Faced with soaring borrowing rates across the Channel, the Bank of England stepped in yesterday due to "real risks to British financial stability", it said. It announced that it would carry out purchases of long-dated government bonds to "restore normal market conditions". It will spend £65 billion overall, with £5 billion of spending every day until October 14.
After the intervention, the yield on 10-year Gilts dropped by 50bps to 4%, while it dropped by more than 100bps to 3.9% for the 30-year Gilts. However, the UK 10-year gilt yield rose 15 bps this morning to 4.16%, while the 30-year yield dropped further.
We thought the era of "whatever it takes" was over, but the Bank of England proved yesterday that it was not. The institution, fearing for the financial stability of Great Britain, will buy in the coming weeks bonds "on whatever scale is necessary". In other words, as much as necessary. It has also delayed the launch of the program to purge its balance sheet after years of economic support. It has to be said that the BoE is in a situation that I would call tricky if I wanted to keep a semblance of style, or downright shitty if I wanted to be closer to reality.
Let me explain: the central bank started to raise rates in December 2021 to try to control one of the highest inflation rates in the developed economies. And when the transmission belt shows its first signs of effectiveness on prices, Liz Truss and Kwasi Kwarteng unleash a big stimulus package dripping with tax cuts, which sends the pound to the floor and drives up the country's borrowing costs. In other words, while the BoE is dousing the hotbed of economic overheating, the new British government is celebrating its arrival in office by doing the same with gasoline. It would have been more appropriate to coordinate and probably more intelligent for Boris Johnson's successor to have planned a two-stage plan, to give monetary policy time to put out the fire.
Prime Minister Liz Truss decided to maintain the costly tax cuts included in its mini-budget, despite harsh criticism from the IMF and Moody’s. She defended on BBC radio the government’s “decisive action” to help families and businesses with energy bills this winter. “If we have higher taxes going into difficult economic times that is likely to lead to a recession,” she said.
The BoE reassured investors that central banks are here to save the day when needed. But in the long run, it is a bit complicated to understand how a central bank can fight inflation while its parent government is rolling out a stimulus package.
Meanwhile, new data published today showed the number of Americans filing new claims for unemployment benefits unexpectedly fell last week, signaling that the job market remains strong. Initial claims for state unemployment benefits dropped 16,000 to 193,000 for the week ended Sept. 24.
In addition, gross domestic product declined by an unrevised 0.6% annualized rate last quarter, the government said in its third estimate of GDP.
Economic highlights of the day:
Three important indicators today: the first estimate of German inflation in September the final reading of the U.S. GDP in Q2 and weekly unemployment data. Federal Reserve Bank of Cleveland President Loretta Mester and San Francisco President Mary Daly both speak today. All the macro agenda here.
The dollar is worth EUR 1.0295 and GBP 0.9168. The ounce of gold is rebounding to USD 1654. Oil is also on the upswing, with North Sea Brent crude at USD 89.89 per barrel and U.S. light crude WTI at USD 82.70. The yield on 10-year U.S. debt is down to 3.76%. Bitcoin is trading around USD 19,300.
In corporate news:
*Tesla announced on Wednesday that billionaire Joseph Gebbia, co-founder of AIRBNB, would join its board of directors to replace Larry Ellison, the co-founder of ORACLE, who has not served since August.
* Twitter - Several major advertisers such as Dyson, Mazda, Forbes and PBS Kids told Reuters they have decided to suspend their marketing campaigns or remove their ads on Twitter because they appeared next to tweets that promoted child pornography.
* Amazon on Wednesday announced an average hourly wage increase to more than $19 for employees in its warehouses and shipping departments.
* Starbucks - The coffee chain announced an increase in its quarterly dividend to shareholders from $0.49 per share to $0.53 on Nov. 25.
* Berkshire Hathaway, Warren Buffett's company, announced on Wednesday that it will buy an additional 5.99 million shares of Occidental Petroleum, bringing its stake in the oil company to 20.9%, which was up 0.8% in premarket trading.
* Rite Aid fell 15% in premarket trading after reporting a larger-than-expected second-quarter loss and lowering its adjusted Ebitda forecast.
* Gilead Sciences - A U.S. federal judge froze the assets of dozens of individuals and entities accused of running a massive program to distribute counterfeit drugs from the company, including one of its HIV treatments.
* KKR - The launch of the U.S. investment fund's takeover bid for Hitachi Transport System for about 670 billion yen will be delayed from the original timetable of late September, the Japanese group said Thursday.
* EQT - The private equity firm announced Wednesday that it will buy Billtrust for a sum valued at $1.7 billion
* Bed Bath & Beyond - The home goods chain reported a wider quarterly loss Thursday, sending its stock down 1.4% in pre-market trading.
* Pacific Gas and Electric (PG&E) announced on Wednesday that it will spin off its non-nuclear generation assets into a standalone division, with 49.9% of the stock to be sold.
Alphabet: Fubon Securities initiated coverage with a recommendation of neutral. PT up 4.9% to $105.
Cadence Design: Deutsche Bank reinstated coverage with a recommendation of buy. PT up 20% to $200.
Direct Line: HSBC moves from light to hold, targeting GBp 190.
Endava: Cowen lowers price target to $95 from $110, maintains outperform rating.
GSK: Oddo BHF upgrades from neutral to outperform, targeting GBp 1700.
Rightmove: Citigroup downgrades from neutral to sell targeting GBp 400.
Synopsys: Deutsche Bank reinstated coverage with a recommendation of buy. PT up 34% to $420.
Visteon: Berenberg starts Visteon at Buy with $152 Price Target