UK financial credibility ‘still damaged’ despite 45p tax rate U-turn; factory downturn continues – as it happened

Last modified: 04: 01 PM GMT+0

Sterling has recovered its mini-budget losses, but traders and economists warn debacle has hurt UK


Time to recap

Britain’s credibility in the financial markets remains weak following the mini-budget, traders and economists have warned.

Chancellor Kwasi Kwarteng’s humiliating u-turn on his plan to scrap the highest rate of income tax (45p on those earning over £150,00) has given UK assets a lift, after a week of market turmoil

The pound has gained over a cent to above $1.13 recovering its losses since Kwarteng’s unfunded tax cuts spooked markets. It’s also up a eurocent at €1.15, for the first time since just before the mini-budget.


UK short and medium-term government bonds have recovered some losses too, with the yield on 10-year UK gilts back below 4%.


The financial markets also lowered their expectations for UK interest rate hikes. Rates are now expected to hit 5.5% next summer – very painful for borrowers, but lower than the 6% expected last week.

Instant response to the change of mind on the 45p rate in money markets.
Traders no longer pricing in 6% interest rates by next year. Now somewhere between 5.5% and 5.75%

— Ed Conway (@EdConwaySky) October 3, 2022

But Truss and Kwarteng both look desperately short of credibility after abandoning the tax cut for top earnings.

Ratings agency S&P warned that the u-turn may not protect the UK from a credit rating downgrade.

Charles Hepworth, investment director at GAM Investments, warned:

When market trust has been shattered, as we saw last week, the uphill task of restoring credibility is extremely hard and even harder when strategies shift.

The market currently has little faith that the Prime Minister and Chancellor can restore credibility in the short term, and this puts further renewed pressure on UK risk assets.”

The Institute for Fiscal Studies pointed out that keeping the top rate of income tax would only save around £2bn from Kwarteng’s £45bn of unfunded tax cuts.

That suggests significant cuts to spending – or further u-turns – are likely to be announced in November.

The Resolution Foundation calculated that top earners are still the main winners from the mini-budget, even though they have now lost much of the benefits.

Here’s an explainer about what the latest developments mean::

And here’s Larry Elliott on the unnecessary harm caused by an already weak UK economy:


Britain’s manufacturing output contracted for a third month in a row in September, hit by falling exports and worries that the economy could be heading into recession.

September’s PMI report suggests that the sector is already in a recession, says Thomas Pugh, economist at RSM UK:

The surge in borrowing costs will reduce investment and employment over the next year as firms cut back on non-essential spend in order to finance debts. As a result, the manufacturing sector is likely to remain in a downturn well into 2023.

The only silver lining is that the recent sharp fall in global commodity prices should start to feed through into lower input costs for manufacturing firms. However, the outlook for energy prices once the government’s six month cap expires will be crucial in determining the fate of the sector.’

🇬🇧 #UK's Manufacturing #PMI posted 48.4 in September (Aug: 47.3), below the 50.0 neutral mark for a third straight month. Weak domestic and overseas markets combined with inflationary pressures to curb goods production. Read more:

— S&P Global PMI™ (@SPGlobalPMI) October 3, 2022

Growth also slowed at US factories, while eurozone manufacturers also suffered another contraction as the energy crisis hit demand and drove up costs.

The oil price has jumped, on speculation that the Opec+ group could cut production by over a million barrels per day.

Energy regulator Ofgem has warned that Britain is at “significant risk” of gas shortages this winter because of Russia’s war in Ukraine and undersupply in Europe.

Thames Water, Southern Water and other companies will be forced to cut tens of millions of pounds from consumers’ bills after the regulator said they had missed pollution targets.

Vodafone and the owner of Three UK are in talks about a potential merger that would create Britain’s biggest mobile operator.

And Kim Kardashian has paid US regulators more than $1m to settle charges for failing to disclose that she was paid to promote a crypto asset in a post on her Instagram page.

Our Politics Live blog has all the latest action from the Conservative Party conference:


Barely a week after spooking the financial markets with a spectacularly badly-received mini-budget, and just hours after a humiliating u-turn on his tax cut for top earnings, Kwasi Kwarteng has told the Conservative Party conference that his economic deal will be backed with an ‘iron-clad commitment’ to fiscal discipline.

Kwarteng also promised to focus relentlessly on growth, and lay out details of his plan to bring down public debt as a share of GDP shortly [it’s scheduled for 23rd November].

Kwarteng also tried to brush aside the opposition to his plans, saying they had ‘caused a litle turbulence’. Tell that to people facing a larger increase in mortgage costs next year….

It is quite to square this rhetoric on fiscal responsibility with that fiscal event. Which happened all of 10 days ago.

— Duncan Weldon (@DuncanWeldon) October 3, 2022

If they’d just done the CT & NICS changes plus the energy package at that budget - and held the rest back until they had a full OBR forecast… they’d be in a much stronger economic & political position.
Such an unforced error.

— Duncan Weldon (@DuncanWeldon) October 3, 2022

On the upside, the markets were little-moved by Kwarteng’s speech – which probably counts as a win.

Kwasi Kwarteng admits tax plans caused ‘a little turbulence’

— The Guardian (@guardian) October 3, 2022

Full details here:

NEW: the pound has now regained the level it was before ⁦@KwasiKwarteng⁩'s mini Budget. Up above $1.13.
Partly a story of dollar weakness. But still: a mini-moment as the Chancellor begins his speech to conference

— Ed Conway (@EdConwaySky) October 3, 2022

Pound extends gains

The pound has now climbed above its levels on the day of the mini-budget.

Sterling has now gained a cent and a half, to $1.131 against the US dollar (which is a little weaker after today’s manufacturing slowdown).

The pound is also up over 1% against the euro to €1.152, the highest since mid-September.


UK chancellor Kwasi Kwarteng is due to address the Conservative Party conference soon.

Kwarteng must try to prove he, and his growth strategy, are credible, hours after he ditched his tax cut for top earnings.

Our Politics Liveblog will have all the action:

In another sign that the global economy is slowing, US manufacturing activity grew at its slowest pace in nearly two and a half years in September.

The latest survey of purchasing managers from the Institute of Supply Management found that new orders contracted, as demand for goods was hit by rising interest rates.

