Pound and UK government bonds rally on rumours of more mini-budget U-turns – business live

That was short-lived. US inflation has come in much higher than expected. The headline rate was 8.2% versus expectations of 6.5%, while the core rate, which strips out food and energy, was 6.6%.

The FTSE 100 index quickly turned negative again while other European stock markets are still up, falling 92 points, or 1.35%, to 6,734. The pound has pared gains and is now up 0.6% against the dollar at $1.1168.

UK government bonds and the pound have rallied strongly, as the Bank of England has ramped up bond-buying ahead of the end of its emergency bond purchases programme on Friday – and as rumours circulate that the government could make a U-turn on its planned cuts to corporation and dividend taxes.

The central bank yesterday bought £4.4bn of gilts, as UK government bonds are known, the biggest daily amount so far.

Gilts have recovered strongly after yesterday’s selloff which sent their yields (or interest rates) to levels last seen in 2002. The 30-year gilt yield has fallen 37 basis points below 4.5%, while the 20-year yield is down 26 bps at just above 4.5%. Both jumped above 5.1 yesterday.

The 10-year gilt has also benefited, with the yield back down to 4.17% (from 4.5% yesterday). The yield on the two-year government bond has fallen to 3.73%, down 28 basis points on the day, the lowest level since the mini-budget on 23 September.

The pound has surged 1.4% to $1.1259 against the dollar.

The recovery in the UK government bond market continues after yesterday’s sharp selloff, which sent yields soaring to levels last seen in 2002, ahead of the end of the Bank of England’s emergency bond-buying programme tomorrow.

However, several economists, including Mohamed El-Erian, who used to run the world’s biggest bond fund Pimco, have said that the central bank can’t just walk away and will continue to provide liquidity.

The yield on the 20-year gilt has fallen 22 basis points to 4.68% while the 30-year gilt has dropped back to 4.59%. Yesterday both jumped above 5.1%.

The Bank of England is the market maker of last resort and has to step in and provide emergency liquidity to maintain orderly markets if needed, so can backstop financial markets. That’s different from the bond-buying programme conducted since 28 September.

Andrew Hauser, executive director of markets at the central bank, gave a speech on this in January last year. You can read it here – entitled “From Lender of Last Resort to Market Maker of Last Resort via the dash for cash: why central banks need new tools for dealing with market dysfunction”.

Poorer families risk £1,000 hit from earnings-related benefits rise

Peter Walker

If the government raises benefits in line with earnings rather than inflation next year, it would drastically cut the incomes of poorer working-age families, while saving less than a tenth of the cost of recent tax cuts, a leading economic thinktank has calculated.

Such a change, which would mean a significant real-terms cut given that wages are rising at 5.5% with inflation close to 10%, could see the effective income of some families reduced by up to £1,000 a year, the Resolution Foundation said.

In a report, it said this decision would end up saving about £3bn by 2026-27, whereas the tax cuts announced in Kwasi Kwarteng’s mini-budget would cost about £40bn, even now that one of them – scrapping the top 45p rate of tax – has been reversed.

Kalyeena Makortoff

Here is our full story on the expected Ofgem announcement:

The UK’s energy regulator will advise households to reduce their gas and electricity use “where possible” after the government blocked a state-led information campaign amid fears over potential blackouts this winter.

Ofgem’s chief executive, Jonathan Brearley, is expected to announce the regulator’s public information campaign on Thursday, when he will tell the Energy UK conference “this isn’t the time for complacency” as energy costs continue to rise.

He is expected to say that reducing energy consumption is “not only the most direct way of reducing our bills [but] it directly helps with security of supply, contributes to decarbonisation, and saves money for the public finances,” according to the Financial Times.

Goldman Sachs has sounded the alarm on the UK commercial property market, saying that developers will struggle because of the sharp rise in borrowing costs since the government’s mini-budget on 23 September.

Rising interest rates – the Bank of England’s base rate is now expected to rise to 6% by next summer – will hit companies like British Land, Land Securities and Hammerson, which build offices, shops and warehouses, just like homebuyers looking for a mortgage deal.

Analysts at Goldman Sachs are forecasting that prices across UK commercial property will fall between 15% and 20% between June this year and the end of 2024, the Financial Times reported.

The five-year swap rate used by commercial property borrowers has jumped from 1% a year ago to above 5%, and Goldman estimates that gross financing costs for the listed property developers will rise by 75% over the next five years.

Buyer demand – enquiries about homes for sale on Zoopla – have dropped by over a fifth in the last two weeks, since the mini-budget sent mortgage rates soaring, the property website reports. It explains:

Mortgage rates were set to rise to 4-5% over 2022 before the mini budget.

