liz Truss announced her resignation. Most of the move lower was already penciled in during the afternoon as rumours of resignation took off $EURGBP pic.twitter.com/6iIEjhMMlk
— Kirstine Kundby-Nielsen (@KirstineKundby) October 20, 2022
The resignation of the prime minister after just six weeks, following mounting chaos and financial turmoil, does not make Britain a particularly attractive place to invest.
Jason Paltrowitz, director at US financial services group OTC Markets, says its hard for American investors to put money into the UK at the moment:
From the US, early reaction to the PM’s resignation fits the recent narrative that the lack of political certainty is proving difficult for UK equities and subsequent valuations.
It will therefore continue to be difficult for US investors to participate and look at future buying opportunities without clarity soon.
Analyst: Conservatives must choose new leader quickly
Sam North, market analyst at eToro, says the current economic crisis warrants fast action from the Conservative Party to elect a new leader.
“The longer a race takes, the more turmoil there could be for markets. UK gilts and GBP have reacted somewhat to her resignation, but we haven’t yet seen a big move. This might begin to change if the contest drags on.
“Chancellor Jeremy Hunt is due to deliver a new Budget and OBR forecast on Halloween, but there is plenty of time for markets to spook before that, making his job tougher, and worsening conditions for households in terms of inflation and interest rate expectations and ensuing tax implications.”
Timings wise, Sir Graham Brady, the chair of the 1922 Committee, has said it will be possible to conduct a leadership ballot by 28 October.
He says:
I have spoken to the party chairman, Jake Berry, and he has confirmed that it will be possible to conduct a ballot and conclude a leadership election by Friday the 28 October.
So we should have a new leader in place before the fiscal statement which will take place on the 31st.
Our Politics Live blog reports that Suella Braverman, the former home secretary, and trade secretary Kemi Badenoch are expected to stand, but that Jeremy Hunt and Michael Gove are not.
Update: Former British prime minister Boris Johnson is expected to stand too.
EXCLUSIVE:
— Steven Swinford (@Steven_Swinford) October 20, 2022
I'm told that Boris Johnson is expected to stand in the Tory leadership contest
He's taking soundings but is said to believe it is a matter of national interesthttps://t.co/SuApE3RmIr
Updated
Capital Economic: New PM must work hard to restore credibility
Although the resignation of Liz Truss as Prime Minister leaves the UK without a leader when it faces huge economic, fiscal and financial market challenges, the markets appear to be relieved, writes Paul Dales, chief UK economist at Capital Economics.
The pound has climbed from $1.12 to $1.13 and 30-year gilt yields have fallen further from 3.95% to 3.90%.
In other words, the markets are further pricing out the risk premium that the Truss government generated. There is still a lot of uncertainty, but the lesson surely is that the economic, fiscal and financial market backdrop matters.
Dales also points out that fiscal policy has swung from being ultra loose, to less loose to outright tight in just a few weeks, as Jeremy Hunt took charge of the Treasury and “almost wiped from history” the tax policies of Truss and Kwasi Kwarteng.
But the new Prime Minister and their Chancellor have a big task to navigate the economy through “the cost of living crisis, cost of borrowing crisis and the cost of credibility crisis”, Dales concludes.
Liz Truss’s departure should help calm the markets, predicts Chris Beauchamp, chief market analyst at IG Group.
An initial bounce in the pound has begun to fade, as the implications of yet another period of uncertainty sink in. But given how quick the change is expected, and with the chancellor likely to stay in place, we should expect market tensions to calm.
In all likelihood Rishi is ready to step in, and with Hunt in alignment with him we can expect a very different approach, but one more likely to please markets.
Although Chancellor Jeremy Hunt has managed to reinstate some economic credibility, there is still a long way to go before political credibility is restored, warns Victoria Scholar, head of investment at Interactive Investor:
The pound is trading higher, attempting to climb back up its 2-week highs logged earlier this week as investors cheer Truss’ departure and the potential for a more economically savvy, market friendly leader.
Sterling’s strength is weighing on the FTSE 100 with its major UK exporter stocks like Diageo and CocaCola languishing near the bottom of the UK index.
