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Here’s the big takeaway from today’s modest recovery in GBP:
GBP is doing better today, but this is because money markets expect a) banks to raise interest rates b) massive cuts in public spending to pay for massive tax cuts. Both moves are punishing ordinary people; both are bad for growth. If neither happens, the pound will fall again.
— Ben Fenton (@benfenton) September 27, 2022
Soaring mortgage costs are a real concern for homeowners on fixed transactions, especially borrowers who still have large loans to pay back.
“When will your mortgage repair end?” is the new “what box are you looking at?” gossiping for the late 30s/early 40s crowd
— Sarah O’Connor (@sarahoconnor_) September 27, 2022
Long-term borrowing costs in the UK continue to climb, a cause for concern.
The yield, or interest rate, on the 30-year gilt has jumped to more than 4.6% this morning from 4.4% on Monday. This is the highest level since 2008.
At the beginning of last week, the yield on the 30-year Treasury note was 3.5%.
Yields are inversely proportional to prices, so this suggests that borrowing costs in the UK will increase significantly over the next 30 years.
Virgin Atlantic chief urges UK government to change course to boost sterling
Virgin Atlantic’s chief executive has called on the UK government to “consider reversing” some of the policies announced last week to support the pound.
Sheves He told a news conference in London that a weaker pound was hurting the economy and consumers, and fueling Britain’s inflation cycle.
Weiss said Virgin Atlantic had taken some “very sensible financial positions” to cushion the impact of a weaker pound on its business [which suggests they’re hedged against a fall in sterling]
But the company is concerned about the economic environment. Weiss suggested that Liz Truss should make a “difficult decision” to reverse sterling’s slide, arguing:
“Sometimes all of us in this room should be humble enough to say: ‘If I do something that doesn’t work, maybe I should change course.’
“It’s not a bad thing.”
That would mean dropping some of the tax cuts in the small budget that would push up borrowing, fuel inflation and exacerbate Britain’s current account deficit.
Weiss said Truss should take steps to protect the country from a loss of confidence in international markets, which could push up interest rates and hurt the economy.
“My message to the government is very clear. Prime Minister Leeds Truss has made difficult decisions when he takes office
“Maybe you need to make tougher decisions to reverse the decline in sterling and make sure the country doesn’t develop unsustainable weakness in international markets, which of course affects interest rates, affects consumers, affects mortgage rates, affects the whole economy.
Deutsche Bank The surge in UK 10-year borrowing costs in recent days has been calculated to be the biggest change in UK government bond yields since 1976.
That year, Britain sought a loan from the International Monetary Fund to prop up the pound after inflation soared over the infamous 1972 giveaway barber budget.
Britain’s 10-year borrowing cost has fluctuated the most in five days since it applied for a loan from the International Monetary Fund in 1976.Deutsche Bank very good chart pic.twitter.com/YYJ0zqxG8k
— Richard Partington (@RJPartington) September 27, 2022
Jim Reid or German bank Said there have been only four major changes since 1934, underscoring the dramatic swings caused by small budgets.
So these are very large moves and continue the rolling VAR shock in fixed income over the past 12 months.
[VAR measures the riskiness of a bond]
Hundreds of mortgage deals disappear amid market turmoil
Zoe Wood
Banks and building societies have cancelled nearly 300 mortgage transactions in the past 24 hours after a fall in the pound sparked predictions of a spike in interest rates.
Bank of Ireland, Clydesdale Bank, Post Office Money and a range of building societies including Monmouthshire, Furness and Darlington have all withdrawn their productss, writes our consumer affairs correspondent Zoe Wood.
The Bank of Ireland said in a statement:
“Due to changes in financial markets, we are currently not offering any new rates for new or existing customers. We will be introducing a range of new mortgage rates as soon as possible”.
There are now 3,596 residential mortgage transactions, down from 3,880 earlier this week, according to data firm Moneyfacts. At the end of last year, borrowers would have 5,315 products to choose from.
Rachel Springerfinancial expert money factsSaying that the market is very volatile at the moment, so borrowers need to seek independent advice to assess their current best options:
“The turmoil in the mortgage market could be frustrating for borrowers and brokers as they see deals disappearing overnight.”
Reduced overnight trading – equivalent to about 7% – has made it difficult for lenders to accurately price their products after last week’s mini-budget sent sterling and government bonds tumbling.
Virgin Money and Skipton Building Society were among lenders to cancel a string of mortgage deals on Monday, while Halifax is withdrawing its fee-based mortgage product
Financial markets are now slightly less expecting a surge in UK interest rates.
Bank of England rates are now expected to rise to around 5.8% by next summer, down from yesterday’s peak of 6%.
But that’s still more than double the current base rate of 2.25%.