This, together with increases in the the cost of living, were starting to weaken demand for homes over the summer months.

The fall-out from the mini budget has effectively added an extra 1% to mortgage rates, which are now settling around the 6% mark.

This increase represents a 25-30% hit to the buying power of home buyers using a mortgage.

Widespread reporting of mortgages being pulled and the increase costs of mortgage payments have certainly dented market activity.

EasyJet says bookings are holding up for this winter and next summer, despite the consumer squeeze.

The airline said ticket sales for the UK’s half term holiday later this month and the Christmas week exceeded pre-pandemic levels and it expects to fly 20m seats in the three months to the end of December, up 30% year on year.

It expects to post an annual loss before tax of between £170m and £190m, down from £1.1bn last year when Covid restrictions led to a slump in air travel.

Johan Lundgren, the chief executive, said:

Our summer 23 season went on sale last week and we were filling the equivalent of more than four A320 aircraft a minute in the opening hours demonstrating the continued demand.

We face the uncertain macro-economic environment with many strengths.

Between July and September, easyJet flew 88% of its pre pandemic capacity, compared with 58% in the same period last year. Passenger numbers increased to 24.3 million, from 13.4 million.

However, Michael Hewson, chief market analyst at CMC Markets UK, says:

With the share price already at 10-year lows, easyJet has had a pretty poor year.

Not only has the airline had to contend with bid speculation from the likes of Wizz Air, but it’s also had to deal with surging energy prices, as well as large scale travel disruption throughout the summer, which cost it £133m, as airports struggled to cope with surging passenger numbers.

He is sceptical that easyJet can fly 20m seats between October and December.

This seems optimistic given that they can barely cope with their current capacity at some airports.

Anecdotal reports of waits of up to 2 hours to be presented with your bags at Gatwick Airport has been a common experience. Until it can sort out logistical problems of this kind easyJet could well struggle to meet its capacity targets, as people simply won’t travel with them.

European stock markets have opened lower, extending their losing streak to a seventh day. The FTSE 100 index has dropped 23 points to 6,802, a 0.36% decline, while Germany’s Dax is down 0.5%, France’s CAC has lost 0.67% and Italy’s FTSE MiB is flat.

Sterling remains under pressure, trading 0.3% lower against the dollar at $1.1069.

UK government bonds sold off heavily yesterday ahead of the end of the Bank of England’s emergency bond-buying programme on Friday, as the central bank ruled out extending it and the governor Andrew Bailey told pension funds they had just three days to fix liquidity problems.

The sell-off pushed yields (or interest rates) on 20- and 30-year gilts to their highest levels since 2002, with both rising above 5.1%.

This morning, they have fallen back a bit, with the 20-year yield at 4.88% and the 30-year yield at 4.78%. Long-dated bond yields have also risen in other countries, but the moves have been most severe in Britain.

However, there are expectations that the Bank will continue to provide some liquidity to the market, as the economist Mohamed El-Erian, who used to run the world’s biggest bond fund Pimco, said this morning.

Analysts from RBC said:

Despite governor Bailey’s comments to the contrary, it seems likely to us given current gilt market volatility that it will be necessary for the Bank of England to continue intervening in the long end of the curve beyond the end of this week.

Pension funds have scrambled to raise cash since the government’s mini-budget on 23 September sparked a selloff in bond markets, forcing funds to stump up emergency collateral in liability-driven investments, after gilts plummeted in value. The Bank of England stepped in the following Wednesday with an emergency bond-buying programme to calm the market and prevent a collapse of pension funds. That programme is due to end tomorrow.

The Bank of England is likely to continue to provide liquidity after the end of its bond-buying programme tomorrow, said Mohamed El-Erian, president at Queens’ College Cambridge and part-time chief economic advisor at Europe’s biggest insurer Allianz.

Speaking on BBC radio 4’s Today programme, he also said the UK cannot wait until the end of the month for Kwasi Kwarteng’s budget announcement and the independent forecasts from the fiscal watchdog.

A lot of people and I would agree that when push comes to shove, the Bank of England is likely to continue providing liquidity support. A central bank is like a doctor. If the patent is really ill and even if the patient has misbehaved it is very difficult for a doctor to walk away. So the reality of central bank emergency interventions is that they tend to continue for longer than what is expected and central banks simply will not walk away.

Asked whether the government understands the gravity of the situation, he said:

I think they’re getting there, but they are not there yet. So they now understand that you can’t resolve the issue by cutting spending heavily that that simply won’t work. There’s starting to be some talk among backbenchers that perhaps we need a reset of the mini-budget and particularly the unfunded tax cuts. And ultimately that is a necessary condition to get us out of this mess.

