![European Commission President Ursula von der Leyen holding the press conference on measures to address high energy prices and ensure security of supply.](https://media.guim.co.uk/3598a44b282cfd70554951b628174afd3a8cb362/0_52_4000_2400/1000.jpg)
Closing post
And finally, here’s our energy correspondent Alex Lawson on the EU’s latest effort to tackle the energy crisis:
The EU has proposed a cap on “excessive and volatile” gas prices this winter as part of a package to protect consumers.
Brussels has put forward a new mechanism to control prices by blocking transactions above a certain level, which can be triggered “when needed”.
European policymakers are attempting to insulate households from the worst of the impact from Russia’s invasion of Ukraine, which has sent wholesale gas prices soaring.
The package of measures, agreed by the EU commissioners on Sunday and announced on Tuesday, included emergency regulations to allow joint gas buying across the EU to negotiate better prices and provisions to permit greater cooperation between countries in a gas supply emergency.
EU leaders will discuss the proposals at a summit lthis week and if approved the cap could come into force this winter.
The European Commission has devised the plan to create a new benchmark for gas prices to better reflect the price of liquefied natural gas and de-link prices from the the main European gas exchange, the Title Transfer Facility (TTF) Dutch gas hub.
However, this scheme is expected to take time to implement, so the option to put a cap on prices will be introduced in the interim. It will block transactions from taking place on the TTF at a price higher than the “dynamic price limit”.
Here’s the full story:
Meanwhile in the markets, the pound has slipped to just above $1.13, down half a cent, as Liz Truss’s premiership hangs in the balance.
The latest from parliament is that Liz Truss is no longer publicly committed to defending the triple lock, under which pensions would rise by inflation or wages..
Here’s the rest of today’s news:
Encouragingly for Europe, and the UK, gas prices have dropped sharply today
The European wholesale contract for delivery next month has dropped by 13%, as has the UK wholesale contract.
Dutch natural gas prices for November Delivery just keep plunging, as storage sites get increasingly full pic.twitter.com/zV2PCy73Q5
— Joe Weisenthal (@TheStalwart) October 18, 2022
Prices are still higher than before the pandemic, but a lot lower than this summer as Russia was turning off gas suppliers.
Am not an energy guy, but latest collapse of UK Nat Gas wholesale price looks like great news! pic.twitter.com/Lpb76uwKC6
— Toby Nangle (@toby_n) October 18, 2022
The contract for delivery in the UK tomorrow has almost halved, to 30p per therm.
Luxembourg’s energy minister, Claude Turmes, says the proposal for joint gas purchases is a potential game-changer.
Today's @EU_Commission proposal to establish a joint #gas purchase mechanism can be a game changer. If we aggregate large volumes, we will lower prices. LU is ready to contribute. Contracts should be short-term enough to avoid carbon lock-in @KadriSimson #REPowerEU
— Claude Turmes (@ClaudeTurmes) October 18, 2022
He also warns that a wholesale gas price cap could backfire if it drives supplies away – it could be better to reduce usage first.
The @EU_Commission is right to be cautious about a wholesale #gas price cap. What will we do if LNG tankers are redirected to Asia? A cheaper and safer alternative is to reduce consumption first, and cap only gas used in the #electricity production @KadriSimson #REPowerEU
— Claude Turmes (@ClaudeTurmes) October 18, 2022
Q: Will Europe’s proposed new gas price benchmark be applied to old contracts?
Kadri Simson, European Commissioner for Energy, says the EU isn’t proposing reopening contracts – and the private companies who decide long-term contracts will decide what to link them too.
Q: Will EU leaders unite behind your proposals for the energy market?
Von der Leyen says she is confident, as the Commission has been working closely with the member states.
There is broad support for the pooling of demand and joint purchasing of gas, and for he drive towards energy savings and efficiency.
Member states also support establishing rules how to share gas in an emergency, she explain.
She admits it was ‘difficult’ at the beginning to get agreement on price caps, but the deeper you go into the problems, the more agreement there is.
[although the Commission still hasn’t proposed a formal price cap – just temporary curbs on volatility, and a new benchmark that, it says, should be more stable].
Q: Which measures will help bring gas prices down this winter?
The proposed market correction mechanism (to prevent excessive spikes at the TTF Dutch gas hub) will have a ‘taming effect’ on European gas prices, Ursula von der Leyen says.
She says it could be immediately effective, at least once it has been fleshed out and agreed.
Here are the key points from the EU’s plan:
Russia's war on Ukraine has triggered an energy crisis
— Ursula von der Leyen (@vonderleyen) October 18, 2022
We have been working hard to protect Europe against the fall-out on the energy markets.
We are now better prepared to face this winter
And in a position to make more steps towards an Energy Union ↓ https://t.co/AEliBAOlr8
Pooling, saving and sharing of gas:
— Ursula von der Leyen (@vonderleyen) October 18, 2022
• We will make joint purchasing operational with new legal tools
• Keep on saving energy
• Establish default rules on solidarity among 🇪🇺 countries. They will apply in case of disruption when there is no bilateral agreement in place. pic.twitter.com/zOGvspMgu1
Taming gas price volatility and spikes:
— Ursula von der Leyen (@vonderleyen) October 18, 2022
The current pricing benchmark is no longer adapted to a market that is shifting from pipeline gas to LNG.
We will develop a new benchmark and put in place a mechanism to limit excessive gas prices in the meantime. pic.twitter.com/c54aLUSgG9
Under the new solidarity proposals, any EU country facing an emergency or supply shortage would receive gas from others in exchange for fair compensation.
Currently, some countries have bilateral agreements, but not enough to guarantee stable supplies.
Ursula von der Leyen will present the EU’s latest proposals to fight the energy crisis to the European Parliament tomorrow, and then to EU leaders on Friday.
Von der Leyen explains that Europe will develop a new benchmark for LNG gas prices, because the current benchmark at the TTF gas hub is outdated.
She explains that TTF’s benchmark was developed for pipeline gas, while the market is now more tilted towards liquified natural gas (which arrives by tanker).
Since Russia squeezed pipeline supplies, Europe has been buying more LNG gas – currently, dozens of ships carrying liquefied natural gas (LNG) are circling off the coasts of Spain unable to secure slots to unload.
Updated
Commission proposes to fight high #energyprices through joint gas purchasing, price limiting mechanisms on the #TTF gas exchange, new measures on transparent infrastructure use and solidarity between Member States, and continuous efforts to save gas https://t.co/fUQaS81uXW
— Alexander von Witzleben (@AlexWitzleben) October 18, 2022
“We know that we are strong when we act together”, von der Leyen declares, as she outlines the plan for member states to buy gas together.
Europe’s energy demand is very large, so it is logical that member states should leverage their buying power by pooling demand, rather than outbidding each other to fill gas storage, she explains.
Von der Leyen: we're taking further steps towards energy union
EC president Ursula von der Leyen is telling reporters in Brussels that Europe has achieved its first goal, of being better prepared to face this winter.
So it can now take further steps towards “a real energy union”, she explains.
Von der Leyen says Europe has faced an “unprecedented energy crisis” due to the Ukraine war, and has made progress in tackling it.
Demand has been cut – by 15% in September, she says, while European gas storage is now at 92% capacity.
Europe has also diversified from Russia to “reliable suppliers” such as Norway, with one figure showing that around two-thirds of the Russian gas flows have been cut.
And countries have been allowed to channel windfall profits on energy companies to vulnerable households and businesses.
Updated
Timmermans: Next few winters will be tough
The EC’s executive vice-president, Frans Timmermans, argues that buying gas collectively will help European countries get through the difficult winters ahead.
Timmermans says:
“The next few winters will be tough, but today’s package helps to keep European families warm and industry going.
By taking measures now and developing the tools to buy gas together instead of outbidding each other, we can again head into the next heating season with enough gas in storage.
But, Timmermans adds that cheap fossil fuels will not return, so Europe must accelerate its transition to renewables
The Commission is also proposing to allow countries to redirect nearly €40bn of ‘Cohesion funds’ from the EU budget to help vulnerable households, small businesses affected by high energy prices.
Those Cohesion Policy funding is provided to poorer member states, whose gross national income (GNI) per capita is below 90% of the EU average.
EU proposes extra energy measures to tackle crisis
The European Commission is proposing that EU countries should buy gas collectively as part of a new set of emergency measures to tackle high energy prices and ensure supplies are secure.
The idea is that by aggregating demand, and buying gas jointly, countries should be able to negotiate better prices rather than outbidding each other on the global markets.
But, Europe is not proposing formal gas price caps, as member states have disagreed about what such a cap would look like.
Instead, the Commission wants to bring in a price correction mechanism this winter to prevent excessive prices and price spikes on the main European gas exchange, the Title Transfer Facility (TTF) in the Netherlands.
It says its temporary price correction mechanism would establish a dynamic price limit for gas transactions on the TTF, explaining:
This will help avoid extreme volatility and excessive prices.
And in the longer term, the EC will develop a new pricing benchmark for liquified natural gas in Europe, to provide ‘stable and predictable pricing’ and avoid a repeat of the soaring prices this year.
Announcing the plan, the EC says the benchmark should launch by 31 March 2023:
Many gas contracts in Europe are indexed to the main European gas exchange, the TTF, which no longer accurately reflects the price of LNG transactions in the EU. The Commission is therefore developing a new complementary price benchmark with ACER to address this systemic challenge.
And with a tough winter approaching, the EC is proposing to beef up its solidarity rules, so that any Member State facing an emergency will receive gas from others in exchange for fair compensation.
The measures will next go to leaders for discussion at the EU Council later this week.
EC president President Ursula von der Leyen says these new steps would improve stability on European gas markets this winter and beyond.
Von der Leyen adds:
The measures will also help to further mitigate the price pressure felt by European citizens and industry, while ensuring security of supply and a functioning internal market.
The Commission will continue its work in other areas, including revision of the State aid Temporary Crisis Framework later this month, and further development of ways to limit the impact of high gas prices on electricity prices.
Updated
Lessons will be learned from the recent stresses in the financial markets, BoE deputy governor Sir Jon Cunliffe insists.
He tells parliament’s Treasury Committee.
“The Bank and the FPC [its financial policy committee] will continue to monitor market conditions, channels through which vulnerabilities could amplify future market stresses, and domestic and international progress towards reforms in the NBFI (nonbanking financial institution) sector.”
Cunliffe also tells MPs that some of the volatility in the bond market following the mini-budget has been unprecedented, at least this century:
The five largest daily moves in the 30 year inflation-linked gilt, in data that dates back to 2000, have all been since the 23 September.
Bid-ask spreads for UK gilts – a measure of liquidity – have reached levels higher than during the March 2020 ‘dash for cash’ and the global financial crisis.
Startling fact by BoE Deputy Governor Jon Cunliffe, in letter to @CommonsTreasury:
— Andy Bruce (@BruceReuters) October 18, 2022
"The five largest daily moves in the 30 year inflation-linked gilt, in data that dates back to 2000, have all been since the 23 September."https://t.co/sNeNYu8cMm
Bank of England: Risk of another fire-sale in gilts significantly reduced - Reuters
The risk of a fresh ‘fire sale’ breaking out in the UK government debt market has been significantly reduced, the Bank of England says.
In a letter to parliament’s Treasury Committee, deputy BoE governor Jon Cunliffe says that liability-driven investment funds were now better prepared to manage shocks like the one triggered by September’s mini-budget
Cunliffe writes:
“Taken as a whole, LDI funds are now significantly better prepared to manage shocks of this nature in the future,”
“As such, the risk of LDI fund behaviour triggering ‘fire sale’ dynamics in the gilt market and self-reinforcing falls in gilt prices has been significantly reduced.”
⚠️ BANK OF ENGLAND: , THE RISK OF LDI FUND BEHAVIOUR TRIGGERING ‘FIRE SALE’ DYNAMICS IN THE GILT MARKET AND SELF-REINFORCING FALLS IN GILT PRICESHAS BEEN SIGNIFICANTLY REDUCED.
— PiQ (@PriapusIQ) October 18, 2022
- Reuters via https://t.co/ymHY6x4lOb
The first fire sale began when pension funds who had used LDI investment strategies received margin calls, due to the fall in the prices of gilts they had pledged. This forced them to sell some gilts, pushing prices lower.
Sky News reported yesterday that Britain’s financial regulators had identified one remaining fund at an asset manager which would have faced a series of “knockouts” yesterday if yields had jumped. In the event, yields fell as Jeremy Hunt scrapped much of the mini-budget.
Updated
On Wall Street, Goldman Sachs is reorganising parts of its business after a drop in earnings.
As had been rumoured, Goldman is to fold its trading and investment banking business into one unit.
This will shrink the bank from four to three divisions; asset and wealth management, global banking and markets and platform solutions.
Goldman also reported earnings per share of $8.25 for the third quarter of 2022, better than forecasts, but down on the $14.93/share a year ago when markets and dealmaking was more buoyant.
Goldman says it “continued to support clients amid a challenging macroeconomic environment”
UK mortgage costs are continuing to climb, even after Chancellor Jeremy Hunt scrapped most of the mini-budget in an attempt to reverse the loss of credibility that drove up borrowing costs.
Bloomberg explains why:
The average two-year fixed-rate home loan jumped to 6.53% on Tuesday, rising further above the 14-year high reached last week, according to Moneyfacts Group Plc. The average five-year fixed-rate deal climbed to 6.36% after breaching 6% for the first time since 2008 a fortnight ago.
On Monday, Hunt reversed almost all of the tax cuts and giveaways that were announced by his predecessor Kwasi Kwarteng in September. The move prompted a surge in UK government bonds, but it will take several days for banks to factor the corresponding fall in yields into the mortgage prices they offer.
Facebook owner Meta ordered to sell Giphy
![The Giphy logo seen displayed on a smartphone.](https://media.guim.co.uk/01c9beb3d7c9e77cfa456e98787d55b23ddf444a/0_216_6000_3600/1000.jpg)
After a long battle, Facebook parent company Meta is being forced to sell the gif creation website Giphy by the UK’s competition watchdog.
The Competition and Markets Authority has made its final decision, after finding that the deal could allow Meta to limit other social media platforms’ access to GIFs, and would also remove Giphy as a potential challenger in the UK display advertising market.
It’s the first time the regulator has moved to block a deal struck by one of the Silicon Valley giants.
The CMA first ruled in August 2021 that the takeover could harm competition, and ordered a sale in November.
Meta appealed that decision to the Competition Appeal Tribunal (CAT), prompting the CMA to reconsider its decision after CAT found in Meta’s favour on one of six points.
But having looked at new third-party evidence and fresh submissions from Meta and Giphy, the CMA concluded Meta would be able to increase its already significant market power by:
denying or limiting other social media platforms’ access to Giphy GIFs, thereby pushing people to Meta-owned sites, which already make up 73% of user time spent on social media in the UK, or
changing the terms of access – for example, it could require Giphy customers, such as TikTok, Twitter and Snapchat, to provide more data from UK users in order to access Giphy GIFs
🔎 A review completed by an independent CMA panel has found the only way to address the significant impact the deal would have on competition is for #Giphy to be sold to an approved buyer.
— Competition & Markets Authority (@CMAgovUK) October 18, 2022
Find out more: https://t.co/VaKLoVNfxw pic.twitter.com/wkU97X8YGO
Meta says it’s disappointed, but accepts the ruling.
Updated
![Barrels of beer](https://media.guim.co.uk/293a26521e9f194426cbc3ec84c5d34177362899/0_321_4841_2906/1000.jpg)
The prospect of a UK beer shortage looms as drivers and workers at a firm that makes about 40% of deliveries to UK pubs and clubs are to stage five days of strike action over pay and job cuts.
About 1,000 drivers and dray workers – a person who delivers beer for a brewery – at GXO Logistics are set to stage a first round of strikes between 31 October and 4 November at depots across the UK.
The union Unite said the strike will “impede the ability of pubs and other venues to replenish their cellars prior to the World Cup”, with more action planned for closer to kick-off on 20 November if the dispute is not resolved.
Unite said the strikes would impact pubs and venues supplied by big brewers including Heineken, Stonegate, Admiral Taverns and Shepherd Neame.
GXO Logistics makes deliveries to about 4,500 pubs in London and the south-east and has a network of 22 depots from Inverness to Southampton where rolling strike action will take place.
A ban on overtime working will come into force from 24 October.
Headteachers to be balloted on industrial action
Back in Brighton, TUC general secretary Frances O’Grady has called for a general election amid the continuing political turmoil.
Addressing her final TUC Congress before stepping down, she said:
“Some say Liz Truss must go. I think they’re wrong.
“This whole rotten Tory Government must go. The Tories are toxic. It’s time for change.
“We need a general election now.”
O’Grady told delegates that the real wealth creators are the “people of this country,” not the hedge funds who profited from betting against the pound as it fell to a record low last month
.@FrancesOGrady kicks off the TUC congress by hitting out at Liz Truss:
— Evie Breese (@EvieBreese) October 18, 2022
“The prime minister believes that Britains poor productivity is down to the poor performance of workers
….
She didn’t even turn up for work yesterday” pic.twitter.com/x7LodD0CB6
The TUC have also heard that the NAHT headteachers’ union will ballot its members on whether they want to go on strike over pay for the first time.
NAHT leader Paul Whiteman said his union, which has around 35,000 members mostly in primary schools, will ask its membership in England if they want to take industrial action over pay and funding.
The NAHT’s first ballot over pay in its 125-year history will ask members if they want to take action short of strike action, and whether they will take strike action:
Whiteman says:
“Over the course of the last few months, I have travelled the country hearing from our members directly. I have never heard more anger and despair.
“School leaders across the country are telling me that they cannot continue to run their schools in the current circumstances. The neglect of pay in education and the funding to support it is now eroding the quality of education that our members can provide.
Headteachers will - for the first time- be balloted for strike action by @NAHTnews in an unprecedented move, announced at congress by gen sec @PaulWhiteman6
— Evie Breese (@EvieBreese) October 18, 2022
This means @NASUWT , @NEUnion and NAHT will all be balloting teachers to strike at the same time. Wow
Updated
Two-year UK government bonds have also dropped after the Bank of England denied deciding to pause debt sales.
The yield on two-year gilts has now risen to 3.65%, up 6 basis points.
That’s a modest move by recent standards, but not the direction the Treasury wants to see, as it reverses some of Monday’s rally.
As Bloomberg explains:
With the BOE saying a Financial Times report it would push back sales was inaccurate, traders are worrying about a deluge of sovereign issuance from both the central bank and government.
The UK’s bonds resume a slide as the Bank of England denies a report it will delay planned sales of gilts https://t.co/FXn0Sbow54 pic.twitter.com/reBHuv4FrC
— Bloomberg UK (@BloombergUK) October 18, 2022
Over in Germany, investor sentiment remains very weak as Europe’s largest economy falls closer to recession in the energy crisis.
The ZEW economic research institute’s economic sentiment index grew slightly in October, to -59.2, from -61.9 in September, slightly better than expected, but still very low.
ZEW’s index of current conditions deterioratated further down by 11.7 points in October to a reading of -72.2.
ZEW President Achim Wambach, said the economic outlook has deteriorated again, warning:
“The probability that real gross domestic product will decline in the course of the next six months has also increased considerably.”
Highly volatile German ZEW Index in October slightly better than expected:
— Mario Cavaggioni (@CavaggioniMario) October 18, 2022
- 59.2 (est -66.5, last -61.9)
- expectations -59.7 (last -60.7)
That said, outlook is everything but encouraging for German economy pic.twitter.com/ir4oMWMd3i
Here’s how the pound reacted:
Pound falls after the Bank of England denies report it was delaying the start of its programme of gilt sales
— Bloomberg UK (@BloombergUK) October 18, 2022
Latest: https://t.co/D1zNpqjNGy pic.twitter.com/iTfBhoKU7F
The Bank of England don’t actually specify what’s ‘inaccurate’ in the FT’s report that they’re set to delay the sale of billions of pounds of government bonds.
The sale was due to start at the end of the month, having been delayed from early October.
So there’s still almost a fortnight before Bank governor Andrew Bailey actually presses the QT button to start gilt sales. So he could still delay, even if that decision hasn’t been taken yet.
And the FT story says that the Bank is “now expected to bow to investor pressure for a further pause until the market becomes calmer”, not that it has bowed.
Reuters’ Andy Bruce dubs this morning’s statement a ‘non-denial denial’, as the BoE isn’t categorically saying that the sales won’t be delayed again.
Bank of England:
— Andy Bruce (@BruceReuters) October 18, 2022
"This morning's FT report that the BoE has decided to delay MPC gilt sales ('QT') is inaccurate."
Collectors item for lovers of non-denial denials?
Also this is a political form of (non)denial that I'm surprised to see the BoE indulging in.
— Andy Bruce (@BruceReuters) October 18, 2022
What are the inaccuracies? https://t.co/faVq3VRQig
Updated
30-year gilt rises 6 basis points after report Bank of England says QT delay 'inaccurate' https://t.co/unox75voJN #news #stocks
— Royal Newsfeed (@RoyalNewsfeed) October 18, 2022
The pound has taken a knock too – down half a cent at $1.1305.
Bank of England: Report of decision to delay bond sales is inaccurate
Newsflash: The Bank of England says the report it plans to delay the sale of some of its UK government bonds is ‘inaccurate’, which has knocked bond prices lower.
As we covered earlier, the Financial Times reported that the Bank was expected to delay the sale of bonds bought through its quantitative easing (QE) stimulus programme, because gilts markets were “very distressed”.
But in a brief statement, a spokesperson for the central bank said.
“This morning’s FT report that the BoE has decided to delay MPC gilt sales (‘QT’) is inaccurate,”
Well..a fairly concise statement from Bank of England on reports it was going to delay bond selling. "This morning's FT report that the BoE has decided to delay MPC gilt sales ('QT') is inaccurate."
— Ashley Armstrong (@AArmstrong_says) October 18, 2022
What will markets make of that?!
Bond traders have responded by selling gilts, which is pushing up the yield (or interest rate) on short and long-dated bonds, which measures the cost of UK borrowing.
The 30-year bond yield, for example, is now up 5 basis points at 4.42%, having dropped as low as 4.32% this morning.
BANK OF ENGLAND SAYS FT REPORT OF POSSIBLE DELAY TO START OF QUANTITATIVE TIGHTENING BOND-SELLING PROGRAMME IS INACCURATE
— Neil Wilson (@marketsneil) October 18, 2022
That's torn it, gilts offered on this
This morning’s FT report that the BoE has decided to delay MPC gilt sales (‘QT’) is inaccurate,” Bank of England spokesperson says in emailed statement.
— Mario Cavaggioni (@CavaggioniMario) October 18, 2022
Gilts becoming the most difficult market to trade....
Updated
Ryanair boss O'Leary blames Brexit for UK economic 'car crash'
Ryanair boss Michael O’Leary has described the current economic situation in Britain as a “car crash” which he blamed on the country’s decision to vote to leave the European Union in 2016, Reuters reports.
O’Leary told a news conference in Rome that Britain needs a sensible trading agreement with the EU, saying
“The mini budget was a kind of spectacular failure of the whole concept of Brexit.”
O’Leary welcomed the appointment of Jeremy Hunt as chancellor, and the economic u-turn announced yesterday:
“The Remainers are coming back, the adults are taking charge again .. we will return to some sensible economic policies.”
He said he expected Truss to be out of office within a week or two, as she was now “in office but not in power”.
Tuesday’s Mail: “In office, but not in power” #BBCPapers #TomorrowsPapersToday https://t.co/7FuHsAaBL7 pic.twitter.com/CzWR2cWUYz
— BBC News (UK) (@BBCNews) October 17, 2022
The UK’s armed forces minister, James Heappey, has shown the challenge Jeremy Hunt will face in cutting spending, by suggesting he would quit if the defence budget wasn’t increased as promised.
Speaking on Tuesday, Heappey said the government still intended to spend 3% of GDP on defence by 2030, as pledged by Liz Truss before she became leader
Asked if he would quit if that changed, he told LBC:
“Yes. But no one has said that 3% is not going to happen by 2030 … we need to be spending 3% of our GDP on defence of our nation by 2030 because there is no prosperity without security.”
Heappey also told Sky News:
“The commitment the prime minister made is 3% by 2030 and to be clear like the secretary of state [for defence, Ben Wallace] that’s something that I believe must be delivered given the need to keep our nation safe given increasingly uncertain times.”
Here’s the full story, by my colleague Jessica Elgot:
Pantheon Economics have warned that chancellor Jeremy Hunt needs to find at least £39bn of additional savings, to get debt falling as a share of the economy in the medium term.
It says:
The new Chancellor’s quick actions have reduced the outlook for public borrowing in 2025/26 by £35B...
...But he needs to find at least £39B more savings to ensure the debt-to-GDP ratio is falling in three years’ time.
Pantheon also estimate that CPI inflation increased to 10.1% in September, from 9.9% in August. The data is due tomorrow morning.
"The Chancellor has Picked the Low-Hanging Fruit; Further Cuts will Hurt" @samueltombs https://t.co/uGy22hqJHs #PantheonMacro pic.twitter.com/MGROg02M1j
— Pantheon Macro (@PantheonMacro) October 18, 2022
“The Chancellor has picked the low-hanging fruit; further cuts will hurt”
— Scott Beasley (@SkyScottBeasley) October 18, 2022
Pantheon Macroeconomics says the government still needs at least another £39bn of savings to ensure debt is falling as a % of the economy in 3 years time
That on top of the £35bn from Jeremy Hunt so far
The demands on the NHS, the increase in pensioners, rising debt costs and the Ukraine war all means that the government can’t cut the size of the state easily, or possibly at all.
Former Conservative leader William Hague makes this case in The Times today, explaining how the Trussomic notion that tax cuts would spark a resurgence of growth was dead and buried:
Enthusiasts for Truss’s original idea will argue that the crashing of it was down to poor driving skills — adding in an unpopular reduction in the top rate of tax and neglecting to accompany the measures with official forecasts ruined everything else. While that is partly true, the decisive problem was that Truss and Kwarteng were driving at a brick wall: the immense difficulty of reducing the size of the state in the present day. This is not the 1980s, when Tories could benefit from unloading nationalised industries and mass council housing, while being cushioned by North Sea oil and eventually a peace dividend as the Cold War ended.
In the 2020s, we have a health service with seven million people on its post-lockdown waiting lists, a larger than ever pensioner population who demand triple-lock increases, debt interest soaring and defence spending necessarily rising as a war on our own continent intensifies. Even if every sinew is strained to reduce other expenditure, those four items alone mean there will be no smaller state in the foreseeable future.
Having tested to destruction the idea that a low-tax revolution can allow a breakout from that reality, Conservatives will now need to turn to new ideas for the future. That may be no bad thing.
Hague is right, obviously. There are no easy or sensible ways to reduce the size of the state. People simplistically arguing from spending/GDP ratios surely understood it. Depressing that it's so rare to see this pointed out so clearly. https://t.co/uQhhdnT7UG pic.twitter.com/7JmeY65XgD
— Giles Wilkes (@Gilesyb) October 18, 2022
But Hague adds that it will be just as hard for Labour to grow the state, without large tax increases for the general population. The task is harder as the Conservatives keep lifting more of their fiscal policies (they’ve already filched the shorter energy bill freeze, and one energy windfall tax earlier this year).
More here: William Hague: Ideology is dead: it’s competence we need now
Updated
FT: BoE set to further delay sales of government bonds until markets calm
![The Bank of England, in the City of London last night.](https://media.guim.co.uk/6903ae9cdc49e215c55f3380a16cffabd042d79c/0_62_5353_3212/1000.jpg)
Today’s bond market stability follows a report that the Bank of England is set to delay the sale of billions of pounds of government debt.
The pause, reported in the Financial Times, is meant to foster greater stability in gilt markets following the UK’s failed “mini” Budget.
The Bank had originally planned to start selling off some of its £838bn of bonds back on October 6th. But it paused the kick-off until the end of this month, after the turmoil in the gilts market.
The FT says the Bank is expected to bow to pressure from investors for a second delay;
The Financial Times has learnt that the bank’s top officials have come to this view after judging the gilts market to be “very distressed” in recent weeks, a view backed by its Financial Policy Committee.
Investors have also warned that the central bank’s plans to begin selling bonds in its portfolio at the end of this month could destabilise markets.
Scoop: The Bank of England is likely to delay the sale of billions of pounds of government bonds to foster greater stability in gilt markets
— roula khalaf (@khalafroula) October 18, 2022
https://t.co/QLoPbFnWxq
The Bank build up its mountain of gilts through its quantitative easing programme, created in the financial crisis and bolstered during the pandemic. QE was designed to push down bond yields, encouraging investors to buy riskier assets.
The reversal (called ‘quantitative tightening’) risks pushing yields up by adding to the number of bonds for sale – at a time when the Bank has only just stopped its temporary emergency bond-buying scheme to maintain market stability.
The Bank must also be concerned about further turbulence in the City, and Westminster too.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, explains:
Newly parachuted in UK finance minister, Chancellor Jeremy Hunt has succeeded in appeasing bond market vigilantes for now. UK government borrowing costs are hovering near yesterday’s low with 10 year gilt yields still below 4%. But the hard won truce could fall apart in the weeks to come, if his spending plans don’t deliver the detail investors crave for economic policy uncertainty to abate.
This is likely to be why the Bank of England is reported to be further delaying the sale of billions of pounds of government bonds which it was originally due to offload earlier this month. It’s clear the bank is still unnerved by the potential for fresh instability in gilt markets given that so much uncertainty still remains about the government’s fiscal plans
Calm in the bond market
After weeks of turbulance, a sense of calm has returned to the market for UK government bonds. So far, anyway.
The prices of both short and long-dated sovereign debt are little changed this morning, meaning UK borrowing costs are flat too following the return to fiscal discipine.
These gilts all rallyied dramatically on Monday after chancellor Hunt binned most of the mini-budget, and slashed the length of the energy price freeze.
This morning, the yield (or interest rate) on 10-year UK bonds has dipped slightly to 3.96%, from 3.98% on Monday night, after tumbling from over 4.3% at the end of last week.
That means it still costs more to borrow than before the mini-budget (when the 10-year bond had a yield of 3.3%), but less than last week when it surged over 4.5%.
Long-dated bonds, where prices had plunged during the crisis in the pensions sector, are calm too.
Famous last words but today could well be the first calm-ish day in UK govt bond markets for a while. Most maturities have opened in a similar place to where they closed last night. Yesterday's harsh fiscal medicine seems to have had some impact. Here's the 30yr yield: pic.twitter.com/ldf7lCpaub
— Ed Conway (@EdConwaySky) October 18, 2022
The UK’s Debt Management Office is auctioning a long-dated bond today – which will be a test of market confidence….
That being said, there's an auction of 2051 debt coming up later on this morning. Let's see how that goes...
— Ed Conway (@EdConwaySky) October 18, 2022
Reeves: won't support further cuts to police, health or schools
Shadow chancellor Rachel Reeves told the Today programme that Britain’s essential services cannot take more spending cuts.
She explained:
The truth is that our public services, our schools, our hospitals, our police force are already on their knees.
Reeves insists that “Austerity Season Two is not the answer”, pointing out that people weren’t talking about the need for spending cuts before the “huge damage” caused by the current government.
But how would Labour tackle the fiscal black hole?
Reeves said she would ‘get a grip’ on government spending – ending the fraud and waste she says was written off by Rishi Sunak, and stopping spending billions on contracts to friends and donors of the Conservative party.
But…
Further cuts to our police, our health service, and our schools is not something that I would support, either as shadow chancellor or chancellor of the Exchequer
Labour will oppose cuts to police, the NHS & schools, @RachelReevesMP tells R4
— Rachel Wearmouth (@REWearmouth) October 18, 2022
And she adds that Labour have a plan to grow the economy:
We’ll inherit the mess that the Conservative’s leave, and I’m under no illusions about the scale of those challenges.
Reeves reiterated calls for an extension of the windfall tax on oil and gas companies, and an end to tax breaks for UK residents who have their permanent home outside Britain.
FTSE 100 at one-week high
The London stock market has opened higher, adding to Monday’s gains following the shredding of much of the mini-budget.
The blue-chip FTSE 100 index has gained 62 points, or 0.9%, to 6983 points, the highest in a week.
The domestically-focused FTSE 250 index (which surged 2.7% yesterday) has gained another 0.65%.
Tomorrow's @Guardian: Hunt rips up PM’s plans in astounding U-turn on tax
— Richard Preston (@richardpreston_) October 17, 2022
• Read our story, by @jessicaelgot, Larry Elliott and @breeallegretti, here: https://t.co/aDB21LrO8G#TomorrowsPapersToday pic.twitter.com/tLo6dQ9uVd
European markets have also opened higher, after gains in Asia-Pacific bourses overnight.
Jim Reid of Deutsche Bank says the UK’s recent woes have impacted global markets, so chancellor Hunt’s u-turn may have reassured investors beyond the City.
Correlation doesn’t equal causality, but the UK news has again seemed to heavily influence global markets over the last 24 hours after the UK government officially announced one of the biggest U-turns in political history and ditched the bulk of what remained of their mini-budget.
However the risk momentum was also helped by a view that earnings season has starting relatively well versus beaten up expectations.
Eurostoxx futures +1.0% in early European trading
— Dr.Anirudh Sethi ,PhD (@Iamanirudhsethi) October 18, 2022
The positive vibes continue to play out, for now at least
German DAX futures +0.9%
UK FTSE futures +0.7%
Updated
UK homebuilder Bellway has told shareholders that demand is moderating, as rising mortgage rates slow the housing sector, and deepen the cost of living crisis.
Bellway said that the elevated demand it had seen since the start of the pandemic has moderated.
Weekly reservations have slowed to 191 per week in the nine weeks since 1 August, down from 218 per week a year ago.
It told the City:
While Bellway entered the year with a strong forward order book, given the backdrop of rising interest rates and wider economic uncertainty, the Board currently expects to deliver volume at a similar level to the prior year.
UK homebuilder Bellway flags moderating demand after annual profit rise https://t.co/8opcRQppoo pic.twitter.com/FAMLZX5QOv
— Reuters UK (@ReutersUK) October 18, 2022
Many parents of young children are struggling with their mental health or finances as the cost-of-living crisis bites and families struggle to access support, charity Unicef UK warns.
A survey of 3,564 parents of children aged four and under in Britain found that the rising prices of essentials, expensive childcare and a lack of local support services are pushing families to “breaking point”.
Nearly 60% of parents said they are struggling with their mental health – particularly poorer families.
Almost a fifth of parents on low incomes are skipping meals to pay for childcare and just under half of parents struggling with the cost of living have already cut back on electricity and gas usage. One in 10 were unable to heat their home properly, even before the winter.
Resolution: Spending cuts could be deep
The Resolution Foundation think tank has warned spending cuts could be as deep as those after the 2009 financial crisis, as the government tries to draw up a plan to get debt falling in the medium term.
Chief executive Torsten Bell said on BBC Radio 4’s Today programme there was a fiscal black hole of around £30bn even after the Government scrapped nearly all of its mini-budget.
“These are big numbers. If we are talking of spending cuts between £30bn to £40bn billion then they’re not that far off the scale of the cuts announced by George Osborne back in 2010.”
Around £32bn of the £45bn of tax cuts in the mini-budget have now been reversed – but the IFS had estimated that over £60bn of spending cuts or tax rises were needed in total.
From our analysis: Kwasi Kwarteng's Fiscal Statement on 23 September had the biggest tax cuts since Anthony Barber's ill-fated 1972 Budget. Jeremy Hunt's reversal of that Fiscal Statement today has the biggest tax increases since Ken Clarke's 1993 Budget: https://t.co/812zNgpoZ2 pic.twitter.com/uchwgNZc5S
— Resolution Foundation (@resfoundation) October 17, 2022
Bell also flagged that middle-income families may be unable to pay energy bills next year, after chancellor Jeremy Hunt cut the energy freeze to six months, from two years.
The average annual energy bill is set to rise to more than £4,000 from April, according to Cornwall Insight – which Bell says will be a ‘big deal’ for households.
“I think really£4,000 is so large that even middle-income households won’t be able to afford those bills next year.
“So he’s done the easy bit, scrapping the existing scheme, what he’s got to do is some hard work about how he intends to provide support for lower and middle-income households next year.”
TUC to fight any anti-union legislation in court
Frances O’Grady will also warn that the TUC will fight the government in court, if new anti-trade union legislation is introduced.
The TUC general secretary will tell Congress today that:
“Just when the citizens of this country are in despair, when key workers’ kids are going to school with holes in their shoes, and young families are worried sick about taking on a mortgage - Liz Truss’ top priority is to make it harder for workers to win better pay.
“It’s a cynical effort to distract from the mess this government has caused.
“If ministers cross the road to pick a fight with us then we will meet them halfway.
“Today I give ministers notice. We’ve already taken legal counsel and we know you’re in breach of international law and trade deals that enshrine labour standards.
“So read my lips: we will see you in court.”
Truss was criticised during last summer’s leadership race, after she pledged to introduce minimum service levels on critical national infrastructure, which could potentially restrict teachers, postal workers and those in the energy sector from going on strike.
Will industrial action escalate this winter, and could we see coordinated strikes?
Frances O’Grady says the level of determination – from postal workers and railway staff to healthcare workers and teachers – is higher than she’s seen before.
People feel they’ve had enough. This government has no mandate whatsoever for cutting public services or cutting people pay, and it’s about time working families were put first.
Introduction: UK workers are facing “two decades of lost living standards”
Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.
UK workers are facing “two decades of lost living standards”, the country’s trade unions warns today, as the spectre of soaring inflation and spending cuts loom.
Following the defenestration of the mini-budget yesterday, the TUC are telling ministers they have ‘no mandate’ for cutting pay and services, after chancellor Jeremy Hunt said he faced ‘decisions of eye-watering difficulty’.
The Trades Union Congress, whose 154th annual meeting begins in Brighton today, are warning that the Conservatives are “toxic” for the economy, and that a proper strategy to help lift wages and improve public services is needed.
TUC general secretary Frances O’Grady, will warn that working families “have been pushed to breaking point” after the “longest wage squeeze since Napoleonic times”.
O’Grady has set the scene, telling Radio 4’s Today Programme that working people must not pay the price for the “absolute mess and damage that this government has caused”.
Jeremy Hunt has slammed the gears into reverse, but an awful lot of damage has been done to livelihoods. People are worried about mortgages, worried about bills.
We simply can’t have a case where working people end up being treated as a cash till again and again and again.
Real wages have had the long squeeze on record. They’re set to fall by £4,000 again, in real terms over the next three years.
No wonder working people are standing up and saying this government has no mandate for cutting pay or services.
We've arrived in Brighton for the start of #TUC22! pic.twitter.com/2LDmrzCm1N
— Trades Union Congress (@The_TUC) October 17, 2022
After a summer of strikes from workers fighting real term pay cuts, O’Grady insist that there is an “absolute morale and economic argument” for making sure that working people’s pay packages at least keep up with inflation.
She say:
The problem is Jeremy Hunt still hasn’t delivered a plan for real growth and rebalancing this economy.
TUC research has shown that dividends have been rising fast since the financial crisis, while real pay has fallen.
Shareholder payouts rose three times faster than UK wages, says TUC. Firms can afford to pay workers more, as dividends have soared £440bn above inflation since 2008, while wages have risen by £510bn less than inflation. The gap has widened! https://t.co/9n2oaXE6eq @Pabloite
— Peter Tatchell (@PeterTatchell) October 17, 2022
The economy has become skewed, O’Grady warns, and the UK needs to ensure people get fair pay and invest in public services.
We’ve got people leaving public services in droves because the pay has fallen so far behind, and frankly they feel taken for granted and undervalued as well as underpaid.
We need a change of direction from this government – but I’m afraid they are levelling down rather than levelling up.
More from O’Grady shortly….
Also coming up today
The pound is holding onto yesterday’s gains, as investors continue to show relief that Hunt has reversed most of Kwasi Kwarteng’s unfunded tax cuts.
But although Hunt scrapped £32bn of unfunded cuts, he may still seek billions more in savings when he presents the medium-term fiscal plan on 31 October. A squeeze on public spending could hurt essential services, and also weigh on growth.
The markets may have recalibrated, but Liz Truss’s position hasn’t changed – if anything it has soured, points out Chris Weston of brokerage Pepperstone:
She looked completely shell-shocked in parliament today, as Penny Mordaunt and Jeremy Hunt led proceedings.
Having just spoken to 1922 Committee Chair Graham Brady it appears he may have told her the sheer reality and the extent of Tory PMs who have little confidence in her position as PM. The situation will really unravel when we get a top-ranking MP publicly speaking out – that hasn’t happened yet, but it feels like a matter of time.
We also get a healthcheck on German economic sentiment, as a tough winter approaches, and on American factories:
The agenda
7am BST: EU car sales in September
9.30am BST: TUC Congress 2022 begins
10am BST: ZEW economic sentiment index for October
2.15pm BST: US industrial production report for September