Closing summary
What a day…what a week!
The pound had slipped 0.5% this morning, then fell 1.2% after Kwasi Kwarteng was sacked as chancellor, as markets don’t like uncertainty. He had dashed back from the IMF meeting in Washington a day early, and Hargreaves Lansdown analyst Susannah Street quipped: “Kwasi Kwarteng straight from arrivals to departures”.
The pound clawed back some losses on news of Jeremy Hunt’s appointment as chancellor, only to sell off again after Liz Truss spoke, as she failed to give the reassurances that markets and the public were looking for. The pound is now 1% lower against the dollar at $1.1207.
Government bonds rallied this morning on expectations of a government U-turn on corporation tax, which later materialised. This pushed yields sharply lower, but the rally faded after the prime minister spoke. Her performance at her brief press conference failed to impress investors, and the 10-year and 30-year yield have since ticked up again. It’s also the last day of the Bank of England’s emergency bond-buying programme, which is due to end at 4.30pm.
The FTSE rally has also petered out, partly because Wall Street banks have reported disappointing results, dragging down US indices. The UK bluechip index is trading just 25 points higher at 6,875, a 0.36% gain, after rising more than 1% earlier. Truss’s press conference only lasted eight minutes, she took just four questions and didn’t really answer the ones about why she should stay on as prime minister.
Our other main stories today:
Thank you for reading. Have a great weekend. We’ll be back next week. Take care – JK
Updated
Michael Hewson, chief market analyst at CMC Markets UK, has summed up this week.
European markets look set to end a turbulent week very much on the up, although we are slipping off the highs of the day, and while the Dax looks set to finish higher for the second week in a row, the FTSE 100 has had a much more difficult week.
The task for the FTSE 100 has been much harder, having hit a 20-month low yesterday, the UK index did look as if it might be able to reverse most of this week’s losses, however that prospect disappeared after the confirmation of the latest UK government U-turn, and the latest 1-year inflation expectations survey for the University of Michigan surged to 5.1% in October, serving to also pull US markets sharply lower.
This week’s volatility in UK bond markets has had a significant effect on the FTSE 100 with wild swings in house builders, consumer staples and banks.
These moves have been driven by the sharp rise and fall in gilt yields, with the sharp moves lower in yields over the last 24 hours helping to pull these sectors off their lows, although today’s price action has been more subdued.
Weighing on the FTSE 100 this afternoon has been weakness in energy and basic resources with concerns over recession acting as a drag on commodity prices.
The British Chambers of Commerce has cautiously welcomed the prime minister’s statement, but urged the government to “quickly set out a longer term plan”.
Shevaun Haviland, director general of the BCC, said:
The Prime Minister was right to take some action now. We have been calling for the government to urgently address market volatility, return stability to the economy and give business some certainty to plan.
Firms will always prefer a lighter tax burden, but they are most concerned about upfront costs, such as national insurance contributions and energy bills. These are the issues that are keeping them up at night, alongside rising inflation and interest rates.
The BCC fully supports a strategy for growth, that lets businesses thrive and support their communities but returning stability to the economy must be the immediate priority.
To do this the government must quickly set out a longer-term plan to prove it is serious about helping businesses through the difficult months ahead. Time is of the essence.
Government bond, FTSE rally fades, sterling slides after Truss speaks
Oh dear. Despite the climbdown on corporation tax, which the markets were expecting, Liz Truss failed to give the reassurances the public, MPs and investors were looking for.
The FTSE 100 index has now pared gains and is only 42 points ahead at 6,891, a 0.6% gain. The pound has dropped 1.2% to $1.1191.
Government bonds were rallying before the press conference, pushing yields sharply lower, but the yield on the 30-year gilt has since ticked up 5 basis points to 4.6% and the 10-year yield has risen to 4.2%. (This means government borrowing costs rise.)
The rise in corporation tax from 19p to 25p next April, originally announced by then-chancellor Rishi Sunak March and which Truss attacked during the leadership contest, will now go ahead in a dramatic U-turn. But Truss left many questions unanswered.
Tory MPs already texting to say they think that Liz Truss's press conference has actually made things worse.
— Pippa Crerar (@PippaCrerar) October 14, 2022
An MP texts: “even by her standards that was really bad”
— Beth Rigby (@BethRigby) October 14, 2022
Updated
Danni Hewson, financial analyst at the stockbroker AJ Bell, says about Liz Truss’s climbdown on corporation tax:
As U-turn’s go it’s a doozy. The freeze in corporation tax wasn’t something most households were talking about around the dinner table, but it was the jewel in the crown of the new PM’s plans to super charge UK economic growth. By allowing companies to keep more of the profits they make, Liz Truss and her former chancellor were banking on that to act as a way to lure more foreign investment and to convince UK based companies to grow right here.
It may have, temporarily, been an incentive for businesses to overlook the tangle of red tape and additional costs associated with trading in a post Brexit world. But at what cost? Companies had already priced in the new tax rates which had been well signposted and at 25% the UK will still be competitive.
And there are approximately 18 billion reasons not to go ahead with the freeze. £18bn is now expected to swell government coffers, which will help to offset the rising cost of borrowing and additional spend required to deal with the energy crisis.
Markets were terrified that the ‘mini-budget’ was unfunded and fiscally irresponsible…
The writing was on the wall when markets surged in anticipatory delight on the news that another post budget U-turn was imminent and moves on corporation tax have gone a long way to bolstering sentiment today. But it’s a sticking plaster that’s already curling at the edges.
Sterling selloff accelerates after Truss press conference
The pound accelerated its slide when Liz Truss spoke, falling 1.2% to $1.1187, and government bond yields, which had fallen earlier today, thereby reducing government borrowing costs, started to tick up again.
The stock markets appear unfazed. The FTSE 100 index has climbed 87 points, or 1.3%, to 6,938.
