Morning from DC where Chancellor arrived a few hours ago…
- 20Y gilt yields (effective Govt borrowing costs) just topped 5% again 5.02 for first time since Bank of England first intervened after mini Budget…after Bailey hard line message
- shock August GDP fall
Not sure I buy the idea that there’s private reassurance the bond buying programme will prolong. Bailey not only volunteered the “you have 3 days” comments, he then when asked for reassurance by the BBC outside, reiterated it unprompted, on camera…
BUT..
What there is into next week is a Temporary Expanded Collateral Repo Facility (TECRF)… which will help banks to help those LDI funds with liquidity, which many in the market thought was the appropriate tool to deal with this anyway…
What there isnt - and tried to make this clear in every bit of reporting - is a threat to DB pensioners…
Their pensions are guaranteed in law by the sponsoring company.
rise in interest rates actually helps long term position, but post mini budget stresses are s-term challenge
So there is a Mexican stand off as I see it between these funds that chose to indulge in some leveraged wizardry in the gilt market, and suffered when gilt yields surged so fast, at record speed after mini budget, and BoE, over selling now at losses
🚨 Bank of England confirm in a statement what I said above and on air yesterday…
Gilt purchases “will end on 14th October” as “has been made absolutely clear in contact with the banks at senior levels”.
New repo facility in place to help with liquidity pressures for the LDIs
NEW Twenty year gilt just reached 5.036% - so now above effective borrowing cost reached in aftermath of mini budget, highest level since June 2008
NEW
this 20 year gilt was one type of Government borrowing the BoE was willing to buy (up until Friday) as part of its emergency operations… its now at 5.07% - highest level since May 2004, ie for over 18 years
NEW
30 year gilt now also above 5% again for first time since post mini budget BoE intervention. A little lower than the high then..
NEW:
Bank of England chief economist Huw Pill:
Mini Budget “will add to inflationary pressure coming from energy guarantee”and
“volatile market dynamics that followed announcement of Growth Plan underline the need to bolster the credibility of wider institutional framework”
think that’s the seventh time the Bank of England has clearly linked the mini budget or UK specific factors to the bond market turmoil, including the Governor on camera to a room full of the world’s top banking CEOs, whose chair thanked Bailey for his leadership in this “crisis”
🚨
Bank of England warns on Govt fiscal policy…
chief economist Huw Pill:
“Main macroeconomic risk” from energy surge is now not inflation but “greater pressure on the fiscal deficit and ultimately the public finances more widely”
“Key” that policy “does not bring longer-term sustainability of the public finances or respect for wider institutional framework for macroeconomic policy into question both in & of itself, but also because maintaining credibility & integrity of framework supports monetary policy”
And Pill refers to my story from before mini budget about OBR offer to do forecast with it being turned down:
“It is welcome that role played by the OBR in scrutinising the Governments fiscal plans will be resumed in the forthcoming Budget statement” will help “add stability”
NEW
UK 30 year yields - have now gone above the post mini budget high, which triggered the Bank’s emergency action - at 5.095% looks to me like the highest level since August 1998, since the creation of Bank independence and the golden fiscal rules under Blair/Brown
Fallen back now below 5% after the Bank of England bought £2bn of bonds in its auction.
My blog from the IMF in Washington where the Chancellor Kwasi Kwarteng has just gone into a meeting with G7 finance minister meeting. There will be questions, around the table, I’m told. bbc.co.uk/news/business-…
NEW
On #BBCNewsTen coming up live from the G7 finance ministers, the Chancellor’s debut on world stage, and I speak to both Mark Carney and Eurogroup President Paschal Donohoe
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US customs messaging note quietly slipped out last night shows that smartphones, the number 1 Chinese export to the US by value last year, exempted from the 125% tariff… alongside chips, processors, wafers, lcd panels, LEDs etc…
8517.13.00.00
Smartphones
US has excluded the single biggest Chinese export, and certainly the most high profile finished good from the tariffs, without publicly announcing it…
Avoiding the very public repricing of IPhones etc across Apple stores, but only in the US….
While obviously smartphones/ iPhones being exempted is big news for now…
Here’s full list of exemptions according to Harmonised US tariff codes that I plugged into its database… lots of semiconductor parts, circuits, processors, solid state storage, flat panel touchscreens 👀
Author of Mar A Lago accord concept that US tariff agenda is basically designed to cause negotiated dollar weakening, (now WH chief economist), gave speech yday which basically suggested that reserve status for dollar was a burden which others might need to “write checks” for
turns on its head the famous description of ex French President then fin minister Valéry Giscard d'Estaing the US enjoyed an “exorbitant privilege” with $ reserve status…
Instead Administration appears to believe this is an exorbitant burden for which US should be remunerated.
It’s part of a narrative that seeks to paint new tariffs (accepted without retaliation) as justifiable payment for burden of strong dollar (eg on US manufacturing exports and jobs)… this new mindset is extremely consequential. The tariffs aren’t going.
President just shared a video on Truth Social saying “Trump
Is purposely CRASHING the market” in order to lower US Treasury yields and the dollar.
The Mar A Lago theory I wrote about two months ago, written by his chief adviser that said tariff chaos would lead to $ deal
Here’s the video…
Dow down another 1000 points…
Obviously RT are not endorsements but why is the President choosing to share this stuff? And if you are another country seeing this, how do you negotiate with this?
👀 From Navarro’s numbers auto tariffs will raise $100bn a year (on $240bn imports) can replicate this calculation by assuming all imports hit by 25% and then US manufactured cars taxed about half that to reflect foreign content…
No exemptions tho…
…that assumes no behavioural change.
Note: will be a lot of behavioural change in supply and demand.
also says tariffs in general will raise $600bn a year of $6 trillion over a decade.
As total goods imports are only $3 trillion a year… “Liberation Day” equivalent of 20% universal tariff??
👀
Indeed Washington Posts chief Econ writer reports President instincts are to go bigger on “Liberation Day” … are we underpricing the return of the universal tariff? It would explain the otherwise inexplicable Navarro numbers this morning,..
Might remember I cornered Rwandan President Paul Kagame in January and asked if UK would get money back if no migrants were transferred to Rwanda… answer revealed today: Govt paid £715m so far until June of this year
“not recoverable under the terms of the Treaty”
terms of Rwanda deal are quite something…
In addition to £715m already paid, Treaty another £100m is due (will it be paid?)
also envisaged £120m bonus after 300 refugees “transferred”. And £20k per person payment.
And then further £150k per migrant payment over 5 years
IF a relocated migrant then relocated from Rwanda, UK government would then pay Rwanda £10k for that onward relocation (instead of the last payments above)
Treasury effectively confirms debt rule loosening, by announcing its new “guardrails” to channel capital spending goes to a 10 year pipeline of major projects that generate economic returns that will help “depoliticise infrastructure”
Their view is independent accountable bodies, either new or given new powers will set & implement a 10 year infrastructure strategy integrated with 2 year spending reviews, and audit this, and assess value for money ensuring capital investment generates clear long term returns…
Ministers now openly call the impact of the Sunak debt rule “a mistake”, that it constrained some much needed public infrastructure investment, while not stopping bad investment in failing projects… capital needs to be properly quality controlled not arbitrarily constrained