There is still plenty of caution towards the UK as an investment destination given the ongoing political uncertainty, the growing risk of recession and Britain’s persistent inflation problem with price levels hovering at 40-year highs.
Updated
Pound holds gains as 'sorry reign' of Truss ends
The pound is still up half a cent at $1.126 as investors digest the departure of Liz Truss, having hit $1.13 as news broke she was resigning.
As Neil Wilson of Market.com point out, although the PM’s ‘sorry reign’ is over, there is still huge uncertainty about whether the Tory party can survive in power.
So that uncertainty means there’s not a firmer move in the markets (the FTSE 100 has now dropped back into the red for the day.
Wilson writes:
The economic policies were already dead in the water so the market doesn’t have a huge amount of genuine new information to move on despite the seismic events of the last 24 hours.
Truss’s decision to standing down may allow for a new leader to see out the parliamentary term, Wilson suggests. It could be a Rishi Sunak/Jeremy Hunt ticket - meaning fiscal restraint.
Wilson also adds that the markets “probably likes orthodox one-nation Tory economics” rather than anything else.
The pound is... rising pic.twitter.com/9TpBxypYZE
— Ed Conway (@EdConwaySky) October 20, 2022
Updated
Liz Truss announces she will resign as UK prime minister
Liz Truss is resigning as prime minister.
in a brief statement outside Downing Street, Truss (who took office just 44 days ago) says she has notificed King Charles that she will step down as PM.
There will be a leadership contest, to be completed within the next week, and Truss will stay on until her successor is chosen.
Our Politics Liveblog has all the action on another day of chaos in Westminster:
The stock market has actually slipped back a little, but the UK-focused FTSE 250 is still up 0.6% today and the pound is still trading near $1.13.
Update: Here’s Liz Truss’s resignation speech in full:
I came into office at a time of great economic and international instability.
Families and businesses were worried about how to pay their bills.
Putin’s illegal war in Ukraine threatens the security of our whole continent.
And our country had been held back for too long by low economic growth.
I was elected by the Conservative Party with a mandate to change this.
We delivered on energy bills and on cutting national insurance.
And we set out a vision for a low tax, high growth economy – that would take advantage of the freedoms of Brexit.
I recognise though, given the situation, I cannot deliver the mandate on which I was elected by the Conservative Party.
I have therefore spoken to His Majesty The King to notify him that I am resigning as Leader of the Conservative Party.
This morning I met the Chair of the 1922 Committee Sir Graham Brady.
We have agreed there will be a leadership election to be completed in the next week.
This will ensure we remain on a path to deliver our fiscal plans and maintain our country’s economic stability and national security.
I will remain as Prime Minister until a successor has been chosen.
Thank you .
Updated
Stocks are rising in London, on news that Liz Truss is to give a statement outside Number 10.
The FTSE 250 index of smaller, more domestically-focused stocks, has gained 0.8% today:
The FTSE 100 index is up 0.3%, with Lloyds Bank (+4.4%) leading the risers.
Pound higher as Truss to make statement
The pound has pushed higher on reports that Liz Truss will give a statement outside Number 10 Downing Street on her future at 1.30pm.
Sterling is now up two-thirds of a cent at $1.128, the highest since yesterday morning.
Earlier today, a spokesperson for the prime minister told reporters that Truss will continue in office beyond the fiscal statement on 31 October.
The pound has hit its highest level of the day, after more Conservative MPs reveal they have lost confidence in the prime minister.
Sterling has risen a third of a cent to $1.125, the highest level this session, after Jill Mortimer, Conservative MP for Hartlepool, said she had submitted a letter.
Jill Mortimer, the red wall MP who won Hartlepool under Johnson, has just put her letter of no confidence on FB. Speaks of the deteriorating situation through the day which ‘left her with no choice’ pic.twitter.com/0WYy3uNLUO
— Beth Rigby (@BethRigby) October 20, 2022
🚨 Jill Mortimer becomes the 15th Tory MP to call for Liz Truss to step down
— Alix Culbertson (@alixculbertson) October 20, 2022
Sir Graham Brady, the chair of the 1922 Committee of backbench MPs, is currently meeting with Liz Truss inside No 10.