The prime minister only took four questions, but failed to answer the one about what credibility she has to continue in her post. The Guardian’s political editor tweets:
At brief Downing Street press conference, Liz Truss is asked by @ChrisMasonBBC what credibility she has to continue in post.
— Pippa Crerar (@PippaCrerar) October 14, 2022
Unsurprisingly, she doesn't answer the question, even though it is the one on her own MPs' lips today.
The head of the Resolution Foundation think tank Torsten Bell says:
Right - the news here is that u-turn is limited to corporation tax. So over half of tax cuts are still going ahead. What does this mean? £20-40bn of spending cuts still to come
— Torsten Bell (@TorstenBell) October 14, 2022
The FT’s Jim Pickard says:
Liz Truss, asked why she isn’t quitting as prime minister, says she’s staying to ensure “economic stability”
— Jim Pickard (@PickardJE) October 14, 2022
Updated
The Guardian’s political editor Pippa Crerar has tweeted the main lines from Liz Truss’s brief press conference. It lasted just seven minutes.
Liz Truss: "I have acted decisively today because my priority is ensuring our country's economic stability".
— Pippa Crerar (@PippaCrerar) October 14, 2022
(Even though it was her own mini-budget which caused much of that instability.)
🚨 Liz Truss confirms she will stick with Rishi Sunak's plan to increase corporation tax from 19% to 25%, raising £18bn per year, as she tries to calm markets.
— Pippa Crerar (@PippaCrerar) October 14, 2022
Truss says her "mission remains" to pursue a low tax, high wage and high growth economy.
— Pippa Crerar (@PippaCrerar) October 14, 2022
Not necessarily what Tory MPs need to hear right now.
And with that, the press conference is over. It lasted just a few minutes.
Truss says Jeremy Hunt as chancellor “shares my desire for a high-growth, low-tax economy”.
But we recognise because of current market issues, we have to deliver the mission in a different way. That’s why we are absolutely committed to do, achieving that stability at what is a very difficult time globally.
When asked why Kwarteng had to leave and she is staying on, she simply replies:
My priority is making sure we deliver the economic stability the country needs.
Updated
Asked by the Telegraph’s Ben Riley-Smith to explain to the public why she should remain as prime minister, Truss says:
I’m absolutely determined to see through what I’ve promised to deliver a higher growth, more prosperous United Kingdom and to see us through the storm we face.
Updated
Truss says Jeremy Hunt, the new chancellor, is one of the “most experienced and widely respected parliamentarians” and will present a medium-term budget at the end of the month.
She says about Kwasi Kwarteng’s departure:
I was incredibly sorry to lose him. He is a great friend and shares my vision to set this country on a path to growth.
Updated
Truss announces a U-turn on the government’s plan to scrap the planned rise in corporation tax from 19% to 25% next April. The rise will now go ahead, and will raise £18bn per year, which she described as a down payment on the government’s medium-term growth plan.
It is clear that parts of our mini-budget went further and faster than markets were expecting.
Updated
Wall Street has opened higher, with the Dow Jones up 170 points, while European shares are also still trading higher. The FTSE 100 index is 1.5% ahead at 6,955, while the pound has lost 1% against the dollar to $1.1213.
The UK prime minister Liz Truss has just started speaking.
Here is our full story on Jeremy Hunt’s appointment as chancellor.
Jeremy Hunt has been appointed as Liz Truss’s new chancellor, in a stunning reversal of political fortune and a sign that the beleaguered prime minister wants to reach out to other sections of the Conservative party.
Hunt, the former foreign secretary and health secretary, who has twice tried unsuccessfully to become Conservative leader, was named chancellor after Kwasi Kwarteng, in the job for just over five weeks, was sacked by Truss ahead of another U-turn over tax cuts.
A wider mini-reshuffle also saw Chris Philp, Kwarteng’s number two as chief secretary to the Treasury also sacked from the role and moved to the Cabinet Office to become paymaster general. In a direct job swap, Philp is replaced by Edward Argar.
Sterling pares losses after Jeremy Hunt appointed chancellor
The pound has pared losses, after falling 1.2% when Kwasi Kwarteng was sacked as chancellor.
It is trading 0.4% lower against the dollar at $1.1285, following the confirmation from Downing Street that Jeremy Hunt, a former foreign, health and cultural secretary and leadership contender, has been appointed chancellor.
Torsten Bell, head of the Resolution Foundation think tank, says:
That is a big change in type/politics of Chancellor as @Jeremy_Hunt arrives at the Treasury https://t.co/JPeUKdFnHn
— Torsten Bell (@TorstenBell) October 14, 2022
Updated
Liz Truss will hold her press conference at 2.30pm and is expected to announce a U-turn on corporation tax, and possibly other tax-cutting measures.
Updated
Downing Street has confirmed that Jeremy Hunt, the former leadership contender and a former foreign secretary, has been appointed as the new chancellor. Edward Argar has replaced Chris Philp as chief secretary to the Treasury.
The Rt Hon Jeremy Hunt MP @Jeremy_Hunt has been appointed Chancellor of the Exchequer @HMTreasury. pic.twitter.com/bldKWr3crG
— UK Prime Minister (@10DowningStreet) October 14, 2022
US retail sales stagnate in September
Over in the US, retail sales ground to a halt in September, as high inflation and rising interest rates have made consumers more cautious about spending.
Andrew Hunter, senior US economist at Capital Economics, says:
With retail sales unchanged in September there is still little evidence that the boost to purchasing power from the earlier sharp fall in gasoline prices has helped real consumption. Energy prices are now edging higher again and employment growth is slowing, so we expect consumption growth to weaken further over the coming months.
The flat headline figure was actually a bit better than the small fall we had expected and August’s gain was revised up slightly. Nevertheless, the data still suggest that spending growth was weak last month. The 0.4% m/m fall in motor vehicle sales came despite the near-3% rebound in unit sales reported by manufacturers.
