All eyes are on UK bonds, and the pound, after both fell sharply yesterday amid speculation over the future of chancellor Rachel Reeves.
Wednesday was a turbulent day for the UK bond market; prices of British government debt fell heavily as investors were gripped by concerns of change at the top of the Treasury. The selloff highlights anxiety that the government’s U-turn on welfare reform has blown a multi-billion pound black hole in the chancellor’s budget plans.
Bonds slumped, driving up borrowing costs, after Keir Starmer failed initially to give his full backing to Reeves at prime minister’s questions, with a tearful chancellor alongside him.
The pound also suffered, falling by a cent against the US dollar as it slid from $1.3745 to $1.3636, making it the worst-performing major currency in the world.
Starmer has now defended Reeves, saying her tears were due to a “personal matter” and insisted she will remain chancellor “for a very long time to come”.
The bond selloff may actually have reinforced Reeves’s position as chancellor, highlighting that the markets would not welcome a replacement who might be less devoted to fiscal discipline.
Andrew Wishart, economist at Berenberg Bank argues that “Investors probably saved the chancellor”, saying: "By selling sterling assets investors have probably kept UK chancellor Rachel Reeves in her post. Financial markets initially reacted little to the government failing to get approval for savings in the disability benefit budget from its own parliamentary faction. But when the prime minister failed to say that a visibly upset Reeves would remain in her job during prime minister's questions, UK assets sold off.
"The chancellor has become synonymous with a fiscal rule of covering day-to-day spending with tax revenue."
That fiscal rule may dictate tax rises in the autumn budget, as spending cuts could be too much of a political headache, judging by the massive rebellion against the welfare bill that has created a £5bn hole in the chancellor’s plans.
America’s economy may take the market spotlight off Reeves this afternoon, when the latest US jobs report is released. It will show whether trade war tensions have hit hiring at US businesses.
After a tough day yesterday, the pound is calmer in early trading.
Sterling is marginally higher (+0.08%) against the US dollar today, at $1.3646, having dropped by a cent yesterday.
The calm follows backing for Rachel Reeves from Keir Starmer.He told the BBC that the chancellor has done a “fantastic job”, adding: “She and I work together, we think together. In the past, there have been examples – I won’t give any specific – of chancellors and prime ministers who weren’t in lockstep. We’re in lockstep.”
That may reassure investors worried that Reeves could be replaced, and that a new chancellor would be less enthusiastic about controlling borrowing.
Simon French, chief economist at investment bank Panmure Liberum, argues that “almost all other chancellor options from within the parliamentary Labour party” are less market friendly options.
French told clients: "Recent weeks have shown that large parts of the parliamentary Labour party in the UK do not have the stomach for the tough fiscal choices required in a normalised interest rate environment, amidst sluggish productivity growth, with the tax burden at an eight-decade high, and with a deteriorating demographic profile.
"The lack of a working majority for its economic plans leaves the Labour government with an intractable problem – its credibility with financial markets hinges on adherence to a set of fiscal rules that are incompatible with its manifesto tax commitments, and the plans outlined at the recent spending review."
The agenda
• 9.30am BST: UK service sector PMI for June
• 10am BST: OECD Economic Survey of the European Union and Euro area
• 1.30pm BST: US non farm payrolls employment report for June
We'll be tracking all the main events throughout the day …
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