National Express has reported a further rebound in passengers and a rise in revenues after it stepped up services during rail strikes and helped shuttle police during the Queen’s funeral.
The coach and bus operator said revenues rose by 33% in the three months to the end of September and were now above 2019 levels, thanks in part to strong growth in its UK and Spanish coach business.
In the UK, it said demand was partly driven by industrial action on the country’s train network. That included August strikes by rail operators that halted intercity trains across Britain.
ING’s James Smith also believes UK interest rates will peak lower than the >5% which the markets had been pricing in:
The @bankofengland has a choice: hike rates aggressively and bake in ultra-high mortgage/corporate rates. Or undershoot market expectations and risk weaker sterling & higher inflation
— James Smith (@SmithEconomics) October 20, 2022
Clear from his speech that Dep Gov Broadbent sees the latter as the lesser of two evils pic.twitter.com/KxcXNBVcTE
Our own base case is 75bp in November & Bank rate ultimately peaking between 3.5-4%. Full speech here: https://t.co/QcQmNL5T9i
— James Smith (@SmithEconomics) October 20, 2022
The head of the CBI has warned that the UK’s growth engine is grinding to a halt in some places, as political instability leaves business owners confused and unwilling to invest.
Tony Danker (who once hailed the mini-budget as a ‘turning point’ for the economy*) says political and market stability is needed.
That means firms can grow, meaning more employment and tax revenues, and less need to slash public spending or hike taxes.
* – and in many ways it was, unfortunately.
Politics is falling apart somewhat. Let me set out why it matters. 1/8
— Tony Danker (@tonydanker) October 20, 2022
In 10 days, the country needs to decide to cut public services and/or raise everyone's taxes. Probably both. The most important principle is protecting those in our society who need it most. That is fundamental. 2/8
— Tony Danker (@tonydanker) October 20, 2022
The only way to avoid this pain is to get more economic growth. Because if firms grow they pay more taxes, higher wages and create more jobs. More tax revenue means fewer cuts. 3/8
— Tony Danker (@tonydanker) October 20, 2022
Today, the UK’s growth engine - firms investing more in products, services and people - is coming to a halt in some places. Political instability makes business owners unsure - What will taxes be?What will regulations be? what will Government spend money on? What will be cut? 4/8
— Tony Danker (@tonydanker) October 20, 2022
Lots of businesses want to invest - they have the money and the plans - but by my estimates, about half of them won't press the button until this political mess clears up and we have a clear government plan and market stability. 5/8
— Tony Danker (@tonydanker) October 20, 2022
Market stability matters because its affects interest rates. That matters to everyone’s bills and mortgages and it also hits businesses. Most firms in the country borrow money to invest so if interest rates rise too fast or high, they simply won't invest. 6/8
— Tony Danker (@tonydanker) October 20, 2022
If we get political and market stability, there will be headspace and clarity for business owners to press go on plans. Then we need all those government enablers for growth to come on tap: immigration reform, a better planning regime, more clean energy projects etc. 7/8
— Tony Danker (@tonydanker) October 20, 2022
That's why we will continue to push Government to both help the hardest hit and keep going on growth. It's the only way to ensure that any spending cuts or tax rises are kept to a minimum. And any recession is short and shallow. And none of this is repeated. 8/8
— Tony Danker (@tonydanker) October 20, 2022
Updated
Here’s the Broadbent effect – market expectations for interest rate rises are down:
thank you, Ben Broadbent: pic.twitter.com/9KdeylR8Qw
— BionicBanker (@BrokenBanker) October 20, 2022
Updated
Back in the markets, UK government bond prices have also strengthened following Ben Broadbent’s speech.
The yields on two-year, 1o-year and 30-year bonds are all now down today, pushing down government borrowing costs.
Markets are react to the deputy governor’s warning that interest rate forecasts may be too high, and have reached levels that would deliver a “pretty material” hit to the economy.
In another worrying sign, more than a quarter of companies said their turnover decreased in September.
The Office for National Statistics (ONS) found 26% of trading businesses reported their turnover was lower compared with August 2022, while just 14% reported their turnover was higher.