The ISM’s manufacturing PMI dropped to 50.9 this month, the lowest reading since May 2020, from 52.8 in August. That’s closer to the 50-point mark showing stagnation.

The report also found that prices were increasing at a slower rate, which may be a sign that the surge in US inflation is abating.

But with employment levels also contracting, and exports down, it adds to evidence of a slowdown.

United States ISM Purchasing Managers Index (PMI) Sep

• 50.9 vs 52.2 est.

• Slowest growth in factory activity since the contractions in 2020.

• New orders contracted

• Employment contracted

• Price pressures lowest since June


— Ophir Gottlieb (@OphirGottlieb) October 3, 2022

The Bank of England kept much of its firepower for calming the UK bond market dry today.

The UK central bank only accepted £22.1m of offers in its daily bond buy-back operation, and rejected £1.89bn of offers.

Bank of England buys just £22 million of long-dated gilts today.

They rejected offers to sell to the BoE worth £1.889 billion.

— Andy Bruce (@BruceReuters) October 3, 2022

That operation to reduce strains in the gilt market was launched last Wednesday, with the BoE saying it would spend up to £65bn on long-dated gilts.

The move immediately calmed the panic in the bond market last week, lifting prices of long-dated debt and pulling down yields.

The Bank may have chosen to reject offers which it felt were overpriced, given the recovery in gilt prices after today’s 45p tax rate u-turn.

But…. the yield on 30-year UK gilts have now shot higher, as investors react to the Bank’s reluctance to accept offers today.

Gilt yields rise after Bank of England goes light in buyback operation

— ForexLive (@ForexLive) October 3, 2022

The decision to keep the 45p tax band for the highest earners may not protect the UK from a credit rating downgrade.

Credit rating agency S&P Global says the U-turn won’t have a material impact on its latest projections for the UK economy.

S&P rating analyst Maxim Rybnikov said.

“We consider that the decision to reverse the tax cuts for highest earners is not going to materially affect our fiscal and economic projections for the UK that we published last Friday.”

“We will continue to monitor government announcements, including possible future fiscal consolidation measures, and assess their impact on our negative outlook.”

Last Friday, S&P lowered its outlook on the UK’s AA sovereign credit rating to “negative” from “stable,” citing concerns about the country’s fiscal outlook and the ‘additional risks’ in lending to the UK.

It also estimated the UK budget deficit will widen by an average 2.6% of gross domestic product per year to 2025, due to the mini-budget measures.

The agency also warned that net general government debt will continue on an upward trajectory, “in contrast to our previous expectation of it declining as a percentage of GDP from 2023.”


— Breaking Market News ⚡️ (@financialjuice) October 3, 2022


Traders are betting it will take a bigger UK government policy U-turn to restore credibility with markets, reports Bloomberg:

The problem for investors is that the rest of the recent mini-budget, including borrowing billions to fund energy price caps and other tax cuts, is still going ahead, hurting the country’s debt sustainability. While the U-turn may slightly improve that outlook, it also damages the credibility of a government facing a revolt in its own party and a collapse in support in voter polls.

“The U-turn represents a concerted effort to soften the narrative regarding the government’s economic agenda but little to change the direction,” said Neil Mehta, a portfolio manager at BlueBay Asset Management.

“This dynamic should support the pound in the short-term, but we think this will be short-lived, as confidence in the government is shot and policies come home to roost over a difficult winter for the UK economy.”

The UK government's policy U-turn on tax cuts for the highest earners won't be enough to stop the pound from falling further toward year-end, according to traders

— Bloomberg (@business) October 3, 2022

Tees Valley mayor Ben Houchen, a Conservative, is pushing for a second U-turn, this time on the removal of the cap on bankers’ bonuses.

Our political correspondent Aubrey Allegretti reports:

Tory mayor Ben Houchen says it was "naive" for govt to announce the 45p tax rate cut

He says row was "so avoidable" and "even though we've rowed back the damage is already done - you've got all of the downsides of announcing that policy without actually implementing that policy"

— Aubrey Allegretti (@breeallegretti) October 3, 2022

Houchen says despite the U-turn, initial plan for a tax cut for the richest will frame public's first impressions of the new government.

He says the next few weeks are going to be "quite difficult" for the Conservative Party - but it is recoverable.

— Aubrey Allegretti (@breeallegretti) October 3, 2022

New: Tory mayor Ben Houchen calls for govt to go further and U-turn on lifting the cap on bankers' bonuses too.

He says it's "unnecessary" and the "wrong time".

— Aubrey Allegretti (@breeallegretti) October 3, 2022


Back in the markets, UK gilts are continuing to rally…. as the global bond market also strengthens.

The yield on benchmark 10-year UK government debt has now dropped to 3.88%, the lowest level since last Monday, down from 4.1% on Friday night.

That suggests the markets are still cautiously welcoming today’s decision to keep the 45p tax rate (as yields fall when investors pay a higher price for debt).

Other sovereign debt is in demand too, with German 10-year bunds down 14 basis points to below 2%, and 10-year US Treasuries down 11bp (or 0.11 percentage points) at 3.7%.

GAM Investments: Markets have little faith that Truss and Kwarteng can restore credibility

Market trust has been ‘shattered’ by the UK government’s push for unfunded tax cuts, warns Charles Hepworth, investment director at GAM Investments.

He believes it will be extremely hard for Liz Truss and Kwasi Kwarteng to restore credibility:

Sterling remains under pressure; the 45% tax rate only brought in a modest £2 billion of tax revenue, which is small change in the overall £700+ billion tax revenue for last year. Similarly, it does little to address wider market concerns of this unfunded budget – billions of pounds will still need to be borrowed.

“When market trust has been shattered, as we saw last week, the uphill task of restoring credibility is extremely hard and even harder when strategies shift.

The market currently has little faith that the Prime Minister and Chancellor can restore credibility in the short term, and this puts further renewed pressure on UK risk assets.”


Resolution: Top earners still main winners from regressive mini-budget

Kwasi Kwarteng’s mini-budget is still deeply regressive, the Resolution Foundation warns, even though the 45p top rate of tax is no longer being axed.

Resolution have calculated that the richest 5% of households have just lost almost two thirds of the cash gains from the mini-budget.

But even so – they still stand to gain £3,500 on average next year from the tax cuts announced in the Chancellor’s recent Fiscal Statement, or a quarter of the whole package.