Declines in spending on furniture, electronics, building materials and leisure goods are consistent with the surge in interest rates starting to take a bigger toll on discretionary consumption. The more modest 0.5% rise in spending at bars and restaurants suggests overall services spending growth weakened too. Excluding autos, gasoline, building materials and food services, control group sales were up by a stronger 0.4% m/m. But with consumer prices rising strongly again last month, the sales data suggest that consumption only edged higher in real terms.
The upshot is that we still expect consumption growth over the third quarter as a whole to have slumped to only 0.7% annualised and, with the impact of the Fed’s aggressive tightening still feeding through, we suspect growth will be even weaker in the fourth quarter.
NEW: US retail sales were sluggish last month, suggesting shoppers are becoming more guarded about discretionary purchases in the worst inflationary environment in decades https://t.co/NOuuuGQ4Vs
— Bloomberg (@business) October 14, 2022
Updated
Jeremy Hunt appointed as chancellor
Jeremy Hunt is the new chancellor, our political editor reports. She has also confirmed that Chris Philp is out as chief secretary to the Treasury.
🚨 No 10 source confirms speculation that Jeremy Hunt will take over as chancellor.
— Pippa Crerar (@PippaCrerar) October 14, 2022
Updated
Rachel Reeves, Labour’s shadow chancellor, has responded to Liz Truss’s decision to fire the chancellor Kwasi Kwarteng after his disastrous mini-budget.
Changing the chancellor doesn’t undo the damage that’s already been done.
It was a crisis made in Downing Street. Liz Truss and the Conservatives crashed the economy, causing mortgages to skyrocket, and has undermined Britain’s standing on the world stage.
We don’t just need a change in chancellor, we need a change in government. Only Labour offers the leadership and ideas Britain needs to secure the economy and get out of this mess.
Mary Creagh, professor at Cranfield University and a former MP who now advises clients on ESG matters, says:
His economic chaos will affect every person in the U.K. for years to come.
— Mary Creagh CBE (@MaryCreagh_) October 14, 2022
Rents, mortgages, pensions, public services all sacrificed for right-wing magic thinking. https://t.co/4gGRETRtby
Updated
Here is a chart showing the drop in sterling.
The pound has fallen vs the US$ following reports about the firing of @KwasiKwarteng pic.twitter.com/RKQcgOD961
— Ed Conway (@EdConwaySky) October 14, 2022
No 10 source tells me Liz Truss wants Kwasi Kwarteng to “carry the can” over humiliating mini-budget climbdown - but Tory MPs unlikely to be satisfied.https://t.co/dRBPlsnPWE
— Pippa Crerar (@PippaCrerar) October 14, 2022
Updated
Kwarteng is leaving 11 Downing Street, Reuters reports.
Kwarteng has confirmed that he has resigned after being asked by Liz Truss to stand aside. Here is his resignation letter. He writes:
You have asked me to stand aside as your chancellor. I have accepted.
When you asked me to serve as your chancellor, I did so in full knowledge that the situation we faced was incredibly difficult, with rising global interest rates and energy prices. However, your vision of optimism, growth and change was right.
As I have said many times in the past weeks, following the status quo was simply not an option. For too long this country has been dogged by low growth rates and high taxation – that must still change if this country is to succeed.
The economic environment has changed rapidly since we set out the growth plan on 23 September. In response, together with the Bank of England and excellent officials at the Treasury we have responded to those events, and I commend my officials for their dedication.
It is important now as we move forward to emphasise your government’s commitment to fiscal discipline. The medium-term fiscal plan is crucial to this and I look forward to supporting you and my successor to achieve that from the backbenches.
— Kwasi Kwarteng (@KwasiKwarteng) October 14, 2022
Updated
Kwasi Kwarteng straight from arrivals to departures - but the pound falls below $1.12 amid the fresh political turmoil.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, says:
Amid the wait for the wheels to screech on another u-turn, the door to no. 11 Downing Street is already groaning on its hinges, with Kwasi Kwarteng exiting the Treasury. The finger of government blame was pointing straight at the chancellor as soon as he was ordered to dash back to from the US a day early, going straight from arrivals to a humiliating departure.
His promise of a medium-term fiscal plan to be delivered on Halloween did not provide enough reassurance that the government was in control of economic policy and investors showed signs of taking fright again. But Liz Truss is still facing a rocky horror show of her own making, given that the UK is still hurtling back into a 1970s time warp.
Even if this embarrassing reshuffle is accompanied with a fresh reversal of policy, as far as the credibility of the government is concerned, significant damage has been done. There will be a long way to go and significant bridge building ahead before the UK risk premium disappears.
The cost of government borrowing fell further earlier, with gilt yields dropping as speculation swirled that there would be a change at the Treasury, an indication that investors in the UK might welcome this change to the front seat line up. But since his departure was made clear, 10-year gilt yields have edged up slightly and the pound fell below $1.12, with no fresh euphoria in sight as markets digest another bout of political upheaval.
For now the prime minister has won breathing space, but the financial markets are highly sensitive and anything less than a co-operative approach with the Bank of England, the Office of Budget Responsibility and international institutions could cause fresh instability.
Liz Truss is fighting for her own survival. Nicholas Watt, political editor at BBC Newsnight, says:
A group of senior Tories have been holding discussions + have decided the following: the sacking of @KwasiKwarteng will prompt them to come out publicly next week + call on @trussliz to resign. My source: “These are serious people. The PM will find it difficult to survive.”
— Nicholas Watt (@nicholaswatt) October 14, 2022
The former foreign secretary Jeremy Hunt is likely to be appointed as the new chancellor, according to the Times.
Updated
Pound slides further after Kwarteng sacked as chancellor
Kwasi Kwarteng has been sacked as chancellor, Downing Street has confirmed, after his disastrous mini-budget sparked financial market turmoil, drove mortgage rates higher and forced the Bank of England to bail out pension funds.
Downing Street sources confirm that Kwasi Kwarteng has now been sacked as Chancellor.