The accommodation and food service activities industry saw the biggest drop-off, with 52% of businesses reporting a drop in turnover compared with August (when the summer holidays will have boosted some takings).
A quarter (25%) of businesses also reported their performance had decreased in September 2022 compared with September 2021.
25% of businesses said their performance had decreased in Sept 2022 compared with Sept 2021 📉
— Office for National Statistics (ONS) (@ONS) October 20, 2022
The accommodation and food service activities industry reported the highest percentage decrease (47%).
➡️ https://t.co/APJ5mR6RoE pic.twitter.com/seuHUltnmg
Companies are also suffering from the economic and political turmoil.
In early October (shortly after the min-budget) more than a third of businesses reported economic uncertainty was having an impact on their turnover. A fifth expect their turnover to decrease in November 2022.
As we covered earlier, the UK hospitality sector is already shrinking at the fastest pace since the 2021 pandemic lockdown:
Updated
ONS: More firms running short of cash
Over 40 percent of UK firms have either no cash reserves left, or have less than three months worth to help them through the downturn.
That’s the worst situation since June last year, the Office for National Statistics reports:
In early Oct 2022, 41% of trading businesses said they had either:
— Office for National Statistics (ONS) (@ONS) October 20, 2022
▪️ no cash reserves (13%)
▪️ had three months or less (28%)
This is the highest percentage reported since late June 2021. pic.twitter.com/Sh6JJRTOxw
The situation is particularly tight in the education industry, where 51% of private sector and higher education businesses have less than three months cash left.
The administrative and support service activities industry reported the largest increase in the proportion of businesses reporting having no cash reserves or three months or less, up to 44% from 35% reported in early July.
This is an important intervention by Ben Broadbent, says Chris Giles of the Financial Times.
He reckons that if the markets take the deputy governor seriously, we’ll see a fall in expected bank rate.
That could leading to lower debt interest service costs for the government – in time to shrink the fiscal ‘black hole’ facing Jeremy Hunt, and also lower mortgages rates in a few days time.
Important Speech by @bankofengland Ben Broadbent
— Chris Giles (@ChrisGiles_) October 20, 2022
More directly saying financial markets are pricing in too many rate rises than I've ever heard before from an MPC member
This is the key chart - how much markets have moved and internal BoE modelling on what it thinks necessary pic.twitter.com/NcuCntAw2k
Broadbent says you need to take the chart with a "heavy dose of salt"
— Chris Giles (@ChrisGiles_) October 20, 2022
But officials don't make comparisons like these on a whim - they don't even recognise externally that this analysis exists within the BoE
Of course we all knew it did and should have been routinely published
The consequence - if markets respond with lower expected bank rate - lower debt interest service cost for government in the medium term fiscal statement - (so fewer tax increases)
— Chris Giles (@ChrisGiles_) October 20, 2022
And cheaper mortgages in a few days time.
All if markets take the dep gov's words seriously
Ben Broadbent has also produced a fascinating chart, showing how market interest rates have risen much higher than the Bank of England’s internal modelling suggests is necessary.
The barchart is the “optimum” level of rate increases you’d expect given the energy support package and the fall in sterling, while the blue line shows the actual, rather higher, rise in yields.
Broadbent says we should treat this with some scepticism, as it uses a simple policymaking “bot” to work out the optimal rate path.
Plus, there are other factors at work – including political uncertainty (that ‘moron risk premium’ we looked at earlier).
Or as Broadbent puts it more diplomatically:
The market may also be wary about further changes in fiscal policy, and to take a skewed view of the risks in that respect.
Ben Broadbent’s speech shows that Bank of England are cautious about how fast to raise interest rates, with the economy weakening.
Here’s Bloomberg’s take:
Bank of England Deputy Governor Ben Broadbent said it’s not clear that UK interest rates need to rise as much as investors expect and warned about a hit to the economy if markets bets come to pass.
While “the justification for tighter policy is clear” in the face of soaring inflation, demand will slow to some extent anyway along with higher prices, Broadbent said in the text of a speech on Thursday. If rates follow the current path, it could cause a 5% hit to GDP, he said.