That’s almost 40 times as much as the poorest fifth of households, who get just an extra £90 to help them through the cost of living crisis.

Here’s the key findings from Resolution:

  • Smaller tax cuts at the top. Scrapping the abolition of the 45p tax rate removes 62 per cent of the cash gains going to the richest 5 per cent of households, and 54 per cent of the gains going to the richest 10 per cent.

  • Still a very regressive policy package. A quarter of the cash gains from the remaining tax cuts package are going to the richest 5 per cent of households – far more than the 16 per cent of cash gains spread across the entire bottom half of the income distribution.

  • Richest households will gain almost 40 times as much as poorer families. The top 5 per cent of households are still set to gain £3,500 on average next year from the remaining tax cuts, compared to just £90 on average for the poorest fifth of households.

  • Chancellor still has tough choices to make before 23 November. The remaining £43 billion of unfunded tax cuts still leave the Chancellor on course to miss his fiscal target of having debt falling in the medium-term. Unless further U-turns are made, the Chancellor will need to announce significant spending cuts on 23 November. The scale of those spending cuts is largely unchanged by today’s U-turn.

NEW @resfoundation analysis. What difference does scrapping 45p tax cut make?
- costs the rich a LOT. Top 5% just lost 2/3 of gains the Chancellor splurged at them. But don't get the🎻out...
- Tax cuts are still highly regressive: quarter of cash gains still go to just top 5%

— Torsten Bell (@TorstenBell) October 3, 2022

Lalitha Try, researcher at the Resolution Foundation, warns that Kwasi Kwarteng may announce significant spending cuts next month:

“The welcome decision this morning to scrap the abolition of the 45p tax rate has made the Chancellor’s package of tax cuts less focused on the very richest households. But the top are still the main winners, and the scale of spending cuts required to pay for them is largely unaffected.

“Despite today’s U-turn, the richest 5 per cent of households still stand to gain far more than the entire bottom half of the income distribution combined.

“The Chancellor remains wildly off-course in meeting his fiscal target of having debt falling in the medium-term, and is on course to announce significant new spending cuts on 23 November as a result.”

Eurasia Group: expect MPs to revolt over other measures

Today’s dramatic U-turn on the 45p rate sends an immediate signal to Conservative MPs that they hold the whip hand over this new government, explains Mujtaba Rahman, managing director for Europe at Eurasia Group.

Rahman writes that other elements of Kwarteng’s mini-budget package are now at risk too:

Barely a month into the new government it represents a massive loss of authority for Liz Truss and Kwasi Kwarteng, who were insisting as late as last night that the plan would go ahead.

The lesson will not be lost on Downing Street that the Government, even with a working majority of 71, is vulnerable to an alliance of its own MPs and the opposition MPs if it pushes its radical vision too far.

We are now arguably in the worst of all worlds

The Govt think its U-turn on 45% is enough. But for markets, the fiscal savings are peanuts

Tory MPs now think they hold whip hand over Govt & will oppose spending cuts

But there is still a big fiscal gap - and it needs financing

— Mujtaba Rahman (@Mij_Europe) October 3, 2022

Rahman adds that further revolts are highly likely:

The episode highlights Truss’ lack of support on her own backbenches—and downright hostility from some critics, including allies of Rishi Sunak, her opponent in the Tory leadership contest. They will now scent weakness; Truss’ attempt to display strong leadership has been undermined.

Fresh revolts seem almost certain on the plan to lift the cap on bankers’ bonuses and the swingeing public spending cuts that appear inevitable if ministers are to convince the Office of Budget Responsibility and the markets that they can cover the massive borrowing necessary to finance the remainder of the tax cuts and help with energy bills promised by Kwarteng in the mini-budget.

These, such as de-linking benefit payments from inflation, as well as other controversial elements of the government’s supply side agenda, including plans to scrap EU rules over maximum weekly working hours, housebuilding and fracking will now be at risk.

This is one month of @trussliz in the FX market

— Mujtaba Rahman (@Mij_Europe) October 3, 2022

SEC charges Kim Kardashian over crypto security promotion

Kim Kardashian in New York City last month
Kim Kardashian in New York City last month Photograph: Gotham/GC Images

In other news… reality TV superstar and influencer Kim Kardashian has been charged with promoting a crypto security without disclosing she had been paid.

The US Security and Exchange Commission has announced that Kardashian failed to disclose a $250,000 payment she received for touting a crypto asset offered and sold by EthereumMax on her Instagram feed.

Kardashian has agreed to pay a $1,000,000 penalty, plus approximately $260,000 in ‘disgorgement’ (returning her payment), without admitting or denying the SEC’s findings.

The SEC says:

The SEC’s order finds that Kardashian failed to disclose that she was paid $250,000 to publish a post on her Instagram account about EMAX tokens, the crypto asset security being offered by EthereumMax. Kardashian’s post contained a link to the EthereumMax website, which provided instructions for potential investors to purchase EMAX tokens.

“This case is a reminder that, when celebrities or influencers endorse investment opportunities, including crypto asset securities, it doesn’t mean that those investment products are right for all investors,” said SEC Chair Gary Gensler.

“We encourage investors to consider an investment’s potential risks and opportunities in light of their own financial goals.”

Big: Kim Kardashian pays over $1 million to settle SEC charges linked to a crypto promo on her Instagram.

— Jim Roberts (@nycjim) October 3, 2022

UK credibility 'still damaged' despite 45p tax rate U-turn

Chancellor Kwasi Kwarteng’s U-turn on the 45p tax rate does little to quell investor concerns about the UK, traders and economists say.

With sterling losing some of its earlier surge, William Marsters of Saxo UK, warns that the government’s credibility is still damaged:

“The rally in sterling up to 1.1281 versus the dollar has already pulled back to below the 1.12 level, highlighting it was a low-level relief.

The move to reverse the tax cut decision won’t add much to the government’s balance sheet and so will be seen more as a signal to investors than anything else.

As far as government credibility goes, investor concern might be more focused around the government’s disconnect internally with Prime Minister Truss saying the top-tier tax cut decision was made by Chancellor Kwarteng, and other cabinet members were not consulted on the matter.”

