Gilts get spooked
UK Chancellor, Rachel Reeves, plans new fiscal rules to enable more investment.
UK Autumn Budget brings higher taxes, increased borrowing, and spending boosts.
Gilt prices fall as investors react to higher borrowing plans.
UK Inflation falls below 2% target for first time in over three years.
UK minimum wage to rise to £12.21 in April 2025.
US tech giants report mixed third-quarter financial results.
Hurricane Milton leaves 2 million without power and 16 dead in Florida.
October proved to be challenging for equity markets, as concerns about economic growth and geopolitical risks continued to weigh on investor sentiment. This caution remained in place despite signs of resilience from the US economy. There were also generally solid third-quarter earnings from companies that reported over the month, although forward guidance was mixed for technology companies, especially in the semiconductor sector. The uncertainty was further heightened by the upcoming US elections, as investors weighed potential policy shifts and their implications for inflation and interest rates.
In this difficult environment, the US Dollar strengthened significantly, providing some relief for UK-based investors. This currency movement helped offset losses in US equities, as the S&P 500 Index, while down 0.9% in dollar terms, translated to a 3.4% gain in Sterling terms.
Chinese equities, which saw strong gains in September following a series of new stimulus measures, continued their positive momentum into October. However, as the month progressed, analyst caution grew around the sustainability of this rally amid China’s broader economic slowdown and ongoing structural challenges in its real estate sector, which continues to weigh on growth. Momentum also faltered as officials refrained from announcing additional stimulus measures, as had been anticipated. This, coupled with the stronger US Dollar, created headwinds for emerging markets.
Neither the US Federal Reserve nor the Bank of England had a Monetary Policy Committee meeting in October although the European Central Bank did cut its main interest rate by 0.25% amid signs that growth and inflation in the Eurozone are weakening. Thursday’s move took Eurozone rates to their lowest point since May 2023 and followed a cut of the same size at the ECB’s meeting last month. While the cut was widely anticipated, the ECB said it was based on an “updated assessment of the inflation outlook”. That suggested price pressures could now be weaker than the central bank forecast last month, when it predicted inflation would rise towards the end of the year but dip back under its 2 per cent target in 2025.
The UK consumer prices index (CPI) fell to 1.7 per cent in September, down from 2.2 per cent in August according to the Office for National Statistics (ONS). This is the first time inflation has fallen below the Bank of England’s 2 per cent target rate since April 2021, while the figure was well below the 1.9 per cent rate expected by economists. It was even further below the 2.1 per cent forecast by the Bank of England.
Uncertainty around global interest rate cuts created headwinds for government bond funds. Meanwhile, credit spreads—the yield difference between government bonds and higher-risk corporate bonds—narrowed. This helped cushion high-yield bonds. UK government bonds, or gilts, were already under pressure when new Chancellor Rachel Reeves confirmed in the build up to the Autumn Budget that she will change the UK’s fiscal rules to instead focus on an “investment rule” as she seeks to fund about £20bn a year of extra investment with increased borrowing. Reeves said her investment rule would ensure Britain avoided “the falls in public sector investment that were planned under the last government”.
Whilst the long-anticipated budget could have been worse for our clients, it was not a kind one and whilst some of the feared changes did not materialise, like a reduction in tax free cash on pensions, the budget has created some key planning questions, especially with regards to IHT.
The Labour manifesto promised to leave the three main revenue-raising taxes alone, Income Tax, VAT and employee National Insurance. Looking at the headlines, one might think the Autumn Statement delivered on this pledge. Income tax thresholds would be unfrozen, and from 2028-29, these thresholds will once again rise in line with inflation, giving workers more headroom for salary growth before they hit the next income tax band. Until then, the income tax personal allowance (PA) will remain frozen at £12,570 and the higher rate threshold (HRT) at £50,270. Additional rate tax (at 45 per cent) will start at £125,140.
If you look deeper though, the average “working people” that Reeves refers to, are in fact going to lose out. The key measure was a 1.2% increase in employer’s National Insurance to 15 per cent. The threshold at which employers start paying the tax was also reduced from £9,100 to £5,000. Rishi Sunak immediately accused Labour of “broken promise after broken promise” and a reciprocal accusation of having fiddled the figures. His view was that employer National Insurance (NI) increases would be passed onto employees via low wage growth and the removal of bonuses. Pensions falling into your estate for Inheritance Tax is another catch all.
Away from political wrangling, immediate effects were seen as the Office of Budget Responsibility (OBR), the fiscal watchdog, confirmed mortgage rates would likely increase as interest rates would need to be 0.25% higher and inflation would rise by 0.4%.
The NI changes will come into effect from April next year and are expected to raise £25bn a year by the end of the OBR’s forecast period. The OBR also stated that it thinks 76% of the employer NI increase will be passed onto employees over time. The Office for National Statistics (ONS) reported the median wage in the UK is now £37,430, meaning the NI rise would cost their employers an average of £965 per year.
The OBR downgraded its growth forecasts for later in the Parliament. The body said that increased public spending would “crowd out” private investment while tax rises on businesses would hit profits and wages. The chancellor told the Commons that the additional investment in her budget would lead to a 1.4% increase to GDP. However, the OBR said it would take 50 years for this growth to be realised.
The budget confirmed a substantial increase in public spending by the Labour government. This policy shift is expected to drive up borrowing needs and result in greater gilt issuance, which, in turn, weighed on bond prices, which were already under pressure. As a result, the yield on 10-year gilts rose from 4% to 4.4% over the month.
While uncertainty remains elevated, it often pays to look beyond short-term market volatility. Ultimately, the key drivers of long-term performance are corporate earnings and the broader economic landscape—both of which appear reasonably strong at present. Inflation also appears relatively under control.
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