The remarks indicate caution at the BOE about how quickly to tighten monetary policy as the risk grows that the UK has already slipped into recession.
It also feeds into a tumultuous few weeks for the central bank and the outlook for the economy after Prime Minister Liz Truss’s government first announced a huge fiscal stimulus on Sept. 23 and then subsequently unwound much of the program.
The Bank of England deputy governor says UK interest rates may not rise as much as the market expects https://t.co/1g6pIFszP6
— Bloomberg (@business) October 20, 2022
Ben Broadbent also warned that achieving a ‘soft landing’ in the UK economy will be difficult.
He explained that the UK’s terms-of-trade shock is far more severe than in the US, where the Federal Reserve is also struggling to get inflation down without pushing America into recession.
Ben Broadbent’s speech, on the inflationary consequences of real shocks, is online here.
It’s about 20 pages long – but the conclusion is that the markets may have overestimated how high interest rates will rise, points out economics writer Duncan Weldon:
Shorter Broadbent: erm, guys… do you really think we’re going to 5.25%? https://t.co/XgA51opp0L pic.twitter.com/G6H3AaUx61
— Duncan Weldon (@DuncanWeldon) October 20, 2022
Lifting rates over 5% by next summer would certainly be hawkish, given the UK could be in recession by then.
Broadbent also points out that we’ve barely seen much of the impact of tighter policy that is being priced in, and which will have a big hit to demand:
BoE's Broadbent - market pricing of Bank Rate path would imply "pretty material hit to demand" pic.twitter.com/99uSRjErxm
— Andy Bruce (@BruceReuters) October 20, 2022
Markets lower rate hike bets
The financial markets are dialling back their forecasts for November’s interest rate rise.
They now indicate there’s an 85% chance that the Bank raises rates to 3% on 3rd November, from 2.25% today, which would be a three quarter-point rise.
A full percentage point rise, to 3.25%, is only a 15% chance. Before Ben Broadbent’s speech, it was a 25% probability, according to Reuters.
Interest rate expectations surged after the mini-budget rocked markets, but have been falling back after the government began ditching the plan.
At one stage after the mini-budget, the markets thought the Bank would choose between a 1% increase, and a monster 1.25% hike.
But even a three-quarter point increase would be the largest rise in UK Bank Rate in 33 years, putting more pressure on borrowers, and meaning remortgaging will be expensive.
Updated
BoE's Broadbent: Interest rates may not rise as much as market expects
Just in. Bank of England deputy governor Ben Broadbent has said it ‘remains to be seen’ whether UK interest rates have to rise as much as the markets predict.
That could bring some relief to mortgage-holders, who are concerned that interest rates are currently forecast to more than double to over 5% by next summer.
Speaking at Imperial College London, Broadbent explains that the economy has been hit by severe real shocks.
The pandemic raised the global demand for goods and reduced their supply; Russia has cut back severely its supply of gas to Europe. These have had dramatic effects on relative prices.
In particular, import prices have risen significantly compared with the price of UK output. This has unavoidably depressed real incomes: the volume of output may have just about recovered to pre-Covid levels but its consumption value has not.
Broadbent also warned that the economy would suffer a hit if market bets about rising rates come to pass.
Broadbend explains that the Bank’s Monetary Policy Committee will respond promptly to news about fiscal policy (the MPC is due to set interest rates on November 3rd, three days after Jeremy Hunt is due to announce his fiscal plan).
Broadbent says the justification for tightening monetary policy is clear (inflation is five times over the Bank’s 2% target, for starters).
But much of the overshoot in inflation is due to higher import prices (such as gas, and food which has risen by over 14% in the last year). That effect should fade as prices stabilise.
Broadbent explains that the path of wholesale energy prices is highly uncertain, but financial markets suggest we’re more likely to see negative than positive inflation in wholesale gas prices a couple of years from now.
Domestic inflation tends to be persistent, however. And reducing it requires the economy to grow below its trend rate for a period of time, he warns.
Broadbent concludes:
Because they’ve depressed real incomes, that slowing in demand will to some degree follow from the very same rises in import costs that have pushed up headline inflation.