Pound surges after @trussliz and @KwasiKwarteng perform 45p tax U-turn:

Sterling spikes to $1.12 and returns to level before the UK Chancellor’s '#MiniBudget' ten days ago.#Sterlingcrisis #Kwarteng #poundcrash

— 凤凰欧洲 PhoenixCNE News (@PhoenixCNE_News) October 3, 2022

George Lagarias, chief economist at audit, accounting and consulting group Mazars, also warns that international investors are wary of UK assets:

“The Chancellor’s forced U-turn should take some pressure off the Pound, for the time being.

Still, the UK has lost some credibility with international markets over the past few years. Despite the Pound’s currency reserve status, British risk assets have a long and difficult way before they return as a staple in the portfolios of international long-term investors.“

Bethany Payne, global bonds portfolio manager at Janus Henderson Investors, warns the pound may remain ‘unloved’ for some time:

“In spite of a significant U-turn from the Chancellor, the currency moves have been fairly minor with sterling trading at similar levels to where it was on Friday and still just below the levels prior to the mini budget.

Meanwhile the Bank of England is in crisis talks with regulators to provide a more medium-term solution to backstopping pension fund strategies to prevent a repeat of last week’s market movements. The Bank of England has so far delayed the date of their own gilts sales to 31 October, in effect giving them and the government a four-week window for resolution.

While authorities dash to save the long-end of the bond market, Sterling still remains under its own unique pressures and we expect it to remain unloved for some time.”


The pound has recovered to its highest level against the euro since the mini-budget, up half a eurocent at €1.145 so far today.

A week ago, sterling hit its lowest point against the euro since the end of 2020, just €1.0832, as markets reeled from the unfunded commitments in the mini-budget.

But it strengthened once the Bank of England stepped in last Wednesday with a pledge to buy long-dated UK government debt to avoid a collapse in the pensions market.

It’s still down over 3% against the euro this year, though:

Recovery..... Look at the history of pound / euro . Long way off recovery.... fall has been Happening over years and governments have stood back and watched

— Eddie hill (@Eddiehillgaa) October 3, 2022

Truss still has confidence in Kwarteng, spokesman says

Liz Truss’s spokesman has said the prime minister still has confidence in chancellor Kwasi Kwarteng, following today’s humiliating u-turn on scrapping the 45p top rate of tax for earnings over £150,000.

Asked whether Truss still had confidence in Kwarteng, the spokesman said: “Yes”, Reuters reports.

The spokesman said he was confident parliament would approve the rest of Kwarteng’s mini budget, which helped spark turmoil in financial markets and a rebellion in her Conservative Party.

No10 says Liz Truss full confidence in Kwasi Kwarteng.

Govt plans to press ahead with the rest of the mini-Budget and confident that it'll pass the Commons...

— Lizzy Buchan (@LizzyBuchan) October 3, 2022

IFS: Chancellor still has lots of work to do

Kwasi Kwarteng must consider more u-turns, or make cuts to public spending to fund his mini-budget, warns the Institute for Fiscal Studies.

IFS Director Paul Johnson says the chancellor still has a lot of work to do if he is to show a credible commitment to fiscal sustainability:

“The direct impact of the government’s U-turn on the abolition of the additional 45p rate of income tax is of limited fiscal significance. At a medium-run cost of around £2bn a year, it represented only a small fraction of the Chancellor’s mini-Budget announcements. His £45bn package of tax cuts has now become a £43bn package - a rounding error in the context of the public finances.

The Chancellor still has a lot of work to do if he is to display a credible commitment to fiscal sustainability.

Unless he also U-turns on some of his other, much larger tax announcements, he will have no option but to consider cuts to public spending: to social security, investment projects, or public services. On the latter, the Chancellor has indicated that departments’ cash spending plans that run to 2024-25 will be left unchanged, which amounts to a real-terms cut in their generosity in the face of higher inflation.

This will squeeze public services, but will not be enough to plug the fiscal hole the Chancellor has created for himself.”

From a fiscal point of view important to remember cut to 45p rate was just about smallest part of the "mini budget". What was a £45bn tax cutting package is now a £43bn package.

This U turn has, in itself, essentially no effect on fiscal sustainability.

— Paul Johnson (@PJTheEconomist) October 3, 2022

The IFS has worked out that reversing the rise in national insurance rates will cost £16bn per year, while bringing forward the 1p cut in basic rate income tax by a year will cost £5bn.

Cancelling the planned increase in corporation tax was one of the biggest measures in the mini-budget, expected to cost over £18bn by 2026/27.

Larry Elliott: Kwarteng’s tax U-turn was inevitable – and he has already done damage

Today’s decision to abandon plans to scrap the 45% top rate of income tax paid by those earning more than £150,000 is a humiliating U-turn for the UK government, but the alternative was even worse.

Economically, it was unavoidable, our economics editor Larry Elliott writes:

A week of turmoil in the financial markets showed just how badly the mini-budget from the chancellor, Kwasi Kwarteng, had gone down with international investors. The pound fell, the cost of government borrowing rose, mortgage products were pulled.

Liz Truss’s government has made faster growth its central mission but the mini-budget was threatening to deliver the opposite to what the new prime minister had wanted: a brutal squeeze on activity caused by dearer imports and higher interest rates.

In itself, scrapping the top rate of tax was relatively small beer. Britain is a £2tn-plus economy and the cost of abolishing the 45% rate is estimated to be about £2bn a year. It made up less than 5% of Kwarteng’s £45bn package of tax cuts.

For the markets, though, the problem was that doing away with the top rate symbolised everything they didn’t like about the mini-budget: the fact that the tax cuts were unfunded, that they might lead to higher inflation, and that they were likely to prompt a tough response from the Bank of England. And, as Truss’s heroine Margaret Thatcher once put it: you can’t buck the markets….

Here’s Larry’s full analysis:

Resolution Foundation’s Torsten Bell also highlights that much of Kwasi Kwarteng’s unfunded pledges are still in place, despite the 45p top tax rate u-turn.

U-turning on 45p DOES:
- help the internal politics (Tory MPs won’t vote down finance bill)
- help wider politics (Labour wants to attack 45p not other tax cuts)
- make the overall tax cut package less regressive (moves it from big giveaway for very top to the top half)

— Torsten Bell (@TorstenBell) October 3, 2022

U-turning on 45p DOESNT:
- change the big picture of a £40bn package of unfunded tax cuts which drove the market reaction
- avoid this the big spending cuts that will follow

— Torsten Bell (@TorstenBell) October 3, 2022

The oil price has jumped sharply this morning, on reports that the Opec+ cartel may cut production to support the market.

