Labour's economic agenda

[funduffer]

In my view the so-called UK bond crisis is overblown.

Bond yields are rising in most western nations and most are at or near decade long highs.

Why are they rising? Less Labour's economic policy, more global uncertainty regarding Trump, China, Russia.

Let's hear from an economist, Jonathan Portes:

https://www.theguardian.com/commentisfr ... nding-cuts

So have the so-called bond vigilantes come after Rachel Reeves, selling off their holdings of government bonds en masse as they did after Truss and Kwasi Kwarteng’s budget? Not really. The Truss debacle was the consequence of a toxic cocktail of irresponsible tax cuts, institutional vandalism and a near-death spiral in an obscure part of the pensions market, all of which were UK-specific. By contrast, since the start of 2023, UK long-term interest rates have broadly followed US ones upwards. While part of this reflects the fact that UK inflation has been somewhat more persistent than the Bank of England hoped, it is mostly driven by global developments, and especially those in the US, where growth and inflation are somewhat higher than expected. It’s this, far more than anything the new UK government has done, that has driven the rise in borrowing costs.

Labour just need to hold their nerve.

FD

[Adamski]

This cold snap won't be helping. Shops, restaurants are quiet. House building and housing market also quiet. These indicate the real economy is in recession.

Monthly gdp fell 0.1% in both Sep and Oct. My guess is we're already in a recession it's just not a technical one until announced in two quarters time.

Add all this extra borrowing, which markets won't accept for much longer, it'll mean more tax rises will be needed. My guess is the wealthy, those with private assets will be targeted next, as we / they got off relatively lightly in the last budget.

[1nvest]

In my view the so-called UK bond crisis is overblown.

Bond yields are rising in most western nations and most are at or near decade long highs.

Why are they rising? Less Labour's economic policy, more global uncertainty regarding Trump, China, Russia.

Let's hear from an economist, Jonathan Portes:

https://www.theguardian.com/commentisfr ... nding-cuts

So have the so-called bond vigilantes come after Rachel Reeves, selling off their holdings of government bonds en masse as they did after Truss and Kwasi Kwarteng’s budget? Not really. The Truss debacle was the consequence of a toxic cocktail of irresponsible tax cuts, institutional vandalism and a near-death spiral in an obscure part of the pensions market, all of which were UK-specific. By contrast, since the start of 2023, UK long-term interest rates have broadly followed US ones upwards. While part of this reflects the fact that UK inflation has been somewhat more persistent than the Bank of England hoped, it is mostly driven by global developments, and especially those in the US, where growth and inflation are somewhat higher than expected. It’s this, far more than anything the new UK government has done, that has driven the rise in borrowing costs.

Labour just need to hold their nerve.

FD

5% decline in the FTSE250 index since Monday is indicative that the international market is starting to see the UK economy as bleak. Considerably higher cost, less productivity - largely driven by private sector fiscal drag and increased taxes (NI etc.) combined with higher costs (for instance soaring raw materials prices makes the likes of house building a million new homes in the UK to accommodate a million new migrants non-viable).

Six months in and Labours claimed hit the ground running has been more a case of policy proposals that kick the can 5 years down the road, a.k.a despite having had 14 years to prepare they haven't a clue (for instance throwing billions more at the NHS when the bottleneck is social care is just a pure cash burn).

[1nvest]

This cold snap won't be helping. Shops, restaurants are quiet. House building and housing market also quiet. These indicate the real economy is in recession.

Monthly gdp fell 0.1% in both Sep and Oct. My guess is we're already in a recession it's just not a technical one until announced in two quarters time.

Add all this extra borrowing, which markets won't accept for much longer, it'll mean more tax rises will be needed. My guess is the wealthy, those with private assets will be targeted next, as we / they got off relatively lightly in the last budget.

Much of big wealth has already flighted. If they target middle wealth then so also will much of that flight (can't see currency controls being viable in the modern day world) - leaving anyone with a mobile phone as being the 'wealthy'. When the 1% that were paying a third of the tax take move overseas, for just that alone the rest are left with having to pay 50% more in taxes to cover that hole. High/rising taxation and inflation is a flat spin death spiral that's more inclined to lead to ejection as the only way of escaping.

[1nvest]

2% real on 20 year Index Linked Gilts, 8% nominal gross equivalent for a higher rate taxpayer on 25 year conventional Gilts. Indicative that the UK is running on empty, no reserves, at a time when it should have built up reserves in preparation for bad times - such as Trump/tariffs and a global slowdown.

[formoverfunction]

"The government’s bond issuance is expected to reach almost £300bn this year, driving up yields even as the economy begins to show cracks."

https://www.cityam.com/pound-sterling-c ... ky-ground/

Pound sterling continues to sink as UK economy ‘clearly on very shaky ground’ - headline

More taxation? I thought the present line was only to deal with execptional circumstances? None of this feels exceptional, it's driven by policy decisions.