Equally, if government support mitigates that effect, there is more at the margin for monetary policy to do. The MPC is likely to respond relatively promptly to news about fiscal policy. Whether official interest rates have to rise by quite as much as currently priced in financial markets remains to be seen.
NEW: #BoE's Broadbent says the MPC is likely to respond promptly to news about fiscal policy; justification for tighter policy is clear; if govt supports mitigates the effect of import costs, there is more at the margin for monetary policy to do.
— Julianna Tatelbaum (@CNBCJulianna) October 20, 2022
NEW: #BoE's Broadbent says there is now some uncertainty about the prospective scale and nature of the govt's energy subsidies; we are unlikely to know for a while precisely the form that will take.
— Julianna Tatelbaum (@CNBCJulianna) October 20, 2022
Updated
After three days of falls, the interest rate on UK 10-year government bonds has risen close to 4% this morning, as the bond market watched the turmoil in Westminster.
This chart shows how 10-year gilt yields had already been climbing through September, but then surged after the mini-budget as investors were alarmed by unfunded tax cuts.
They had been recovering this week, as the City welcomed Jeremy Hunt’s decision to ditch most of the mini-budget.
But uncertainty over Liz Truss’s future is now hitting bond prices, with a member of the 1922 Committee has told ITV News’ Paul Brand that the “odds are against” her surviving the day as prime minister.
Our Politics Liveblog has all the details:
Incidentally, the Financial Times’s Alphaville site has written a detailed piece on the rise in borrowing costs caused by the UK’s financial turmoil, here:
Quantifying Britain’s moron risk premium
Counting the cost of the UK's 'moron premium'
What is the cost of the chaos and incompetence in Westminster on the UK’s financial position?
Simon French, chief economist at Panmure Gordon, has calculated that Britain is currently paying significantly more to borrow for a decade than it would do under a competent government.
He explains that the UK ten-year bonds would be trading at a yield of 3.25% (given how British debt had been trading compared to other G7 nations until late summer), not around 4% today.
That 75 basis-point diffence means billions of pounds extra being paid out in interest, rather than investing in services. This extra cost has been dubbed the “moron risk premium” by economist Dario Perkins of TS Lombard.
Here’s Simon’s thinking:
Enjoyable to join @seanfarrington on #r4today earlier to discuss what financial markets make of recent U.K. economic governance. I had incoming on how I arrived at the estimate that the U.K. is paying 75bp too much on its 10-year debt - indeed across most of the sovereign curve…
— Simon French (@shjfrench) October 20, 2022
Firstly debt interest costs for sovereigns, households & corporates have been increasing all year. This part of the government narrative of “global forces” rings true. Interest rate for U.K. 10Y debt would be 3%-4% - not 1% as in Jan - regardless of UK economic governance. But….
— Simon French (@shjfrench) October 20, 2022
…where in that higher range the U.K. sits is linked to domestic governance. Benchmarked against wider G7 bond market trends all year (until late summer) the U.K. should be middle of the pack - which would equate to ~3.25% on 10Y, not 4.0%. pic.twitter.com/dQAIrSxZkN
— Simon French (@shjfrench) October 20, 2022
Dubbed in some quarters as the “moron premium” (clearly more engaging writers of sell side research than I) if this is sustained this translates through to billions of pounds of public & private money paid to creditors/ inward investors almost entirely unnecessarily.
— Simon French (@shjfrench) October 20, 2022
Looked at another way this is the “dullness dividend” (am I doing this right?!) if a new PM/ Cabinet can restore a sense of order, economic coherence and respect for independent institutions that has been so lacking in recent weeks /END
— Simon French (@shjfrench) October 20, 2022
Chart 👇by @shjfrench illustrates how UK 10y gilt yields have risen relative to other G7 since Truss became clear front runner for PM in late July. This provides the basis for his 75bp estimate of the Truss risk premium over and above global trends, which looks about right to me. https://t.co/XSWYiYg7RU
— John Hawksworth (@jhawksworth5) October 20, 2022
Updated
Inflationary pressures are rising in Germany too, where the prices charged by producers are rising at a record pace
Producer prices soared by a staggering 45.8% year-on-year in September, matching August’s reading, which was the highest since 1949.