Everybody will acknowledge that the fluid global conditions have contributed to this; the main cause has been the mini-budget. And there are ways to measure this. Just look at the interest rate differential between the UK and Germany, the UK and the US, you will see that that differential widens quite a bit on the announcement of the mini-budget so there is definitely a domestic driver, it is not the only driver there certainly are global factors. There is a worldwide increase in yields but it has been much bigger in the UK than it has been in other countries.

The chancellor now plans to make his budget announcement on 31 October, which was brought forward from 23 November, alongside independent forecasts from the Office for Budget Responsibility, but El-Erian says we cannot wait until then.

We should not wait until the end of the month. There is a lot of damage being created right now, the high interest rate structure is getting embedded into the economy, the mortgage market is coming under pressure. People’s confidence and business confidence is coming down. So if we wait another three weeks, there will be more damage not just to actual growth but also potential growth.

Finally, El-Erian provided some reassurance about pensions – while mortgages are another matter.

You shouldn’t be worried about your pensions because that is going to be supported one way or the other. You should be worried if you’ve got a mortgage coming up because that is unlikely to come back to the sorts of levels where we were at a few weeks ago, it will take time. Then longer term we should all be worried that unless we can restore confidence and private sector buying for the government policy package it’s going to be harder to grow at a time when the global economy is facing significant headwinds.

Mark Sweney

UK homeowners will struggle to make mortgage repayments and repossessions will rise next year as soaring interest rates and falling prices mark the end of the 13-year housing market boom, according to a sobering report from the Royal Institution of Chartered Surveyors (RICS).

The number of inquiries from potential homebuyers fell for a fifth month in a row in September, while sales fell to the lowest level since May 2020 when the housing market all but ground to a halt during the early stages of the coronavirus pandemic, it said.

The number of new instructions to sell has continued to fall – stock levels are at historic lows with estate agents on average listing just 34 homes on their books.

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

The UK chancellor, Kwasi Kwarteng, is meeting world leaders at the autumn meetings of the International Monetary Fund in Washington today. His first major international appearance comes at a critical time, as he is under huge pressure at home to reverse his mini-budget of unfunded tax measures, which sent the pound sliding, government borrowing costs soaring and pushed up mortgage rates.

Back home, Britain’s energy regulator will urge consumers to reduce their gas and electricity use “where possible”, the Financial Times reports. The Ofgem boss Jonathan Brearley will say in a speech in London that cutting back on energy is “not only the most direct way of reducing our bills [but] it directly helps with security of supply, contributes to decarbonisation, and saves money for the public finances”.

However, he will also play down the threat of energy shortages this winter, saying that a supply emergency is not likely.

Michael Hewson, chief market analyst at CMC Markets UK, sums up yesterday’s moves in the financial markets.

It was another disappointing session for the FTSE 100 yesterday as the UK blue chip closed at an 18-month low, dragged lower by a sharp fall in banks and house builders as a result of a sharp rise in long term [bond] yields.

This rise in yields has been driven over concerns about the fiscal plans of the UK government as well as the prospect of a bumper rate hike by the Bank of England in November.

US markets also underwent a difficult session with the S&P 500 languishing close to 18-month lows, along with the Nasdaq 100.

Last night’s Federal Reserve minutes contained little in the way of surprises, with central bank officials indicating that rate hikes were likely to continue, given that inflation remained unacceptably high, and that it was likely to remain higher for longer than expected.

A little surprisingly, yields slipped back in the aftermath of the release of the minutes despite there being little sign of any shift in thinking, with the expectation that another 75 basis point rate hike is coming at the beginning of November.

This morning, the yen is hovering near a fresh 24-year low while sterling slipped as investors awaited US inflation figures today and the end of the Bank of England’s emergency bond-buying programme on Friday. The pound dropped 0.2% to $1.1076.

The yen fell to 146.98 per dollar, close to the 147.64 low hit in August 1998, and well past last month’s low of 145.90 per dollar which prompted Japanese to step in to buy the yen.

Asian stocks weakened ahead of US inflation, which could determine the pace of further interest rate hikes from the Federal Reserve. Japan’s Nikkei fell 0.5%, Hong Kong’s Hang Seng dropped 0.8% and the South Korean Kospi lost 1.3%.

The Agenda

• 9am BST: IEA Oil market report

• 9.30am BST: Bank of England Credit conditions survey

• 1.30pm BST: US inflation for September (forecast: 6.5%)