It only ever worked if you could ride a wave of confidence, that for the moment seems to be evaporating, It takes it out of the hands of the govenement and nerve keeping. Bond markets want cuts, they are signalling they've lost confidence in growth.

Labour could be heading to Governing by austerity.

Over tax now and there will be even less potential for growth. That's why the sudden mentions of sovereign crises. Austerity might not be a choice, but could be a political and economic reality. If tax returns crater and the bond market don't want even more of your paper then you get a crisis.

There's already political calls for Reeves to make more statements:

"Urgent Question from Shadow Chancellor of the Exchequer @MelJStride: “To ask the Chancellor of the Exchequer if she will make a statement on the growing pressure of borrowing costs on the public finances.”
— UK House of Commons (@HouseofCommons) January 9, 2025"

How long before she has to cancel China?

[formoverfunction]

UK Bond Selloff Puts Reeves’ Economic Project on the Brink

https://www.bloomberg.com/news/articles ... omepage-uk

Bloomberg this morning, I wonder what today will hold for vigilantes?

More from Bloomberg:

Gilts Aren’t Only Besieged By Bond Vigilantes

Risk managers at dealers, clearinghouses and hedge funds are also to blame for the selloffs in Treasury and gilt markets.

https://www.bloomberg.com/opinion/artic ... omepage-uk

[formoverfunction]

Overall, every British newspaper appears to be negative, ranging from Reeves is "searching" for ideas to get growth, to the Guradian warming Reeves is considering deep cuts, even the Daily Star now features Starmer with a clowns nose.

It's all bad news for a governemnet of hope, that's project depends on goodwill and confidence.

Let's hope they can pull a rabbit out of the hat or at least come up with some ideas.

[formoverfunction]

https://www.cityam.com/reeves-will-be-f ... -predicts/

Reeves ‘will be forced to hold Spring Budget’ to settle gilt jitters, Abrdn predicts

But will another broken promise help her? If she cancels China, the sharks will smell blood in the water, but 3 months is a long time to wait.

"Rachel Reeves has previously pledged to hold only one Budget a year."

A “brutal throwback” to 1976.


All dismal stuff.

[formoverfunction]

The move prompted jokes in the City and beyond, with Citigroup describing sterling as the “Great British Peso” - a reference to a more volatile emerging-market currency.

“The pound could remain the preferred pressure valve for anxious investors who worry about the outlook of their UK portfolios,” said Valentin Marinov, head of Credit Agricole’s Group-of-10 FX strategy in London.

“Markets are quite skittish at the moment. FX traders will continue to ‘milk’ the heightened FX volatility for whatever it’s worth.”


High gilt yields and low pound spell out "CAPITAL FLIGHT", visible from space.

[funduffer]

I don't really get why the recent rise in 10yr (for example) bond yields of 0.2% - 0.25% over the last week or so in the UK is especially a problem, when the same thing has happened in every other western economy?

Just look at this 1 week 10yr gilt chart for any major economy and you can see the same trend.

https://tradingeconomics.com/united-kin ... bond-yield

Surely global issues are driving this trend rather anything particular the government have done or not done?

As someone once said: crisis, what crisis?

FD

[dealtn]

I don't really get why the recent rise in 10yr (for example) bond yields of 0.2% - 0.25% over the last week or so in the UK is especially a problem, when the same thing has happened in every other western economy?

Just look at this 1 week 10yr gilt chart for any major economy and you can see the same trend.

https://tradingeconomics.com/united-kin ... bond-yield

Surely global issues are driving this trend rather anything particular the government have done or not done?

As someone once said: crisis, what crisis?

FD

Said the frog in the saucepan.

[formoverfunction]

The combination of escalating gilt yields and falling pound suggest there is wider financial issues. It's a warming that capital flight is taking place.

The net consequence of that is investing for growth becomes more expensive, the government has to pay more for it's borrowing, and the "real" economy falters, so tax receipts fall.

It becomes a doom loops, where the entire economy becomes de-anchored.

The UK, it planning to issue £300b of gilts this years, so it become more expensive, invest for growth (or as Starmer calls is getting the foundations right" gets more expensive, so doesn't happen and you get a fiscal and policy unwinding that sends investors running for the hills.

So i's not just the gilt yield its the combination of it with the falling pound and insipid growth, even though we might already be in a recession.

Confidence has been eroded by the government and it's largess and borrowing plans have made it worse, so yes global trends are having an effect, but the idea is to mitigate those with policy, not exaggerate the impact of those trends.

This is what the Guardian have to say about it:

"One worrying aspect of the market turmoil this week is that both UK government bonds and the pound have fallen.

In more normal times, a rise in government borrowing costs (caused by a fall in the value of bonds) tends to lead to a stonger currency.