— Pippa Crerar (@PippaCrerar) October 14, 2022
The pound has extended losses and is trading 1.4% lower versus the dollar at $1.1169.
Updated
The pound has fallen further on the news, and is down 1.2% at $1.1190.
Kwasi Kwarteng has been sacked as chancellor after less than six weeks in the job, the BBC reported.
His sacking makes him the shortest-servicing chancellor since 1970, and his successor will be the UK’s fourth finance minister in as many months.
Liz Truss to sack Kwasi Kwarteng ahead of corporation tax U-turn
The Guardian’s political editor Pippa Crerar is also hearing that Kwasi Kwarteng is to be sacked as chancellor.
He arrived back in London from the IMF meeting in Washington just before 11am and headed straight to 10 Downing Street for talks with Liz Truss. The prime minister will hold a surprise press conference at 2pm.
Pippa writes:
Kwasi Kwarteng will be sacked as chancellor as Liz Truss tries to restore her political authority ahead of a U-turn on parts of her disastrous mini-budget later on Friday, according to sources.
A Downing Street source confirmed to the Guardian the prime minister intended to get Kwarteng to “carry the can” over her climbdown as she sought to calm the markets and the nerves of jittery Tory MPs.
Truss is meeting Kwarteng, previously her closest political ally and co-architect of her plan for growth, for crisis talks in Downing Street after he dashed back overnight from an International Monetary Fund (IMF) meeting in Washington.
Whitehall insiders told the Guardian the pair held different views on how far the government should go in reversing key elements of its plan to steady the markets and placate anxious Conservative MPs.
Updated
Henry Dyer, investigations reporter at the Guardian, has done this ranking of chancellors according to the number of days spent in office:
Shortest serving chancellors post-war
— Henry Dyer (@Direthoughts) October 14, 2022
1. Iain Macleod, 30 days (died in office)
2? Kwasi Kwarteng, 38 days
3. Nadhim Zahawi, 63 days (caretaker)
4. Sajid Javid, 204 days
5. Peter Thorneycroft, 358 days
Former LBC presenter Matthew Stadlen tweets:
If Kwarteng goes, we’ll soon have had four Chancellors in less than four months - Sunak, Zahawi, Kwarteng and whoever his successor is. That isn’t a recipe for economic stability. There really should be a General Election so voters can own their future.
— Matthew Stadlen (@MatthewStadlen) October 14, 2022
IMF Africa head: global inflation causes 'horrifying' food insecurity
Over in Washington: global inflation is causing “horrifying” food insecurity, the International Monetary Fund’s Africa head has warned, who described inflation as an “insidious tax on the poorest”.
The IMF’s twice-yearly regional economic outlook released today warned that 123 million people, or 12% of sub-Saharan Africa’s population, face acute food insecurity – where the lack of access to adequate food puts someone’s life or livelihood in immediate danger – by the end of the year.
This compares to around 82 million people before the Covid pandemic, but the combined blows of the virus, spillovers from the war in Ukraine as well as worsening unrest and drought in parts of Africa have sharply driven up the numbers.
The IMF’s African department director Abebe Selassie told Reuters this week:
What worries us really is the fact that this is coming on top of all of the dislocation caused by the pandemic.
I was in Chad (in May) and really the conditions that you saw there in terms of food security really are very, very horrifying.
Ethiopia, Somalia and parts of Kenya are also on track for a fifth failed rainy season, with famine looming in Somalia.
Annual food price inflation in sub-Saharan Africa has exceeded 10% since the second half of last year, and the IMF’s new economic forecasts this week revised up its regional inflation projection by 2 percentage points to 8.7% for this year.
The fund also cut its GDP growth forecast by 0.2 percentage points to 3.6%, a significant drop from the 4.7% expansion in 2021, and has said Nigeria, Ghana, Ethiopia, Malawi, and Zimbabwe may all need to raise interest rates faster or more aggressively. Africa’s central banks are caught in a dilemma, trying to tame inflation that is mostly out of their control.
Selassie said:
It’s a delicate balancing act that central banks face. Inflation is this insidious, insidious tax on the poorest.
Rapidly rising global interest rates mean that sub-Saharan Africa’s most heavily-indebted countries have effectively lost access to the international capital markets. This has forced countries including Ghana to request IMF bailouts and Selassie said work was still ongoing to determine if the West African country now needs debt relief.
Kwasi Kwarteng has reached prime minister Liz Truss’s Downing Street office, according to a Reuters photographer.
Torsten Bell, chief executive of the Resolution Foundation, has tweeted:
U-turning now not the end of October is important because it reduces the fiscal hole:
— Torsten Bell (@TorstenBell) October 14, 2022
- directly (ie you don't have to pay for the tax cuts) AND
- indirectly (ie the falls in market interest rates will cut @OBR_UK debt interest forecast which is doing a lot of the damage)
Professor Costas Milas, of the Management School at the University of Liverpool, says it would make sense to stick the planned rise in corporation tax to 25% next April from 19% (the government wanted to scrap the rise, but is now expected to make a U-turn).
Whatever the fate of chancellor Kwarteng, we need to make a U-turn on the corporation tax. At 19%, our corporate tax rate is lower by as many as 4 percentage points than the average rate in the OECD economies. In fact, the UK corporate tax rate has been lower than that in OECD economies for the last ten years.
Despite this, UK business investments have not taken off. Consequently, raising the corporate tax rate to 25% will not undermine investment growth. The chancellor needs to focus, instead, on improving government effectiveness which, according to the latest World Bank data, shows that the UK is down from the top 7% of countries to the top 13% over the past five years. Doing so will boost investments and economic growth without risking our fiscal responsibility.
Our political editor Pippa Crerar has tweeted:
🚨The always plugged in @Steven_Swinford is reporting that Kwasi Kwarteng is being sacked as chancellor as Liz Truss prepares to reverse mini-Budget.