Opec and its allies meet on Wednesday, and are expected to discuss cutting production by over one million barrels per day in November – which would be the biggest reduction since early in the pandemic.

Oil producers are keen to prop up prices, after Brent crude fell to $84 per barrel last month, from over $120/barrel back in June.

Today, Brent is up almost 4%, back to $88.50/barrel.

Major asset price moves
Major asset price moves Photograph: XM

Sterling dips back as UK still faces problems

The initial sterling rally seems to be fading, as investors ponder the scale of the UK’s economic challenges.

Having jumped almost two cents this morning, from $1.1088 to over $1.127 , the pound is back below $1.12 against the US dollar.

Russ Mould, investment director at AJ Bell, pooints out that there are still ‘plenty of problems’ – from the stretched public finances to the poor economic outlook.

The U-turn is important for two reasons.

First, the market was panicking about the cost of the tax cuts and how that would push up Government debt and in turn raise the prospect of reduced public spending and benefit cuts.

“Removing one of the key components of this seemingly flawed plan provided some relief, and you saw that in how the pound rallied and 10-year gilt rates briefly fell below 4%.

“The other factor to consider is that Kwarteng has effectively admitted to a massive policy error only weeks into his tenure as Chancellor. If Liz Truss is to establish any credibility as Prime Minister, can she afford to have anyone on her team who has effectively scored an own goal in the opening game?

“The fact that both the pound fell back and gilt rates started to move higher after the news had been digested is the market’s way of saying there are still plenty of problems with the Government’s finances, state of the consumer and business, and economic outlook.

With or without the 45% tax cut, the country still faces challenging times with individuals and companies finding life a lot harder.


Fears of gas supply cuts leading to blackouts this winter

Energy news: Britain is at “significant risk” of gas shortages this winter because of Russia’s war in Ukraine and undersupply in Europe.

Energy regulator Ofgem has said there was a possibility that Britain could enter a “gas supply emergency”. That would see supplies to some gas-fired power plants cut off, stopping them generating electricity.

The admission is likely to increase fears of blackouts because the UK relies on gas plants for the biggest share of its electricity supplies.

The Times has more details, explaining that power stations who were cut off could face huge charges to penalise them for not supplying electricity.

Bloomberg’s energy expert Javier Blas says it shows the urgent need to conserve energy (Liz Truss has opposed the idea of energy rationing ….)

The letter, from UK energy regulator @Ofgem and dated Sept 30, involves a rather, but important, technical change in the UK electricity market.

*** But the key is the first paragraph of the "background" section, highlighted for your perusal ***.

— Javier Blas (@JavierBlas) October 3, 2022

Maybe, maybe, maybe... it's time for the UK government to seriously get a grip with the energy crisis, and start a public campaign for energy savings, before it is too late. Winter is coming awfully quickly, and we are betting the house on a warmer-than-average season.

— Javier Blas (@JavierBlas) October 3, 2022

Anti-poverty charity Oxfam have welcomed the decision not to cut taxes for Britain’s top earners.

Katy Chakrabortty, head of policy and advocacy at Oxfam GB, said:

“We are pleased that the Government has stopped, listened and understood that cutting taxes for the richest during a cost of living crisis is not the way to go. It needs to keep listening and provide urgent support to people facing poverty in the UK and those facing famine in other parts of the world.

“It is essential that ministers don’t seek to balance the books on the backs of people struggling to pay the bills and feed their families - public services, welfare and aid are all needed now more than ever.“

Abolishing the 45% top rate of tax, paid by those earning over £150,000, would have pushed up UK borrowing by £2bn per year.

Overall, the tax cuts in the mini-budget will cost £45bn by 2026/27, meaning extra borrowing or painful cuts to public spending.

Simon Clarke, the levelling-up secretary, warned late last week that public spending must be cut to help to fund the government’s £45bn of tax cuts.

But as Ben Chu of Newsnight points out, there is strong public opposition to any further austerity, given how stretched households and public services already are.

Was the 45p tax cut scrapped because it was unpopular?

If so, worth remembering that less than 10% of the public are in favour of lower spending on public services and social benefits...

— Ben Chu (@BenChu_) October 3, 2022

....which are the only means for the Chancellor to show debt falling as a share of GDP if he pushes on with his OTHER tax cuts....

— Ben Chu (@BenChu_) October 3, 2022


Abandoning the proposed removal of the 45p tax bracket eases some of the worries created by the mini-budget, but it is not a solution to the market turmoil, says Neil Birrell, chief investment officer at Premier Miton Investors.

Birrell points out that high inflation and high interest rates are not going away quickly, and economic growth is under severe threat, adding:

The Bank of England and the government are at loggerheads and, as importantly, there is no conviction in government policy. It all makes a for a very uncertain backdrop for markets, particularly gilts and sterling. However, markets move to discount the outlook quickly.

The rise in gilt yields has been dramatic and sterling has fallen to historic lows. In the meantime, UK equities have been relatively resilient and look cheap by international and historic comparison.

Birrell adds that:

A period of slow news and no surprises would help stabilise fears and volatility.”

UK manufacturing downturn continues as weak pound drives up costs

Britain’s manufacturers have been hit by falling demand and soaring costs as the weak pound drove up import costs.

UK factory output fell for the third month running in September, with firms cutting production as their new orders fell for the fourth month in a row.

Firms were also hit by soaring input costs, which led them to hike their own prices at an accelerated rate too.

This pulled the closely-watched S&P Global / CIPS UK Manufacturing Purchasing Managers’ Index down to 48.4 in September, up from 47.3 in August.

That’s below the flash estimate of 48.5 (released on mini-budget day). Any reading below 50 shows a contraction.

The report found that companies faced tougher conditions in both domestic and export markets, with some orders being canned due to rising uncertainty, inflationary pressure and the cost-of-living crisis.

🇬🇧 #UK's Manufacturing #PMI posted 48.4 in September (Aug: 47.3), below the 50.0 neutral mark for a third straight month. Weak domestic and overseas markets combined with inflationary pressures to curb goods production. Read more:

— S&P Global PMI™ (@SPGlobalPMI) October 3, 2022

Dr. John Glen, chief economist at the Chartered Institute of Procurement & Supply, said:

Supply chain managers were buying less as customers either failed to place orders or cancelled work in hand. This slowdown was across the board as both domestic and export orders fell, impacted by concerns over transportation difficulties, disruptions in Felixstowe and longer lead times.