When both fall together, it can be a sign of fiscal de-anchoring, and potentially capital flight out of the UK.

This last happened in the 1970s crisis, a point another former Bank official Martin Weale made yesterday, when he warned that recent events echo the 1976 debt crisis “nightmare” that forced the government to ask the International Monetary Fund for a bailout."


Increased borrowing costs with the combination of falling currency, suggest there's trouble brewing, that why the deep concern about it, ingoring it might make it go away, or lead to panic over a concerns about the government's grip and understanding of what's going on.

This is much more a UK problem than a global trend.

[Nimrod103]

I don't really get why the recent rise in 10yr (for example) bond yields of 0.2% - 0.25% over the last week or so in the UK is especially a problem, when the same thing has happened in every other western economy?

Just look at this 1 week 10yr gilt chart for any major economy and you can see the same trend.

https://tradingeconomics.com/united-kin ... bond-yield

Surely global issues are driving this trend rather anything particular the government have done or not done?

As someone once said: crisis, what crisis?

FD

Have you not noticed that British bond yields have risen considerably relative to Italy, and Spain?
https://www.telegraph.co.uk/business/20 ... l-markets/
The markets think that Britain is outdoing the over-indebted Mediterranean countries for fiscal-monetary incompetence.

[formoverfunction]

Deutsche Bank advice: sell the pound and brace for a slowdown in Britain’s economy following the sell-off in bond markets.

"Deutsche Bank said sterling had made a “concerning” decline this week despite surging yields in bonds, which would usually act as a support for the currency."

The Deutsche Bank strategist Shreyas Gopal: “We think there’s further to go in the recent pound weakness.”

[formoverfunction]

Barclays, UK chief economist, believes Reeves will be forced into making spending cuts, unless borrowing costs change before the OBR report.

A more likely outcome than tax rises.

A forced intervention.

This is sure to be very damaging for Reeves, Starmer et al.

It now looks like the earliest rate cut is pushed out to October '24. It's going to be a nervous few days.

[1nvest]

Barclays, UK chief economist, believes Reeves will be forced into making spending cuts, unless borrowing costs change before the OBR report.

A more likely outcome than tax rises.

A forced intervention.

This is sure to be very damaging for Reeves, Starmer et al.

It now looks like the earliest rate cut is pushed out to October '24. It's going to be a nervous few days.

No. October 2024 and they'll leave rates as is, wont be until November 2024 that rates are cut by 0.25%

[formoverfunction]

"They are putting a postive face on it, but there's alarm in private"

Bloomberg UK Politics: Gilt-y Plea : Why Market Turmoil Is a Big Problem for Rachel Reeves

https://www.youtube.com/watch?v=CS97J5ux0uY

We are a into a slow motion car crash, that if we don't get spending cuts could spiral. Reeves could be lucky, but if she isn't cutting to the extent that will be required it could be very bad news.

"we are in the realms of spending cuts" "but they might have to have tax increases to bring markets along"

But where would that leave growth? If your remit is growth, killing it leaves no political purpose except, in the short term, being an alternative regime. It already looks insipid and deteriorating.

Focus seems to be falling on the benefits bill. "May be credible for the market", possibly...

Rachel Reeves The *Chance -llor" who might now be just keeping her fingers crossed and hoping the winds of chance blow her way.

[Lootman]

We are a into a slow motion car crash, that if we don't get spending cuts could spiral. Reeves could be lucky, but if she isn't cutting to the extent that will be required it could be very bad news.

At least with Truss the problem came and went quickly. RR's "slow motion car crash" seems less easily fixed and reminds me more of the mid to late 1970s when Callaghan and Healey just sat and watched the nation slide into a solvency crisis that required the IMF to come to the rescue, a humiliation for the nation.

Some good may come from this if finally RR adopts some serious austerity measures. Although even then I cannot see Labour making the cuts that are really needed, such as to welfare and to public sector pay and pension costs.

Of course the very worst thing she could do is have another tax-raising budget just months after the last one. That would smack of desperation.

[Oggy]

We are a into a slow motion car crash, that if we don't get spending cuts could spiral. Reeves could be lucky, but if she isn't cutting to the extent that will be required it could be very bad news.

At least with Truss the problem came and went quickly. RR's "slow motion car crash" seems less easily fixed and reminds me more of the mid to late 1970s when Callaghan and Healey just sat and watched the nation slide into a solvency crisis that required the IMF to come to the rescue, a humiliation for the nation.

Some good may come from this if finally RR adopts some serious austerity measures. Although even then I cannot see Labour making the cuts that are really needed, such as to welfare and to public sector pay and pension costs.

Of course the very worst thing she could do is have another tax-raising budget just months after the last one. That would smack of desperation.

I will bet everything I have she will raise taxes again in the next budget. It is the socialist way.... to perdition.