— Pippa Crerar (@PippaCrerar) October 14, 2022
Treasury sources tell us that Nadhim Zahawi or Sajid Javid could replace him at No 11.
Events moving very fast.
TalkTV’s Tom Newton Dunn has heard that the former foreign secretary Jeremy Hunt could be the new chancellor.
I hear Jeremy Hunt is top of Truss’s list to be her new Chancellor. Grey beard unity candidate, reaches out to the party left. Let’s see if he agrees.
— Tom Newton Dunn (@tnewtondunn) October 14, 2022
Updated
Government bonds, stocks surge, pound slips
UK government bonds continue their rally, amid expectations that key parts of the mini-budget will be scrapped, and reports that Kwasi Kwarteng will be sacked as chancellor.
It is also the last day of the Bank of England’s emergency bond-buying programme.
The rally has pushed bond yields dramatically lower, reducing the cost of government borrowing. The two-year yield has fallen 17 basis points to 3.67%, the lowest since the day of the mini-budget, and the 10-year bond is yielding 3.96%, down 23 bps.
The 30-year yield has tumbled 31 bps to 4.28% while the 20-year yield has dropped 26 bps to 4.37%. Both surged above 5.1% on Wednesday.
European stock markets have all risen more than 1%, with the FTSE 100 in London is 1.15% higher at 6,928, a gain of 78 points.
The pound has retreated 0.5% to $1.1269.
Updated
Kwarteng 'being sacked as chancellor' – report
Will he stay or will he go? Kwasi Kwarteng is being sacked as chancellor, according to Steven Swinford, political editor at the Times.
EXCLUSIVE:
— Steven Swinford (@Steven_Swinford) October 14, 2022
I'm told that Kwasi Kwarteng is being sacked as Chancellor as Liz Truss prepares to reverse the mini-Budget
Not clear who will be replacing him
Events moving very, very quickly this morning
No 10 not commentinghttps://t.co/LoUAVxD00N
Updated
Kwasi Kwarteng has arrived back in the UK after an overnight flight from Washington. His plane touched down at Heathrow about half an hour ago.
You know it’s an important political news day in the UK when news channels are live-streaming a (beautiful) Airbus A380, this time with the UK Chancellor onboard…#Kwarteng pic.twitter.com/rLS7wnz7li
— Alex Macheras (@AlexInAir) October 14, 2022
Ben Riley-Smith, political editor at the Daily Telegraph, is tweeting that the UK government will make a dramatic U-turn on its plan to scrap the rise in corporation tax to 25% next April from 19% – but will keep the national insurance cut and 1p income tax basic rate cut.
🚨Exclusive: Corporation Tax will **rise** to 25% from 19% this April, Liz Truss will announce at 2pm press conference today.
— Ben Riley-Smith (@benrileysmith) October 14, 2022
A huge climb down. Sticking to Rishi Sunak’s original plan. Removes central plank of her leadership bid. More here: https://t.co/tJvN01vDSd
But Telegraph understands Truss will **keep** her National Insurance cut and 1p income tax basic rate cut. So sounds like those two tax cuts are staying. The big reveal at 2pm.
— Ben Riley-Smith (@benrileysmith) October 14, 2022
Updated
The press conference will happen at 2pm BST, Reuters reports.
The chancellor, Kwasi Kwarteng, will not be standing next to the prime minister, Liz Truss, when she gives her press conference this afternoon, Sky News is reporting.
Sources have said “it looks as if the deal has been done”.
Updated
Liz Truss to hold surprise press conference today
Downing Street has just announced that Liz Truss will hold a press conference later today. More on our politics live blog with Léonie Chao-Fong.
Liz Truss is to hold a surprise press conference today, presumably to execute the biggest U-turn of modern political history
— Jim Pickard (@PickardJE) October 14, 2022
Kwasi Kwarteng on our flight. Hope he's got his laptop. Hasn't he got an economy to sort out??
— Jack Mitchell (@jackthesticks) October 14, 2022
Updated
Eurozone runs up record trade deficit – like UK
The eurozone has run up a record trade deficit because high energy prices boosted its import bill.
The eurozone’s balance for trade in goods with the rest of the world was in the red by nearly €51bn in August, according to the EU’s statistics office Eurostat. It is the highest deficit recorded since Lithuania joined the bloc in January 2015 to become its 19th member.
The trade gap ballooned from €34bn in July and marked the tenth month of deficits for the eurozone which has recorded large surpluses in the past. The swing into the red has largely been caused by its soaring bill for energy imports.
Exports of goods rose 24% in August from a year earlier, but imports surged nearly 54%.
Britain’s trade deficit also widened to a record high in August, £7.1bn, because of the cost of natural gas, official figures showed earlier this week. The trade in fuels gap, which includes oil and gas, climbed to £9.8bn. The UK is a net importer of energy.
Here is our full story on the up to 10,000 job cuts planned by Royal Mail. Ouch.
The pound is trading 0.55% lower against the dollar at $1.11269, while the government bond rally continues, sending yields lower.
Russ Mould, investment director at the stockbroker AJ Bell, has looked at the moves in markets.
It’s been a wild ride on the markets this year and there are still plenty of opposing forces which could push and pull equities, bonds and currencies in one direction or the other.
After yesterday’s yo-yo session on Wall Street where higher than expected inflation figures initially caused a slump and then a sudden reversal, European and Asian markets have chosen to take an optimistic view and moved higher. How long that will last is another matter.
Investors need to accept that high inflation could stick around for longer and that interest rates will almost certainly move a lot higher in the near-term. It will take a lot of short-term pain to get inflation back towards central bank targets.
There was plenty of action in the UK as investors speculate about a potential government U-turn on tax cuts. That fact chancellor Kwasi Kwarteng is leaving his US trip early to return for crisis talks only stirs the speculation pot faster in terms of what might happen next. At this stage, the nation is asking if his tax cut plan or his job are toast, potentially both.