A shortage of components particularly made the completion of finished goods more difficult.

Glen adds that conditions may not improve in the last quarter of the year, given the economic unheaval":

It is unlikely that supply chain managers will have hedged against the weaknesses in the pound for instance which will continue to impact on imports and what consumers will see on shelves as the shopping season begins in the coming months.”

UK PMI indicated manufacturing contracted in September, but recorded a slight improvement from August. Falling demand from US, EU & China, falling new orders, high transport costs and cancelled orders due to long lead times contributing to current weakness.

— Mark Magill (@MarkMagill1982) October 3, 2022

Despite this morning’s U-turn, the damage in the bond market is still clearly visible, says Ben Laidler, global markets strategist at social investment network eToro

The UK government has bowed to the dramatic pressure from the financial markets today. Shelving the top rate of income tax cut provides short term relief to hard pressed Sterling and UK bond markets, but the government is not out of the woods yet with the vast majority of its unfunded spending plans still intact, from cuts to national insurance and basic income tax, to corporation tax and alcohol.

“Much of the damage from last week is also still visible, with 10-year bond yields up by a quarter from early September and by half from August, implying higher costs for all borrowers.”

Analyst: No denying government looks incompetent

The pound is holding onto most of its early morning gains, at around $1.123.

Fiona Cincotta, senior financial markets analyst at City Index and, warns that the markets are still fretting about the Truss government, despite the 45p tax rate u-turn.

The pound is clearly pleased with the move, as it lessens the huge unfunded borrowing burden, at least slightly. However, there is no denying that the move makes the government look incompetent, which is less than favourable for political stability in the UK.

The pound has been behaving more like an emerging market currency in recent weeks, and this behaviour from the government will do little to change that the perception. The first major U-turn within the first month of rule isn’t exactly an encouraging start for Liz Truss’ government.

The move could potentially limit gains in sterling as the market frets over the governments ability to ride this storm out in a coherent manner.

Kwarteng: mistake to attend champagne reception for Tory donors on day of mini-budget

Kwasi Kwarteng has said it was a mistake to attended a champagne reception for Tory donors on day of mini-budget, in an interview with Nick Ferrari on LBC.

Q: Why did you go to a party with hedge fund managers after the mini-budget?

Kwarteng says it was an event organised by the Conservative party. He was only there for about quarter of an hour, maybe more.

I spent, I think, quarter of an hour there, or maybe a bit longer. It was a party event, we have party events all the time.

Q: Do you regret going?

Kwarteng says:

I think it was a difficult call and I totally get how it looks. I just feel that it was something that I was signed up to do and I had to do

He goes on:

With hindsight it probably wasn’t the best way to go.

Q: Will there be more austerity measures?

Kwarteng replies: “I don’t think so at all.” He is focused on growth, he says.

Kwarteng has also suggested to BBC Breakfast that Liz Truss took the decision to scrap the abolishment of the 45p tax rate.

Andrew Sparrow’s Politics Live blog has all the details:

In the eurozone, the manufacturing sector’s downturn has accelerated.

Demand for goods from euro-area factories tumbled again in September, as orders dropped and some firms were forced to cut production due to soaring energy prices.

The latest survey of purchasing managers also found that business confidence has dropped to its lowest level since May 2020, as price pressures intensify, More here.

The downturn in #euro area #manufacturing steepened in September, as the #PMI slid to a 27-month low of 48.4 (Aug: 49.6). New orders continued to fall amid soaring energy prices and economic uncertainty. Read more:

— S&P Global PMI™ (@SPGlobalPMI) October 3, 2022

Thames Water, Southern Water and other companies will be forced to cut tens of millions of pounds from consumers’ bills after the regulator said they had missed pollution targets.

Eleven water companies will have to return about £150m to customers in the form of lower bills in the 2023-24 financial year, the water regulator for England and Wales, Ofwat, announced this morning.

The 45p tax rate U-turn hasn’t brought much cheer to the stock market, though.

Britain’s blue-chip FTSE 100 index has dropped to its lowest level since March, down 1.1% or 80 points to 6,815 points. Banks and consumer groups are among the fallers.

The smaller, more domestically-focused FTSE 250 index is down 1% too – with travel companies such as cruise operator Carnival (-7.6%), Tui (-4.8%) and easyJet (-4.7%) dropping.

Recession worries and the recent selloff in government bonds are hitting stocks, say analysts at Saxo Bank:

Market sentiment continued to deteriorate late last week on geopolitical concerns and despite the Bank of England’s intervention helping to at least temporarily stabilize global sovereign bond markets after their aggravated slide of late.

Guy Foster, chief strategist at wealth manager RBC Brewin Dolphin, sums up the market reaction:

“The pound and gilts have reacted well to the U-turn on plans to scrap the 45p tax rate. The derivatives market is now signalling one less rate increase since this U-turn on additional rate tax.

The move is symbolic more than fundamental with the tax cut making up around £2bn of about £40bn per year increase in funding requirement announced at the mini-budget.”

Markets no longer expect 6% UK interest rates next year

Investors are dialling back their expectations for UK interest rates next year, as gilt yields drop back.

The money markets now suggest Bank Rate will have risen to around 5.6% by next summer, down from the 6%+ levels feared last week.

Sky’s Ed Conway has tweeted the key chart:

Instant response to the change of mind on the 45p rate in money markets.
Traders no longer pricing in 6% interest rates by next year. Now somewhere between 5.5% and 5.75%

— Ed Conway (@EdConwaySky) October 3, 2022

But even so, homeowners whose fixed-rate mortgage deals are running out, or who are on trackers or variable rate deals, still face a sharp jump in their repayments.

The UK base rate is currently 2.25%, and until recently the markets had expected it would have risen to 4.5% by next spring.

The surge in borrowing costs forced mortgage lenders to withdraw hundreds of deals last week.

