Hope, deferred. Or jam tomorrow? Andy Burnham rolled the dice with his first conference speech as Prime Minister, calling for an end to the pension triple lock, social care overhaul, and opened the door to rejoining the EU. But not until after an election.
There does not seem to be much for today, but the Budget is just 4 weeks away.
It seems Burnham wants to get the Budget out of the way, deliver his ten-year plan, ride the hopium express into an election and win a mandate to tax and spend.
Ending the triple lock is a credible solution to ending the ratchet of ever-higher real terms spending on pensions.
The gilt selloff continued and I fear that gilt investors are going to demand bit more than just promises of hope. But there is good news today with Q2 growth revised up to +0.5% from +0.4% previously estimated, which delivers some relief and a bit of political capital albeit things are likely to slow into the year-end.
Pension spending is becoming a considerable burden at a time when the nation’s finances are stretched in all directions. Crisis upon crisis has left the UK with little room for manoeuvre. The triple lock is a bind – it locks in a higher rate of spending for as long as it remains in place. If the government is serious about getting a grip on welfare spending, then the triple lock is the best place to start.
Pensions make up 45% of the welfare bill. According to the IFS, the UK now spends 4.9% of GDP on state pension spending, up from 4.3% in 2010 and 3.6% 20 years ago in 2006–07. IFS says it will add £50bn to the welfare bill by 2050 if it is retained. About 11% of all government spending today is the state pension.
The policy contains a permanent upwards ratchet – the extra amount it increases by over the rate of inflation may be small a lot of time, it’s baked in; any increase comes on top of past increases. It is also a pro-cyclical policy, so when the fiscal outlook is risky due to a surge in bond yields, it acts to make this worse. Ending the triple lock is on the face of it a net positive for gilts but if governing is about choices, then it’s important to point out that the choice by Burnham is to spend it – any saving are already being earmarked for social care.
There is not much clarity about how much triple lock savings will be swapped out for social care bills on a straight like-for-like basis, and when are these going to show up in the fiscal outlook? It’s hard to see how ending the triple lock delivers enough savings for a fully-costed social care package without tax rises. For the time being it remains a policy objective of the government but not an actual policy.
European stocks advanced after the retreat in oil prices yesterday saw Brent back to around $102, which has helped to cool the bond rout and seen yields come back in from yesterday’s highs. Saudi flows through the East-West pipeline continued to recover, with Middle East exports returning towards pre-war levels. JPMorgan estimates crude shipments have rebounded to 17.5 million barrels per day, or 98% of pre-war levels, while product flows, including diesel and gasoline, have recovered more slowly to 3 million barrels per day, or 58%. Goldman Sachs estimates the global oil market is roughly balanced in September.
The FTSE 100 rallied +0.9% early doors Wednesday after a decline of –0.5% in the prior session, with the drop in oil, lower yields and higher copper prices delivering a boost to miners and utilities. The blue chips are solidly risk-on with only really the oil majors offering any gravitational pull. The FTSE hasn’t really done anything this month and I think this reflects a broader theme – investors are unwilling to chase equity markets higher when there is so much volatility in the bond market and yields keep drifting higher, which makes it harder to value stocks and price in future earnings.
US stock markets fell on Tuesday after another rise in Treasury yields. All three of the major indices posted back-to-back losing sessions as pressure on the long bond produced a 24-year high for the yield. The 30-year Treasury bond yield crossed to a high above 5.6%, a level last seen in June 2002. The benchmark 10yr scaled a fresh 19-year cycle high close to 5.3%, but has retreated nearly 10bps to 5.20% this morning with the drop in oil prices.
There are also perhaps signs that tighter financial conditions as a result of the bond selloff, as well as war-related inflation, are already starting to impact the US economy. US September consumer confidence fell to a 12-year low, while job openings slumped to a 5-year low.
Traders are waiting on today’s PCE inflation index for clues on the Fed’s future moves. Headline and core PCE inflation are both seen rising +0.3% month-over-month, producing headline year-on-year inflation of 3.7% and core inflation YoY of 3.3%.
The Fed may be concerned that the market is moving too far out and pricing in too much hiking. NY Fed President John Williams pushed back against expectations for an imminent follow-up Fed hike, saying there is “no urgency” after September’s move and that policymakers have time to assess incoming data. He still sees one further hike as potentially appropriate later this year. But this misreads the strength of the monetary policy signal for the market – this is being driven by forces largely external to the setting of overnight rates; fiscal largesse with deficit of 6%, energy prices, and corporate debt crowding out.
Stocks have had a mixed month. The S&P 500 and Dow Jones are both headed for declines while the Nasdaq is up more than 1%. The S&P 500 and the Nasdaq are up 2% in Q3, while the Dow Jones has shed about 2%. This has been a story of the recovery in megacap tech over the rotation story into materials and energy and financials that preceded. Just about every sector except tech is down for September, though for the quarter Energy (+13%) is the standout.
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