Always look at the bond market if you want to know what the smart investors are thinking, and a drop in gilt yields on Friday tells you one of two things. Either the Bank of England is hoovering up gilts sold by pension funds (pushing up the price and pulling down the yield) before the end of its support measures today, or markets believe the chancellor is going to rip up his mini-budget and start again. The smart money is probably on the latter.
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Senior Tory warns Truss economic U-turn must be ‘significant’
A senior Conservative MP has said that Liz Truss must not “nibble at the edges” but instead perform a “powerful” and “significant” U-turn with its so-far disastrous economic plan, reports my colleague Jamie Grierson.
Mel Stride, the chair of parliament’s Treasury select committee, told the BBC’s Today programme:
My personal view is that it [a U-turn] should happen, we have reached a point where we need this very powerful and significant signal to the markets that fiscal credibility is firmly back on the table, and I think that means doing something right now and not delaying.
Doing something very significant too – right at the heart of that will be unwinding the position on corporation tax.
The danger here is the argument in the room lands in a place where they decide to nibble at the edges of this and I’m afraid I don’t think that will cut it, and you could end up in that circumstance in the worst of all worlds where you’ve U-turned but doesn’t settle the markets in the way we need to.
The Financial Times reported that up to £24bn of tax cuts could be reversed, including the flagship £18bn plan to cancel a scheduled increase in corporation tax next April. One person briefed on the fraught negotiations in Downing Street said: “Almost everything in the Budget is now up for grabs.”
European shares hit one-week high
As hopes of a U-turn on the UK government’s fiscal plans lift the mood among investors, European shares have hit a one-week high.
The Stoxx 600 index rose 1.2% this morning, hitting its highest level since 7 October, also boosted by last night’s rally on Wall Street. This put the index on course for a weekly rise despite losses in the first three days of the week, caused by recession fears. The FTSE 100 index in London has advanced nearly 1% to 6,914.
However, some analysts say traders have been snapping up beaten-down stocks and warn the share gains could be short-lived, as high inflation could prompt central banks to become more aggressive in raising interest rates. US inflation came in higher than expected yesterday.
European Central Bank vice president Luis de Guindos said this morning that the central bank was prepared for a possible technical recession (defined as two consecutive quarters of contraction) coupled with high inflation, which must be brought down to maintain market confidence.
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Just a few hours to go before end of Bank of England's bond-buying programme
Some pension funds may face a cliff edge at 4.30pm when the Bank of England’s emergency bond-buying programme comes to an end. It was brought in two weeks ago to limit damage to pension funds from a sudden drop in the value of UK government debt following the mini-budget.
The Bank made two big bets when it stepped in to manage the market meltdown, writes our banking correspondent Kalyeena Makortoff. First, that £65bn was enough to hoover up UK bonds – known as gilts – being dumped on the market by pension funds scrambling to raise cash to pay their banks. Second, that two weeks would be long enough for the pensions industry to sort itself out and avoid another fire sale of assets.
The first bet seems to have been sound. The Bank has so far spent £17.8bn of the £65bn earmarked for the emergency intervention. On Thursday, it spent £4.7bn, its highest daily total so far, but still well below the £10bn daily cap. But the second bet is proving much more of a gamble. It is still unclear whether all pension funds have built up a big enough cash cushion to weather further storms.
Victoria Scholar, head of investment at interactive investor, says:
It is the final day of the Bank of England’s emergency intervention, with the spotlight on the gilt market and pension funds next week once those support measures are removed. The big question is whether pension funds have done enough over the last fortnight in terms of fundraising, reducing leverage, and increasing capital buffers.
If they have, this will sharply reduce the risk of financial contagion from any further volatility in the bond market. Although the Bank of England’s intervention is set to end today, its mandate to ensure financial markets’ stability remains, suggesting that support could be reinstated if the dysfunction resumes.
Nigel Green, chief executive and founder of deVere Group, says:
Despite assertions from the Bank of England to the contrary, we expect that the UK’s central bank will extend in some form its bond-buying support beyond Friday’s self-imposed deadline. It will likely be called something other than an ‘extension’, but we expect that support will not be removed.
In the midst of such market upheaval, the Bank can’t change path now. Gilt markets are a cornerstone of the financial system and a major pillar upon which pensions, insurance, amongst other funds, rely.
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On the oil markets, Brent crude, the global benchmark, has inched up 0.2% to $94.73 a barrel, while US light crude is at $89.27 a barrel, but oil prices are heading for their first weekly loss in a fortnight.
Naeem Aslam, chief market analyst at the broker Avatrade, says:
Brent and crude oil prices are on track to record their first weekly loss in nearly two weeks. Traders are still very much digesting the message from the US crude inventory data which confirmed that supply is on the rise in the United States. Remember, the United States has one path to go if it wants to increase oil supply without worrying about what OPEC+ is doing, and that is ramping up the oil supply in the country.
The tensions between the United States and OPEC+, especially with Saudi Arabia, are still intense. and this is something that oil traders are very much worried about. If these tensions do not ease off, there is a serious threat that this could lead to a supply war, and in that scenario, the United States could lose the game by a large margin.
UK government bonds (gilts) are in focus today with the Bank of England set to end its market intervention at 4.30pm BST. After a sharp selloff on Wednesday, they have rallied over the last 24 hours on hopes of changes to the government’s fiscal plans, sending yields lower (and thereby reducing government borrowing costs).
Neil Wilson, chief market analyst at Markets.com, says:
Gilt yields fell as investors speculated Truss and Kwarteng will be forced into a humiliating U-turn on tax cuts. There is not the same fear as there was a couple of days ago when Andrew Bailey laid down the law and said funds have three days to get their house in order.
Given the Bank is maintaining a hard line, we think that the market is moving on expectations that the government will back down or seek to soothe markets somehow. Could this be a false hope? Kwarteng and Truss are thus far holding the line and we only have vague speculation about a U-turn. The political reality, however, will bite sooner or later. I think this weekend will be ‘interesting’.
