Not out of the woods: The Bank of England left rates on hold, with the message ‘move along, nothing to see here’. However, today’s borrowing figures showed a huge jump ahead of official forecasts – laying bare Rachel Reeves’ challenge. Sterling is rightly getting the treatment because the borrowing is too high, unsustainable, and out of control, and it is unlikely to change. The FTSE is flat this morning despite sterling tumbling.
Just as well, I suppose, the BoE is slowing gilt sales to £70bn and changing the maturity to sell fewer long-dated gilts to help the debt interest payments for the government. Yields at the long end actually rose, with the 30-year gilt yield touching 5.56 per cent, its highest in a week, though some ways off the 5.7 per cent seen at the start of September. It’s picked up again this morning on those debt figures. It seems the market is expecting a slower pace of easing and chief economist Huw Pill wanted to keep the pace of gilt sales at £100bn. And, it will now actively sell £21bn of bonds this year vs £13bn last year. But the key is the debt level right now and the market’s assessment of whether the government can take control – I bet that it cannot, and we see fresh highs on the 30-year yield.
Sterling moved aggressively lower off Wednesday’s highs as it was roundly offered and the dollar bid up on higher Treasury yields post-Federal Reserve cut, despite markets pricing quite a hawkish outlook of just a one-in-three chance of another cut this year by the BoE. This looks too hawkish – December surely has to be in play if November isn’t. Either way, the BoE is treading a fine line between growth, jobs and inflation that is erring in the direction of stagflation. Let’s hope all these big tech investments from the US will boost not just jobs but also productivity.
Opinions differ on how deep the Bank goes and how quickly. “I continue to think that there will be some further reductions, but I think the timing and scale of those is more uncertain now,” noted governor Andrew Bailey, who suggested the UK is “not out of the woods” in terms of inflation…you don’t say.
I think they have come round to the Fed’s way of thinking – prioritise the jobs market (in the UK it really is creaking badly, whereas in the US it’s more of an argument as to where it stands), and lower those debt interest payments. Bailey added: “We are also seeing softening in the labour market going on, and there is a risk that could, of course, get larger. It’s a risk rather than a central expectation.” I equate this to mean going beyond the 3.6 per cent implied by the market.
Elsewhere, Intel soared on news that Nvidia is taking a $5bn stake in the company and will co-design data centre and PC products. The US administration had already taken a 10 per cent stake in Intel. Huge changes afoot at Intel, and perhaps a sign of the way things are going with consolidation and cooperation in the tech space – driven by national security and trade policies emanating ultimately from the Donald Trump White House. The US needs Intel or it’s reliant on Taiwan Semiconductor. Ultimately, this could just be the start to greater pooling of resources, harnessing domestic tech and ensuring it remains focused on doing what the government requires of it.
By Neil Wilson, investor strategist at Saxo UK