Someone who fixed at 2% two years ago could soon be looking at a remortgage rate at 5%. If they had a £200,000 mortgage over 25 years, that’s a rise in monthly payments from £848 to £1,169 – or an extra £321, as our explainer lays out here:

Despite the recovery in gilt yields this morning, Britain’s borrowing costs are still much higher than even a month ago, as the BBC’s Andy Verity flags here:

Since 8am gilt yields have dropped - perhaps suggesting relief that the government is listening to its critics on the markets. Currently down 11 basis points (a basis point is 0.01%) for 5-year gilt yield at 4.29%.

— Andy Verity (@andyverity) October 3, 2022

However, before we celebrate cheaper mortgages, remember that that rate was less than 3% on September 5 when the new government took power. So interest on 5 year fixed rate home loans is set to cost over a third more than it would have a month ago.

— Andy Verity (@andyverity) October 3, 2022

UK government bonds strengthen after tax U-turn

Gilts, the debt issued by the UK government, are rallying this morning after the humiliating decision to abandon scrapping the 45p tax rate.

Kwasi Kwarteng’s u-turn on the top rate of tax seems to be calming the gilt market, after prices tumbled in the panicky selloff following the mini-budget.

This has pushed down the cost of short and medium-term government borrowing (known as the yield on the bonds, which fall when prices rise).

The benchmark 10-year UK gilt yield has dropped by 10 basis points, to 4%, from 4.1% on Friday night.

Last week it spiked as high as 4.5%, having been just 3.5% before Kwarteng announced his unfunded tax cuts and spending pledges.

UK 10-year gilt yields
UK 10-year gilt yields Photograph: Refinitiv

Shorter-dated two-year gilt yields are down 9 basis points to 4.2%.

Long-dated 30-year gilts (which are now being bought up by the Bank of England to calm the markets) have only strengthened slightly. Their yield has dipped a little to 3.76%, having hit 5% before the Bank intervened.

Significantly, other government bond prices are not moving as much. German 10-year bunds are flat, while US 10-year Treasury yields are only down 2 basis points.

This reaction, like the selloff last week, is being driven by the government’s actions, even though Kwarteng told the Today Programme this morning that rising interest rates are being driven by the US Federal Reserve (which is lifting interest rates to tackle inflation).

He made a similar point to LBC:

Mr Kwarteng tells @LBC that what happened in the gilt market “had nothing to do” with scrapping the tax rate.

He says that he accepts it was “controversial”.

In the “spirit of contrition and humility” he won’t go ahead with it, he adds.

— Theo Usherwood (@theousherwood) October 3, 2022

Victoria Scholar, head of investment at Interactive Investor, explains:

The Chancellor’s mini-budget sparked a major sell-off in the UK gilt market last week, prompting emergency intervention from the Bank of England. The dysfunction in the bond market has forced the Bank of England to carry out conflicting policies; one to stem inflation and another to avoid financial contagion. It is having to buy long-dated gilts to prop up its sovereign bonds and the pound.

Meanwhile it is likely to carry out a jumbo 100 basis point hike next month as it looks to rein in economic activity to stem inflation. This push and pull underscores the UK market’s disorder at the moment.


Credit Suisse shares hit record low

Elsewhere in the markets, shares in investment bank Credit Suisse have dropped 10% in early trading to a new record low.

The fall comes despite the chief executive of Credit Suisse reassuring staff that the globally significant Swiss bank has a solid balance sheet, after credit markets rated its risk of default as the highest in a decade.

Credit Suisse now down another 9% as CEO Memo fails to calm markets

— IG (@IGcom) October 3, 2022

In a memo to staff on Friday, Ulrich Körner said there were “many factually inaccurate statements being made” in media coverage of the bank’s crisis, which has seen its share price plunge by 56% this year.

Körner said:

“I trust that you are not confusing our day-to-day stock price performance with the strong capital base and liquidity position of the bank,”

“We are in the process of reshaping Credit Suisse for a long-term, sustainable future – with significant potential for value creation.

“Given the deep franchise we have, with a longstanding focus on serving some of the world’s most successful entrepreneurs, I am confident we have what it takes to succeed.”

The UK government still has ‘a lot to do’ to recover its credibility, warns Jane Foley, head of FX Strategy at Rabobank.

“Clearly sterling has performed better on the news, but there are still a lot of questions, ultimately the 45 pence tax rate was only a small part of the unfunded tax cuts announced.

The question remains is this enough? The answer will be clear in a few weeks’ time when the bank of emergency measures end.

“UK assets, the pound and gilts are not out of woods yet, and the British government has a lot to do to get back credibility.”

Haven’t looked at this for a while but the figures won’t have changed that much. The 45p tax rate isn’t a big deal in terms of government revenue. The basic rate has a much bigger impact.

— Rick 🇺🇦 (@FlipChartRick) October 3, 2022

Analyst: Truss looks 'highly malleable', rather than new Iron Lady

Liz Truss had hoped to carve out a reputation as the new Iron Lady. Now, though, she will be seen as “highly malleable”, says Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

Streeter explains that investors will be encouraged that the ‘more reckless’ nature of Truss’s administration can be reined in, saying;

She has been manipulated into this U-turn after senior Conservatives yesterday came out in open revolt at the Treasury’s decision to scrap the 45p tax band for the wealthy while refusing to rule out cuts to welfare for the poorest.

Admitting to a communication mistake rather than a serious policy mishap didn’t cut it. Now this embarrassing climb down, taking unfunded tax cuts off the table, which Chancellor Kwasi Kwarteng has called a distraction, will help reassure the markets a little that the more reckless nature of this new administration can be reined in by the Conservative party.

A big part of the questionable battle plan to try and stimulate growth is being ripped up, which may actually help calm the feverish rise in borrowing costs for companies, homeowners and the government. But the credibility of the government in providing a steady hand on the tiller at a time of such economic uncertainty has been lost, perhaps irrecoverably.

Streeter adds that Truss could yet decide to “change tack and Chancellor”, if the pound remains volatile in the weeks and months ahead.

Anyway good luck to the Truss government on fracking, cutting employment rights, planning reform, and massive spending cuts.

— Sam Freedman (@Samfr) October 3, 2022


Pound jumps as UK PM Truss & chancellor Kwarteng have abandoned plan to abolish top rate of income tax for highest earners in astonishing U-turn. Kwarteng acknowledged that plan to axe 45% rate on earnings >£150,000 in a move to be paid for by borrowing had become "distraction."

— Holger Zschaepitz (@Schuldensuehner) October 3, 2022

Jan von Gerich, chief analyst at banking group Nordea, warns that the pound will probably remain under pressure.

He says that from a market perspective, scrapping plans to axe the 45p top rate of tax is "a good step in the right direction”.

It will take time for markets to buy the message but it should ease the pressure.”

“Questions still remain and sterling will likely remain under pressure.”

CBI: 45p tax rate U-turn is a good development.

The CBI, which represents British businesses, have welcomed the decision not to abolish the 45p tax rate.

Tony Danker, director-general of the CBI, has told Radio 4’s Today programme that scrapping the plan should help markets stabilise.

Danker says:

Businesses up and down the country want the markets to stabilise.

That is an absolute precondition to investment and growth, and it’s a precondition to getting onto these very good reforms.

So yes I think it’s a good development this morning.

If the markets stabilise, Danker hopes that the investment climate will also stabilise.

Danker also says he agrees with Kwasi Kwarteng that the 45p tax cut had become a distraction from the supply-side reforms in the government’s growth plan.

He says it is ‘absolutely essential’ that those reforms – which are “controversial enough” at the Conservative’s conference – were passed, as they will lift growth, he believes.

The pound has now recovered all its losses since Kwarteng’s mini-budget sent it slumping to record lows a week ago.

The pound jumped following news of the u-turn on the 45p rate abolition

— Ed Conway (@EdConwaySky) October 3, 2022


Kwarteng scraps abolition of 45p top tax rate

It’s official: the UK government will not go ahead with its controversial plan to scrap the 45p top rate of tax paid by h igh earners.

Chancellor Kwasi Kwarteng has announced the u-turn on Twitter, declaring:

“We are not proceeding with the abolition of the 45p tax rate. We get it, and we have listened.

Kwarteng says it has become clear that the plan has been ‘a distraction’ from the government’s mission to tackle the challenges facing the UK.

By abandoning it, he says the government can focus on delivering the major parts of its growth package.

We get it, and we have listened.

— Kwasi Kwarteng (@KwasiKwarteng) October 3, 2022


Pound up following reports that government is set for U-turn on income tax cut


— Bloomberg UK (@BloombergUK) October 3, 2022

Scrapping the abolition of the 45p top end tax rate is a ‘big deal’ for the pound, says Viraj Patel, macro strategist at Vanda Research.

He predicts the pound may push higher this week, as the damage caused by Kwasi Kwarteng’s mini-budget is unwound.

My estimates suggest $GBPUSD should be trading around 1.13-1.14 if the entire 'Kami-Kwasi budget' risk premium is unwound. Seems reasonable we get there in the next few sessions... 45p tax cut was the nail in the coffin for the pound last week. Taking this out is a big deal

— Viraj Patel (@VPatelFX) October 3, 2022

Introduction: Sterling rallies on reports of 45p tax rate u-turn

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

The pound is rallying this morning, on reports that the UK government is preparing a screeching u-turn on its plan to abolish the 45p top rate of income tax.

Sterling has jumped by as much as a cent to over $1.126 – its highest level in over a week, just a week after it slumped to a record low around $1.035.

The pound vs the US dollar
The pound vs the US dollar Photograph: Refinitiv

The recovery was sparked by reports chancellor Kwasi Kwarteng may reverse the proposed scrapping of the 45p rate of income tax, just 10 days after it was announced in the mini-budget.

The U-turn comes after strong opposition from several Tory MPs, after the mini-budget caused chaos in the financial markets last week amid concerns that Britain was increasing borrowing to fund tax cuts for the rich.

Last Friday, ratings agency Standard & Poor’s cut the outlook for its AA credit rating for British sovereign debt to “negative” from “stable”, judging that prime minister Liz Truss’s tax cut plans would cause debt to keep rising.

But it’s a remarkable twist; yesterday Truss said she was absolutely committed to abolishing the 45% top rate of tax.

Major U-turn by Truss & Kwarteng - planned scrapping of 45p top rate of tax will NOT go ahead

Markets react very positively; pound 1.17% against dollar in half an hour after U-turn announced

— Jack Parker (@JackParkr) October 3, 2022

Our Politics Live blogger Andrew Sparrow reports:

Only yesterday Liz Truss told the BBC’s Laura Kuenssberg that she was committed to sticking to the plan, announced in the min-budget, to abolish the 45% top rate of tax. Now the government is set to ditch it – after it became clear on the first day of the Conservative party conference that Truss would face a huge rebellion if she tried to force her MPs to vote for it.

The Sun’s political editor, Harry Cole, first broke the news of the U-turn last night. He is co-writting a biography of Truss, and is one of the journalists seen as being close to her administration.


NEW: Liz Truss preparing to ditch 45p rate TODAY after late crisis talks with Chancellor

Humiliating climb down plan comes after day of acrimony on Brum

Announcement expected in morn in body blow to new Government

No denial from No10 this eve

— Harry Cole (@MrHarryCole) October 2, 2022

Andy is covering all the action from the Conservative Party conference here:

Also coming up today….

European stock markets are set to start the new month with fresh losses, as recession fears mount.

Earlier today, data shows that Japan’s manufacturing activity grew at its slowest pace since the start of last year in September.

Japanese factories were hit by a slide in output and new orders, due to weakening demand from China, the United States and other trading partners.

Joe Hayes, senior economist at S&P Global Market Intelligence, which compiles the survey, explained:

“Weakness in Japan’s manufacturing sector persisted in September and even turned worse.

That’s a bad sign for demand in the global economy.

European Opening Calls:#FTSE 6839 -0.79%#DAX 11942 -1.43%#CAC 5686 -1.33%#AEX 632 -1.31%#MIB 20373 -1.34%#IBEX 7277 -1.22%#OMX 1808 -1.16%#SMI 10160 -1.05%#STOXX 3274 -1.33%#IGOpeningCall

(Note - these are % from previous cash close, futures largely flat).

— IGSquawk (@IGSquawk) October 3, 2022

We’ll also find out how factories in the UK, eurozone and US fared last month, as worries about the global downturn deepen.

The agenda

  • 9am BST: Eurozone manufacturing PMI report for September

  • 9.30am BST: UK manufacturing PMI report for September

  • 3pm BST: US manufacturing PMI report for September



Graeme Wearden

The GuardianTramp

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