Kwarteng is flying back from Washington early to speak to Truss – he could be made the fall guy, which he could hardly complain about. What kind of reprieve this gives Truss – who faces a potential coup from her own party – is hard to see. But markets look a little calmer this morning – helped in no small measure by the risk-on rally sparked on Wall Street yesterday despite a hot inflation report.
Credit Suisse: UK recession could be deeper than forecast
Credit Suisse’s head of UK economics, Sonali Punhani, has warned that the UK’s recession could be worse than expected because of the recent market turmoil.
• Owing to the market turmoil that has followed the announcement of the mini-budget, risks are rising that the recession in the UK is deeper than we forecast. If the market moves are sustained or worsened, they can offset the impact of the tax cuts and increase the depth of the recession through much higher mortgage costs and currency-led inflation.
• Real incomes could be squeezed further by 1-1.5% in 2023 if the recent market moves are sustained, which is likely to add downside risks to our growth forecast of -0.2% in 2023.
• For the moves to stabilise, the Bank of England would need to restore credibility by hiking aggressively in the near term. We expect the BoE to hike 100bps in November and raise rates to 4.5% by early 2023.
• More importantly, the markets would need to see a credible fiscal plan on October 31 to reverse these moves, in our view. We calculate that fiscal tightening of 2.5% of GDP (£60bn) in 2026-27 would likely be needed to stabilize the debt to GDP in the medium term. This is possible via a combination of a U-turn on tax cuts (being discussed and look possible) as well as spending cuts. It would be challenging to deliver the scale of these cuts, but for them to be credible, these need to be delivered sooner rather than in the latter part of the forecast.
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Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, has looked at what the chancellor’s early return from Washington means, and the broader outlook for mortgages and the economy. He is still in the air, we just heard.
The FTSE100 reacted positively yesterday, and [did] the same again today, on news that the government may finally be heeding warnings and is considering a reversal on more of its planned tax cuts.
Anxiety around the enormous funding gap needed to pay for the cuts has triggered sharp market turmoil the UK had hoped not to see for a long while following the pandemic. Chancellor Kwasi Kwarteng won’t be blind to the effect flying home from his Washington DC trip early will have – there is allegedly no precedent for a chancellor returning early from the IMF event for personal reasons.
There is a sense of urgency in this move and it would seem the market is optimistic that Kwarteng’s romcom-worthy dash through the airport suggests a dramatic reconciliation between stubborn existing policy and the U-turn investors have been waiting for.
It’s worth keeping in mind that the FTSE will remain over-sensitive to any changes from here, if U-turns fail to materialise, or are deemed too small, we’re likely to see an adverse reaction.
The availability of mortgages and consumer and corporate credit is expected to shrink in the latest tangible sign of the weakening economy. Higher interest rates and the nerve-wracking economic outlook, which has been compounded by the higher-than-expected inflation reading in the US this week, are all contributing to a lower risk appetite for lenders. This will have a knock-on effect for consumer spending power, and also has the potential to take the wind out of the house market’s already faltering sails. The number of people defaulting on their loan payments is already increasing which suggests worse is to come.
This news comes as investors’ attention turns to the imminent earnings releases from the US’ major banks. JPMorgan, Wells Fargo, Morgan Stanley and Citigroup are among those reporting.
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The CWU union has responded to Royal Mail’s threats to axe up to 10,000 jobs by August, calling for an urgent meeting – and declaring outright war.
Its general secretary Dave Ward said:
The announcement is the result of gross mismanagement and a failed business agenda of ending daily deliveries, a wholesale levelling-down of the terms, pay and conditions of postal workers, and turning Royal Mail into a gig economy style parcel courier.
What the company should be doing is abandoning its asset-stripping strategy and building the future based on utilising the competitive edge it already has in its deliveries to 32 million addresses across the country.
The CWU is calling for an urgent meeting with the Board and will put forward an alternative business plan at that meeting.
This announcement is holding postal workers to ransom for taking legal industrial action against a business approach that is not in the interests of workers, customers or the future of Royal Mail. This is no way to build a company.
European stocks, government bonds rally
European stock markets are rallying at the open, along with the government bond markets. The FTSE 100 index in London is 1.4% ahead at 6,943, a gain of 92 points. The German market has risen 1.6%, the French and the Spanish indices are both up 1.5% and the Italian and Portuguese markets have jumped 1.7% and 2.2% respectively.
The rally has pushed yields on UK government bonds, known as gilts, lower – lowering the cost of government borrowing. The yield on the two-year gilt has fallen 16 basis points to 3.69%, the lowest since the disastrous mini-budget was announced on 23 September.
The 30-year yield has also fallen further, by 14 basis points to 4.4% while the 20-year yield is at 4.6%. On Wednesday, both jumped above 5.1%. The 10-year bond is yielding 4.01%, the lowest since 6 October.
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My colleague Phillip Inman has looked at what dropping various measures from the mini-budget might save, and what else might be jettisoned or delayed from Kwarteng’s unfunded £43bn tax-cutting package.
Liz Truss is on the verge of reversing one of the last major pillars of her chancellor’s disastrous September mini-budget.
While Kwasi Kwarteng mingled with finance ministers at the IMF gathering in Washington DC before dashing back a day early, discussions are taking place in London that would see the promise to freeze corporation tax rates binned.
There is also speculation about dropping smaller measures including a more generous tax treatment of share dividends. These U-turns would come hard on the heels of the humiliating climbdown on Kwarteng’s promise to scrap the 45p top rate of tax.
Whether those reversals will be enough to calm the market turmoil that followed the mini-budget remains to be seen.
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Liz Truss and Kwasi Kwarteng are “determined and resolute” to deliver their economic growth plan, junior trade minister Greg Hands said today.