Germany fears UK ‘major experiment’
The German government is concerned that Britain is conducting a “major” experiment of cutting taxes and increasing borrowing while the central bank is raising interest rates.
German Finance Minister Christian Lindner has questioned the British government’s plans to speed up spending while the central bank tightens policy to control inflation.
Another sign of rising international attention, Lindner warned:
“In the UK, a major experiment is starting, as the state simultaneously hits the gas pedal and the central bank hits the brakes,”
Last night, at an event hosted by Frankfurter Allgemeine Zeitung, Lindner hinted that it would not end well…
“I would say we wait for the results of this attempt and then learn from it.”
JP Morgan economist Allan Monks believes Kwasi Kwarteng will need to change his strategy.
Monks warned (via Reuters) that this cannot wait for the chancellor to lay out his medium-term fiscal plan on November 23.
Monks said yesterday’s statements from Kwarteng and the Bank of England were “measured”…
“But there is still no clear sign that the source of the problem – the government’s fiscal strategy – is being reversed or reconsidered.
This needs to happen by November to avoid a worse outcome for the economy.
Summers: Crisis could push sterling below euro-dollar parity
Former U.S. Treasury Secretary Larry Summers has warned that the British government’s “totally irresponsible” plan could drag the pound below par against the euro and dollar.
Summers has sharply criticised Chancellor Kwasi Kwarteng for undermining credibility by saying ‘incredible things’ about planning more tax cuts – the weekend remarks pushed sterling to a record low on Monday Point at $1.0327.
Summers said he was “very pessimistic about the consequences of Friday’s totally irresponsible UK policy” but didn’t expect markets to get so bad so quickly.
Summers also suggested the Bank of England should act more decisively than yesterday’s “cowardly” statement.
Summers said:
The first step in restoring credibility isn’t to say unbelievable things. I was surprised when the new Prime Minister spoke over the weekend about the need for further tax cuts.
I don’t see why BOE, knowing the government’s plans, decided to act so timidly.
Summers pointed to soaring interest rates on long-term UK debt as “a sign of a discredited situation”.
“This happens most often in developing countries, but before the Mitterrand U-turn in the early days, before Volcker in the late Carter administration, and in Lafontaine in Germany.”
Summers warned that a currency crisis in the pound could have global repercussions as the pound is a reserve currency.
The magnitude of the UK’s trade current account deficit underscores the magnitude of its challenges. My guess is that GBP will be below parity with USD and EUR.
Sterling is currently trading at 1.12 euros, having touched 1.08 euros in yesterday’s crash, its lowest level since late 2020.
Here is the complete thread.
I am very pessimistic about the consequences of Friday’s totally irresponsible UK policy. However, I didn’t expect the market to get so bad so quickly.
A strong trend toward higher long-term interest rates as currencies depreciate is a sign of loss of credibility.
— Lawrence H. Summers (@LHSummers) September 27, 2022
This happened most often in developing countries, but before the early Mitterrand U-turn, in the late Carter administration before Volcker, and in Lafontaine in Germany.
— Lawrence H. Summers (@LHSummers) September 27, 2022
Credit default swaps in the UK still show negligible probabilities of default, but they have risen sharply. I don’t recall a single G10 country with such a large debt sustainability risk in its own currency.
— Lawrence H. Summers (@LHSummers) September 27, 2022
The first step in restoring credibility isn’t to say unbelievable things. I was surprised when the new Prime Minister spoke over the weekend about the need for further tax cuts. I don’t see why BOE, knowing the government’s plans, decided to act so timidly.
— Lawrence H. Summers (@LHSummers) September 27, 2022
It seems odd to suggest that there is some kind of disinflation from the Bank of England about unlimited energy subsidies. Subsidies affect whether energy is paid for directly or through taxes now and in the future, not its ultimate cost.
— Lawrence H. Summers (@LHSummers) September 27, 2022
The magnitude of the UK’s trade current account deficit underscores the magnitude of its challenges. My guess is that GBP will be below parity with USD and EUR.
— Lawrence H. Summers (@LHSummers) September 27, 2022
I would not be surprised if short-term interest rates in the UK more than triple in the next two years and reach levels above 7%.
— Lawrence H. Summers (@LHSummers) September 27, 2022
I say this because U.S. rates are now expected to be closer to 5%, while the U.K. has far more inflation, is seeking a more aggressive fiscal expansion, and faces greater funding challenges.
— Lawrence H. Summers (@LHSummers) September 27, 2022
The financial crisis in the UK will affect the viability of London as a global financial centre, so there is a risk of a vicious circle where volatility damages fundamentals, which in turn increases volatility.
— Lawrence H. Summers (@LHSummers) September 27, 2022
A currency crisis in a reserve currency is likely to have global consequences. I’m surprised we haven’t heard anything from the IMF.
— Lawrence H. Summers (@LHSummers) September 27, 2022