Today’s markets: Kwasi budget time, cable flounders

  • small budget
  • Fiscal easing expected
  • The stock markets remain restless

Where is the mandate? I’m all for lower taxes and a smaller state, but where’s the mandate for some of what’s talked about in this mini-budget? Perhaps that’s a question for political and constitutional analysts – should Truss have been forced to call elections? Anyway, this morning’s chatter points to the biggest fiscal event in decades, with tax cuts of all kinds from stamp duty to the base rate of income tax. An IFS-Citi report argues that the Kwasi budget is unsustainable with too much borrowing while interest rates rise. There’s even talk of changing the time – having British Summer Time all year round. Where is the mandate or evidence to support this move? The fact that no economic forecasts are associated with this event shows the contempt with which our elected leaders treat the people. Of course, the OBR will not mark Kwasi’s homework with an A*.

Bond markets went into convulsion yesterday, with the benchmark 10-year Treasury yield jumping from 3.5 percent to over 3.7 percent, while 2s rose 4.16 percent. At one point, the gap between 2-year and 10-year Treasury yields was the steepest since 1981. US mortgage rates jumped to 6.3 percent, the highest since 2008 — now everyone is saying the housing market is next behind Equities will be forth and bonds.

Gilts were in turmoil as the Bank of England hiked interest rates to their highest level since 2008 and investors looked to this mini-budget and what it means for borrowing. The yield on 10-year gilts topped 3.5 percent for the first time since 2011 after the Chancellor announced the government would reverse increases in social security contributions. Spreads to European neighbors widened, the gap between UK and German debt was the widest since 2015.

Deficits matter…or not? The widening trade deficit, which has risen to near an all-time high of £27bn in the three months to July, is half of a twin deficit that is making traders bearish on the pound. And all these tax cuts will not help the other half of the UK’s twin deficits – the budget deficit – and could lead to another revaluation of sterling. Citi: “Fiscal and external risks are now a problem of the first order in our view… Further cross-market cheapening seems likely” and: “It is not at all clear, in our view, that the external picture will be sustainable without further extensive pricing adjustments.” But …if the measures to be announced by the government today and later boost long-term productivity, spur sustained GDP growth above 2% and usher in a new pro-business era, then perhaps that is the kind of turnaround the country needs. On the other hand, relinquishing any semblance of fiscal discipline is usually not a recipe for long-term confidence in the country’s assets.

Bank of England hikes

Still too slow, still complacent. Andrew Bailey’s tenure at the Bank of England has been marked by a lethargy and complacency which, although initially at least in line with peers, has now become worryingly out of step. The MPC voted to raise interest rates by 50 basis points to a 14-year high. But it’s also true that the 2.25 percent bank rate versus 9.9 percent CPI inflation just isn’t credible. Other central banks – with the notable exception of the Bank of Japan for reasons of their own – came out buoyant with hikes of 75 basis points. The BoE was among the first to tighten but has yet to shake off its patient, step-by-step approach and adopt a more forceful stance. There are clearly pains that are better gotten out of the way quickly, like the Fed is doing.

And new MPC voter Dhingra voted for a meager 25 basis point raise. She believes that “recent data suggest that activity is already moderating and risks of second-round effects from near-term inflation are receding.” The MPC summary further elaborated on the reasoning: “In the latter, higher-than-expected service price inflation could reflect energy price or base effects in some sectors that would not last, and wage growth in all service sectors was negatively correlated with producer price inflation in the last quarters. On the other hand, further demand pressure on supply could arise in the medium term, also due to the expected fiscal policy.” Hiking by 25 bps does absolutely nothing; futile.

Sterling in Kwasi time

Whatever Kwasi does, Sterling doesn’t particularly like it. GBPUSD hit a fresh 37-year low ahead of the Kwasi budget at 1.11 this morning.

Given where sterling is headed, how interest rates are rising and that we are already in a recession, it is unsurprising that UK consumer confidence continues to crumble. GfK reports this morning that UK consumer confidence fell to a new low of -49 in September, the worst since records began in 1974.

stocks lower

European stock markets traded only marginally lower in early trading on Friday. The FTSE 100 fell into the 7,100 area and the DAX fell below 12,450. Wall Street closed lower led by Technology/Growth as yields rose. The Nasdaq closed nearly 1.4 percent, while the S&P 500 was down 0.84 percent at 3,758 during the session, with a sharp pullback to close suggesting the bulls are nowhere to be seen.

Tesla tumbled 4 percent as it was ordered to recall nearly 1.1 million vehicles in the US after windows closed too quickly in all four models…. ARKK slumped 4 percent, nearly touching its YTD low . Cathie Wood has since relinquished day-to-day management of two of her funds, the 3D Printing ETF and the ARK Israel Innovative Technology ETF.

Stifel calls the bottom: “Only when the Fed becomes incrementally more hawkish… do we see the 10-year TIPS yield continue to rise, so we believe the P/E has bottomed. We see lower inflation, a decline in the 10-year TIPS yield and 4,400 for the S&P 500 by Q4 2022/1. quarter of 2023.”

I reiterate that I think the Fed is gradually becoming more hawkish. As Stan Druckenmiller pointed out, once inflation rises above 5%, it has never fallen again without the Fed’s interest rate exceeding the CPI. That means the Fed is going north from 5 percent, not staying at 4.5 percent. And BofA/IMF data shows that once inflation rises above 5 percent, it takes an average of 10 years to fall back below 2 percent.

NQ futs are holding the critical 11,500 support this morning – a break here that will require a retest of the June lows.

Consumer confidence in the EU

Finally, yesterday’s data pointed to a record low for EU consumers and the worst of the energy crisis is probably yet to come… one thing to note is that this measure is always negative! Europeans simply haven’t been that optimistic since the single currency came into existence….

Neil Wilson is Chief Markets Analyst at

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