Peak #inflation? Not yet in #Germany! German Consumer Prices (CPI) are likely to rise further after Producer Prices (PPI) remain at 45.8% in Sep, the strongest increase since 1949. pic.twitter.com/JEMyxkpUtH
— Holger Zschaepitz (@Schuldensuehner) October 20, 2022
Energy prices were the primary factor – 132.2% higher than in the same month last year.
But rising energy costs drove up other prices too, with intermediate goods (+16.8%), capital goods (+7.8%) and durable and non-durable consumer goods (10.9% and 18.3%) also rising significantly.
In September alone, prices rose 2.3%, which was also above consensus for 1.3%.
Die #Erzeugerpreise gewerblicher Produkte waren im September 2022 um 45,8 % höher als im September 2021. Hauptverantwortlich für den Anstieg ist weiterhin die Preisentwicklung bei Energie. Im Vormonatsvergleich stiegen die Erzeugerpreise um 2,3 %: https://t.co/1NSYOGKBtd #Preise pic.twitter.com/QQsUOoOiwf
— Statistisches Bundesamt (@destatis) October 20, 2022
City fund managers are also having a tough year, as investors are spooked by recession fears and soaring inflation.
Jupiter Fund Management told shareholders this morning that:
A worsening macroencomic backdrop, continued geopolitical challenges and inflationary concerns, particularly in the UK, again weighed upon investor sentiment in the third quarter
Net outflows from Jupiter slowed in the third quarter to £600m, meaning clients pulled out cash at a slower rate – although it did see net inflows of £500m from institutional investors.
Matthew Beesley, CEO, says:
“I am encouraged by the improved flow picture in Q3, despite continued market volatility.
Schroders has reported a 2.7% drop in assets under management during the quarter to £752bn, down from £773.4bn three months ago, due to a drop in its asset management arm.
UK borrowing costs rise as markets watch Truss chaos 'in horror'
UK government bond prices have fallen at the start of trading, as investors watch the chaotic scenes in Westminster, with Liz Truss’s government on the brink.
This has pushed up the yield, or interest rates, on both short and long-dated gilts, although they’re still well below the peaks seen after the mini-budget.
Bill Blain, strategist at Shard Capital, says the markets are watching events “in a kind of stunned, open-mouthed horror”.
He told Radio 4’s Today Programme that the last couple of weeks have destroyed the image of political competency – which is a key element to make any economy work.
He explains that countries need a stable currency, a sustainable bond market, and you need competent politics.
Because it looks like competent politics are broken, that’s creating the volatility that we’re seeing in markets. And I’m afraid that’s going to continue….
Whatever it is that Liz Truss tries to do to introduce stability, it just creates more chaos.
Blain concludes that markets will only rally when they see real change, and that probably means a general election, he says.
Two-year gilts are yielding 3.6%, up from 3.5% last night, while 30-year bond yields have risen to 4.06%, from below 4%.
Yields rise when bond prices fall, and rising yields show that investors want a larger return for holding the debt.
Updated
The oil prices has risen to its highest level in almost a week, which could add to inflationary pressures this winter.
Oil was lifted by news that China is considering easing its Covid-19 restrictions, such as cutting the amount of time people coming into the country must spend in mandatory quarantine.
Brent crude has gained almost 1% to $93.25 per barrel. It had dropped below $85 per barrel last month, prompting Opec+ to agree to cut output.
Oil prices rise on possible easing in China COVID quarantine measure https://t.co/nHsgzjSGP9 pic.twitter.com/jPGH7iKzba
— Reuters (@Reuters) October 20, 2022
Car drivers are also being squeezed, with insurance premiums up 14% year-on-year, the biggest annual increase in the past 5 years.
Figures from comparison site Confused.com show that insurance premiums have risen for the last four quarters, meaning drivers are now paying £586 on average.
In the past 3 months alone, premiums have increased for motorists by £32 (6%), on average, the’ve calculated.
UK’s biggest food bank network to spend millions on parcels this winter
The UK’s biggest food bank network is preparing to spend millions of pounds topping up charity food parcels this winter, my colleague Patrick Butler reports.
The Trussell Trust will be offering help to record numbers of families at risk of going hungry as a result of the cost of living crisis.
The expenditure was needed to ensure food banks had adequate food reserves because the Trussell Trust’s customary main source of food supplies – donations from the public – was failing to keep pace with rapidly increasing demand.
The trust said it expected 1.3m emergency food parcels would be distributed by its members over the next six months to help soaring numbers of households in need – including 500,000 to families with children.
Introduction: Cost of living crisis weighs on economy as millions skip meals
Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.
The cost of living crisis is hitting UK firms, and forcing millions of people to skip meals as soaring inflation leaves them unable to buy essentials.
A survey by Which? just released found that almost half of all consumers are finding it harder to eat healthily compared to before the crisis, rising to 78% of those finding it very difficult to cope financially in the worst squeeze in decades.
Around 9% people are now finding it “very difficult to get by” – and half of those people say their household was skipping meals. A quarter of those who are finding the current situation “quite difficult” are also skipping meals.
Which? is calling on supermarkets to help their customers with clearer pricing, promotions targeted at supporting shoppers on low incomes and by ensuring budget lines are widely available, particularly in locations where people need them most.
Our latest research shows families are making huge changes to how they shop and eat as they feel the impact of soaring inflation. Among those who said they are struggling the most financially, 50% said that their household was actively skipping meals. https://t.co/pwuDfVtAG9
— Which? Money (@WhichMoney) October 20, 2022
Which?’s findings chime with data from the Food Foundation charity this week, which found that more people went hungry than during the chaotic first weeks of the Covid lockdown.
Hunger levels have more than doubled since January, according to the foundation’s latest tracker, with nearly 10 million adults and 4 million children unable to eat regular meals last month.
Retailers are also feeling the chill. Homeware chain Dunelm, which has enjoyed years of strong growth, has reported an 8% drop in sales in the last quarter.
Dunelm made sales of £357m for the 13 weeks to 1 October, while gross margins fell compared to last year, although it is seeing a “very good response” from customers to its seasonal “winter warm” products including rugs, curtains and blankets.
Dunelm warns that the macroeconomic environment “remains challenging”, pointing to the “particularly volatile” exchange rate movements in recent weeks.
The pound’s wild swings will have made it hard for many businesses to judge the price of imports.
Nick Wilkinson, Dunelm’s chief executive officer, warned that the landscape is demanding as shoppers face a tough winter:
“As we enter what will clearly be a challenging winter for consumers, our absolute focus remains on making every pound count for everyone, through a tight grip on operations.
Just posted: Dunelm (#DNLM) – Q1 sales -8% YoY, FY guidance “remains unchanged” https://t.co/azxQal2sg5
— Share Prophets (@ShareProphets) October 20, 2022
Across the economy, there are signs of a slowdown as consumers cut back.
Tourism and recreation, which includes pubs, hotels, restaurants and leisure facilities, saw the sharpest fall in output of any UK sector in September, according to the latest Lloyds Bank UK Sector Tracker.
Demand fell for the fourth month running as consumers reined-in discretionary spending amid rising inflation – which hit 10.1% in September, the highest in 40 years.
Also coming up today
European leaders will discuss the Commission’s latest proposals for easing the energy crisis, when they meet for a summit today.
They’re expected to back proposed emergency regulations to allow joint gas buying across the EU to negotiate better prices, and provisions to permit greater cooperation between countries in a gas supply emergency.
But they remain split over whether and how to cap gas prices to stem high inflation and stave off recession. The Commission is proposing a new, more stable gas price benchmark, and a new mechanism to curb volatile prices if they spike excessively.
The pound is hovering around $1.122 in early trading, as investors digest the deepening turmoil in Westminster after a chaotic Wednesday which saw the resignation of home secretary Suella Braverman, and total disarray in the Commons over a vote on fracking.
The agenda
7.45am BST: French business confidence report
9.30am BST: Weekly economic and business activity data from the ONS
1.30pm BST: US weekly jobless report
3pm BST: US weekly home sales
Updated
