Summary
Time to recap
Britain’s credibility in the financial markets remains weak following the mini-budget, traders and economists have warned.
Chancellor Kwasi Kwarteng’s humiliating u-turn on his plan to scrap the highest rate of income tax (45p on those earning over £150,00) has given UK assets a lift, after a week of market turmoil
The pound has gained over a cent to above $1.13 recovering its losses since Kwarteng’s unfunded tax cuts spooked markets. It’s also up a eurocent at €1.15, for the first time since just before the mini-budget.
UK short and medium-term government bonds have recovered some losses too, with the yield on 10-year UK gilts back below 4%.
The financial markets also lowered their expectations for UK interest rate hikes. Rates are now expected to hit 5.5% next summer – very painful for borrowers, but lower than the 6% expected last week.
Instant response to the change of mind on the 45p rate in money markets.
— Ed Conway (@EdConwaySky) October 3, 2022
Traders no longer pricing in 6% interest rates by next year. Now somewhere between 5.5% and 5.75% pic.twitter.com/WNXbWsbo0a
But Truss and Kwarteng both look desperately short of credibility after abandoning the tax cut for top earnings.
Ratings agency S&P warned that the u-turn may not protect the UK from a credit rating downgrade.
Charles Hepworth, investment director at GAM Investments, warned:
When market trust has been shattered, as we saw last week, the uphill task of restoring credibility is extremely hard and even harder when strategies shift.
The market currently has little faith that the Prime Minister and Chancellor can restore credibility in the short term, and this puts further renewed pressure on UK risk assets.”
The Institute for Fiscal Studies pointed out that keeping the top rate of income tax would only save around £2bn from Kwarteng’s £45bn of unfunded tax cuts.
That suggests significant cuts to spending – or further u-turns – are likely to be announced in November.
The Resolution Foundation calculated that top earners are still the main winners from the mini-budget, even though they have now lost much of the benefits.
Here’s an explainer about what the latest developments mean::
And here’s Larry Elliott on the unnecessary harm caused by an already weak UK economy:
Elsewhere…
Britain’s manufacturing output contracted for a third month in a row in September, hit by falling exports and worries that the economy could be heading into recession.
September’s PMI report suggests that the sector is already in a recession, says Thomas Pugh, economist at RSM UK:
The surge in borrowing costs will reduce investment and employment over the next year as firms cut back on non-essential spend in order to finance debts. As a result, the manufacturing sector is likely to remain in a downturn well into 2023.
The only silver lining is that the recent sharp fall in global commodity prices should start to feed through into lower input costs for manufacturing firms. However, the outlook for energy prices once the government’s six month cap expires will be crucial in determining the fate of the sector.’
🇬🇧 #UK's Manufacturing #PMI posted 48.4 in September (Aug: 47.3), below the 50.0 neutral mark for a third straight month. Weak domestic and overseas markets combined with inflationary pressures to curb goods production. Read more: https://t.co/EWyzjhJF4R pic.twitter.com/J6pwkRRgVe
— S&P Global PMI™ (@SPGlobalPMI) October 3, 2022
Growth also slowed at US factories, while eurozone manufacturers also suffered another contraction as the energy crisis hit demand and drove up costs.
The oil price has jumped, on speculation that the Opec+ group could cut production by over a million barrels per day.
Energy regulator Ofgem has warned that Britain is at “significant risk” of gas shortages this winter because of Russia’s war in Ukraine and undersupply in Europe.
Thames Water, Southern Water and other companies will be forced to cut tens of millions of pounds from consumers’ bills after the regulator said they had missed pollution targets.
Vodafone and the owner of Three UK are in talks about a potential merger that would create Britain’s biggest mobile operator.
And Kim Kardashian has paid US regulators more than $1m to settle charges for failing to disclose that she was paid to promote a crypto asset in a post on her Instagram page.
Our Politics Live blog has all the latest action from the Conservative Party conference:
Updated
Barely a week after spooking the financial markets with a spectacularly badly-received mini-budget, and just hours after a humiliating u-turn on his tax cut for top earnings, Kwasi Kwarteng has told the Conservative Party conference that his economic deal will be backed with an ‘iron-clad commitment’ to fiscal discipline.
Kwarteng also promised to focus relentlessly on growth, and lay out details of his plan to bring down public debt as a share of GDP shortly [it’s scheduled for 23rd November].
Kwarteng also tried to brush aside the opposition to his plans, saying they had ‘caused a litle turbulence’. Tell that to people facing a larger increase in mortgage costs next year….
It is quite to square this rhetoric on fiscal responsibility with that fiscal event. Which happened all of 10 days ago.
— Duncan Weldon (@DuncanWeldon) October 3, 2022
If they’d just done the CT & NICS changes plus the energy package at that budget - and held the rest back until they had a full OBR forecast… they’d be in a much stronger economic & political position.
— Duncan Weldon (@DuncanWeldon) October 3, 2022
Such an unforced error.
On the upside, the markets were little-moved by Kwarteng’s speech – which probably counts as a win.
Kwasi Kwarteng admits tax plans caused ‘a little turbulence’ https://t.co/iAxUCvBdcB
— The Guardian (@guardian) October 3, 2022
Full details here:
