Reshuffling the pack

In January’s Alpha Bites ‘You don’t know what you’re doing,’ we highlighted the cost of UK government borrowing that stood then at a 27-year high. Market, business and consumer confidence had all taken a hit from Chancellor Rachel Reeves’s first budget.

Fast forward to today and UK government borrowing costs are once again at a 27-year high, with the 30-year Gilt yield hitting 5.6% at one point last week. Rachel Reeves is once again facing a fiscal black hole – this time entirely of her own making! While the UK economy is starting to get a boost from government investment, which was delayed by the Spending Review, many UK businesses and consumers are still cautious. Now rumours are once again circulating ahead of the Autumn Statement with likely targets for tax hikes from a wealth tax to windfall taxes.

A review of Stamp Duty – a sensitive issue for the Labour government – is underway, which could be replaced by a Proportional Property Tax, paid for by sellers rather than buyers. In addition, a ‘mansion tax’ could be introduced for higher-value property. Currently, a person’s principal home is exempt from capital gains tax. Another option might be to increase council tax on the highest-value properties. The question is what would be the value threshold, £500,000 or more? Estate agents in London have already noted a slowdown in higher-value property transactions.

Another property-related proposal is that landlords in the UK may need to pay National Insurance contributions depending on their rental income and whether they are considered self-employed.

A windfall tax on UK banks to raise up to £8bn has also been proposed. However, the banks warn that this would undermine their international competitiveness.

Who knows what Rachel Reeves will do? Does she? Her National Insurance hike has proved to be a massive own goal! The only thing we can say with any certainty is that the latest tax rumours and the long time to wait for the Autumn Statement risk undermining UK economic growth. Markets and businesses hate uncertainty!

PM Sir Keir Starmer has reshuffled his cabinet following the resignation of Deputy PM Angela Rayner. Within this, Darren Jones, chief secretary to the Treasury, who previously told companies to ‘suck it up’ when the National Insurance hike was introduced, has moved to become chief secretary to the Prime Minister. Meanwhile, Torsten Bell, previously chief executive of the Resolution Foundation, is now helping Chancellor Rachel Reeves. The Autumn Statement will be on the 26th of November. Time to be afraid?

 

What have we been watching?

 

A major global bond sell-off that pushed the 30-year UK Gilt yield to the highest level since 1998! The yield on French government bonds also hit their highest level since 2009. US Treasuries also sold off, with the 30-year yield testing 5% before dipping back to 4.75% on soft jobs data. Gold jumped above $3,600 for the first time. Concerns about inflation and government fiscal discipline, as well as ongoing worries about the independence of the US Federal Reserve, all contributed to the sell-off in bonds. French bonds reflected the risk of another government collapse this week. Meanwhile, fears about AI-linked valuations of some US mega-tech equities once again reignited. The week ahead will be an important one for US interest rates as the latest inflation report is due, with analysts focused upon the impact of Trump’s tariffs.

Donald Trump has threatened tougher sanctions against Russia after its heaviest aerial bombardment of Kyiv since the war began.

US jobs data later this week will be key for the next expected Federal Reserve (Fed) interest rate cut in mid-September. Fed funds futures are currently pricing in around cuts amounting to 1.4% by the end of 2026. This level of easing, since the 1980’s, has only occurred around recessions! Core PCE inflation for August came largely in line with expectations. The second quarter US economic growth data was also revised upwards from 3% to 3.3%. Meanwhile, markets remain focused on Trump’s attempts to remove Fed governor Lisa Cook and the independence of the Fed.   

 

In the UK, PM Sir Keir Starmer announced a major reshuffle of his cabinet prompted by the resignation of Deputy PM Angela Rayner. It was also announced that the Autumn Statement isn’t going to be until 26th November, a month later than last year! Does that mean some big changes are being planned under the ‘new team?’ The long wait prolongs the uncertainty and risks undermining UK economic activity. The Chancellor faces a difficult trade-off between keeping voters and markets happy. Too much fiscal tightening would adversely affect economic growth and could accelerate Labour’s decline in opinion polls, but too little tightening could raise market concerns and borrowing costs. A middle-ground compromise might mean that neither group is happy! Further pressure could come if the Office for Budget Responsibility (OBR) is forced to make further economic growth downgrades after the Autumn Statement.

 

In Europe, core ‘flash’ inflation was slightly higher than expected in August at an annualised 2.3%, although headline inflation was in line with expectations at 2.1%.

 

In the US, job openings for July fell to a 10-month low, exacerbating fears about a labour market slowdown. Meanwhile, non-farm payrolls growth was weaker than expected and there were further slight downward revisions to the previous two months’ data, albeit not as bad as the sizable downgrade in the previous report. However, in a case of ‘bad news is good news,’ it helped calm bond markets a little, after the sell-off, on hopes that the jobs data might increase the chances of more US interest rate cuts.

 

Japan’s PM Shigeru Ishiba announced over the weekend that he will step down, after several weeks of speculation after the poor summer election results.

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Brent oil dipped below $67 on media reports that OPEC+ is considering a further increase in oil production. 

Finally, we recently flagged the unreliability of UK economic statistical data, which is unfortunate, to say the least, given government borrowing costs are so high. Sadly, the Office for National Statistics (ONS) has blundered again, admitting that it had overestimated retail sales. ‘Revisions’ to data means sales growth was 1.1% in the first half of 2025, down from the 1.7% previously calculated. Not helpful for the Bank of England or analysts trying to gauge the health of the UK economy!

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