Asked whether there would be a U-turn on the tax package, Hands said everyone would have to wait until 31 October when Kwarteng is due to present his medium-term budget plan.
Hands told Sky News:
I saw the prime minister yesterday. The prime minister and the chancellor are absolutely determined to deliver on the growth plan.
However, Kwarteng’s early departure from the IMF meetings suggests something is afoot, and even he said last night “let’s see” when asked by the Telegraph about U-turns.
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Bankers' bonuses double since 2008 crash
Bankers’ bonuses have doubled since the 2008 financial crash, according to research by the TUC, which accuses the government of enriching City financiers while “holding down” the pay of key workers.
The unions’ umbrella body said bonuses in finance and the insurance sector have reached a record £20,000 a year on average – which it says is almost one-and-a-half times the average pay collected by teaching assistants.
The TUC found that average City bonuses increased by 101% in cash terms between 2008 and 2022, prior to the chancellor, Kwasi Kwarteng, announcing plans last month to scrap the bankers’ bonus cap.
“Everyone who works for a living deserves to earn a decent living, but ministers are holding down the pay of millions of key workers, while lining the pockets of City financiers,” said Frances O’Grady, general secretary of the TUC. “There is simply no justification for lifting the cap on bankers’ bonuses – especially when nurses and teaching assistants are having to use food banks to get by.
Royal Mail could cut up to 10,000 jobs
Royal Mail has said it may need to cut up to 10,000 roles by next August, blaming strike action by its workers and the continuing decline of its core business.
Royal Mail said that this figure includes the cost of eight days of strike action that have taken place, and two more planned days of action notified by the Communications Workers Union (CWU) on 20 and 25 October, adding that the loss could rise to as much as £450m if customers turn to rivals due to ongoing disruptions to its delivery services.
The company said that it needs to cut up to 6,000 full time frontline roles in delivery and processing by March and seek an overall reduction of 10,000 full time equivalent roles by next August. This is out of a workforce of 140,000.
We will be starting the process of consulting on rightsizing the business in response to the impact of industrial action, delays in delivering agreed productivity improvements and lower parcel volumes.
Wherever possible, we will look to achieve FTE rightsizing through reductions in overtime, temporary staff and natural attrition.
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Last night, government sources told the Guardian that a climbdown on the plan to scrap the rise in corporation tax was now “on the table”.
In 1976 Chancellor Healey flew early to the IMF to negotiate the meta loan and spending cuts that ended the Keynesian consensus. In 2022 Chancellor Kwarteng flies back early from the IMF to reverse unfunded tax cuts and the Thatcherite consensus. A bookending to close an era.
— Will Hutton (@williamnhutton) October 14, 2022
Truss and Kwarteng will have to eat a giant slice of humble pie and ditch the entire mini-Budget, tax cuts and all. There won’t be much left of the PM’s election campaign either. Whom the financial markets would destroy, they first make mad….
— Lionel Barber (@lionelbarber) October 13, 2022
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Introduction: Kwasi Kwarteng returns early from IMF as markets price in more U-turns
Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.
Kwasi Kwarteng has cut short his trip to the International Monetary Fund’s autumn meeting in Washington, flying home early as the political crisis over his tax-cutting mini-budget intensifies.
Adding to signs that the government is preparing to announce a U-turn over its plan to scrap a rise in corporation tax, the chancellor left the US capital a day earlier than planned. He spent two days there, and was publicly dressed down by Janet Yellen, the US Treasury secretary, at a meeting of G7 finance ministers and central bank governors, who warned that tax cuts that required extra borrowing posed a risk to financial stability. The IMF said yesterday it would welcome changes to the mini-budget.
Kwarteng’s unscheduled departure on a late-night flight from Washington capped another febrile day in Westminster and prompted comparisons with the sterling crisis suffered by the Labour government in 1976. Then, the chancellor Denis Healey turned around at Heathrow rather than fly out to an IMF meeting in Manila after pressure mounted on the pound.
In Sep 1976, following a slide in the pound, Denis Healey abandoned his plans to travel to a summit of finance ministers.
— Ed Conway (@EdConwaySky) October 14, 2022
In Oct 2022 @KwasiKwarteng cut short his trip to an IMF meeting in DC.
Worrying echoes. Healey later had to ask the IMF for a bailouthttps://t.co/dtBdweoPKF
UK government bonds rallied yesterday, and the pound surged on reports that the government will execute further U-turns on its recent mini-budget, a package of unfunded tax measures that triggered market turmoil.
This morning, sterling has slipped 0.1% to $1.1315, but is hovering near a one-week high against the dollar.
Michael Hewson, chief market analyst at CMC Markets UK, says:
While 10 Downing Street has denied such a U-turn will happen, markets seem to think that the chancellor won’t have a choice, and his early departure from the IMF meetings in Washington appears to suggest that something is afoot.
There is also an expectation that whatever the Bank of England and governor Andrew Bailey says about ending the support for the gilt market today, if we get further turbulence next week, they will have little choice but to step in and provide liquidity to the market.
The rebound in the pound was also helped by a sell-off in the US dollar, on an expectation that we could well see more aggressive hikes from the ECB and the Bank of England in response to a more aggressive Federal Reserve.
The Bank of England’s emergency bond-buying programme, announced on 28 September to calm nerves and prevent a run on pension funds, ends today.
Wall Street staged an impressive comeback yesterday after early heavy losses as investors shrugged off hotter-than-expected inflation data, and UK and European shares also closed higher.
In Asia, stock markets have rallied on hopes of more Chinese stimulus and speculation about more U-turns on the UK’s fiscal plans. Japan’s Nikkei rose 3.5%, Hong Kong’s Hang Seng has gained 2.7% and the Shanghai composite is up 1.8%. European shares are also expected to open higher.
The Agenda
10am BST: Eurozone trade for August
1.30pm BST: US Retail sales for September (forecast: 0.2%)
3pm BST: US Michigan consumer sentiment for October (forecast: 59)
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