Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Then comparisons are being made to this trust But is
Speaker 2: this more callahan than trusts?
Speaker 1: Is this more seventy six than twenty two? Possibly?
Speaker 3: What we are seeing in the UK, guy is a
Speaker 3: train break in slow motion. Welcome to the City of London, the.
Speaker 4: City of the City of the City of London.
Speaker 3: Please mind the gap between the and the platform, the
Speaker 3: financial hearts of the country, the city, the city.
Speaker 2: Welcome to in the city.
Speaker 3: Stand clear of the doors.
Speaker 5: Pe So, Dave, we're putting a bonus episode out today
Speaker 5: because there's been a lot of turmoil for UK assets.
Speaker 5: Now this is probably not only a UK story, but
Speaker 5: they're definitely at the forefront of this global route sparked
Speaker 5: by I guess latest threats of tariffs and worries that
Speaker 5: inflation will remain elevated in the US for longer than expected.
Speaker 4: Yeah, yeah, absolutely.
Speaker 2: I mean, as I'm sitting here in New York and
Speaker 2: you know, there are echoes of a few years ago.
Speaker 2: Because the UK term on in the market is breaking through.
Speaker 2: People in New York and around the world are asking
Speaker 2: what's going on with the UK assets?
Speaker 4: Why invest It seem to be fleeing.
Speaker 2: We're seeing falls in stocks, falls and bonds and the
Speaker 2: pound at the same time.
Speaker 4: All of that adds up to.
Speaker 2: A real lack of confidence in the UK as a
Speaker 2: place to invest.
Speaker 5: Yeah, and of course the global bond sell off is
Speaker 5: unnerving for many reasons. But of course it changes expectations
Speaker 5: on government's fiscal operations. So we're bringing you the special episode,
Speaker 5: this emergency edition of In the City to try and
Speaker 5: understand what it all means for the Chancellor of Rachel Reeves.
Speaker 5: I'm frontin Laqua in the London studio and.
Speaker 4: I'm David Merritt here in New York.
Speaker 5: And today we're discussing how the UK bond sell off
Speaker 5: is putting Rachel reeves economic projects on the brink, and
Speaker 5: with us Phil Aldrich, our senior reporter covering the UK
Speaker 5: economy and of course a regular on in the City. Phil,
Speaker 5: thank you so much for joining us. It's been a wild,
Speaker 5: wild week for UK assets.
Speaker 1: Why that is the question. Why now it's a bit
Speaker 1: of a quandary. And obviously what's been happening is, you know,
Speaker 1: US bond markets have been moving, Donald Trump has been
Speaker 1: spooking people with tariffs. So there's this backdrop of sort
Speaker 1: of less certainty about the outlook, and the UK is
Speaker 1: has been most exposed of you know, the major economies
Speaker 1: to that. We've seen this big increase in bond yields,
Speaker 1: so government boring costs are soaring, and the pound is falling,
Speaker 1: which is indicative of you know, capital flight in the UK.
Speaker 1: So people are losing confidence in the UK assets. So
Speaker 1: why is it happening now, it seems that people have
Speaker 1: or why is it happening particularly to the UK's people
Speaker 1: will investors seem to be sort of taking the making
Speaker 1: a judgment that Reeves's budget isn't going to deliver what
Speaker 1: is necessary both to bring the debt on put the
Speaker 1: debt on a sustainable footing and to bring inflation down.
Speaker 1: And so there seems to be this kind of this
Speaker 1: nervousness now about the outlook. But having said that, it
Speaker 1: seems a little unfair to put the UK right in
Speaker 1: the crosshairs of all this, given that we do have
Speaker 1: a we have a stable government. You know, by comparison,
Speaker 1: you might say France looks like a bit of a
Speaker 1: basket case at the moment, and yet the UK is
Speaker 1: the one that's really getting it in the neck.
Speaker 2: I mean, Phil, I do remember the conversation we had
Speaker 2: when you came on after the budget and I was
Speaker 2: struck at the time. You were pretty surprised at the
Speaker 2: scale of the tax risers and the spending. It blew
Speaker 2: through your expectations. And you said at the time, I
Speaker 2: remember clearly we talked about this question about the headroom
Speaker 2: and we talked about how there isn't really a room
Speaker 2: for maneuver here if there's a bit of a shock.
Speaker 2: And of course back then we didn't know that Donald
Speaker 2: Trump was going to win the election, and yet it
Speaker 2: was a big possibility and and you said, this is
Speaker 2: a risky budget. You know, there's there's not room from maneuver,
Speaker 2: and you know, and lo it came to pass and
Speaker 2: we've seen more turbines and markets in the UK has
Speaker 2: really copped it. I mean, I think you called it right,
Speaker 2: didn't you.
Speaker 1: I'll tell you that one. It may have been one
Speaker 1: of the few times I did. But yeah, the thing
Speaker 1: is the headroom is is very thin. It's the third
Speaker 1: smallest headroom the Chancellor has had since the OBI was
Speaker 1: set up in twenty ten.
Speaker 2: So is that how big mistake you think, like not
Speaker 2: trying to kind of put the country's finances on a
Speaker 2: more stable first thing and find public services. But she
Speaker 2: just didn't give herself enough room for maneuver in the
Speaker 2: world we're in now, I.
Speaker 1: Think I think that was that was clearly a risk,
Speaker 1: and OBR clearly flagged that risk in the in the
Speaker 1: budget in October, and I do think that was an error.
Speaker 1: I mean, if she had gone with the sort of
Speaker 1: more traditional levels of headroom, which would be twenty five
Speaker 1: billion to thirty billion pounds, you know, this was sort
Speaker 1: of you know, pre twenty nineteen levels, then you know
Speaker 1: this would not have eroded. She would have eroaded half
Speaker 1: her headroom. She'd still have, you know, enough to say
Speaker 1: I can meet my fiscal rules. The whole point about
Speaker 1: the headroom is it's a it's a buffer against unexpected shops.
Speaker 1: If you leave yourself nothing, which is you know this,
Speaker 1: as I say, it was the third slimmest headroom ever,
Speaker 1: then you know you are exposing your rules to movements
Speaker 1: in markets like this, and you know, if you're saying that,
Speaker 1: you know what you're trying to provide is fiscal stability
Speaker 1: on which you can then build your growth program. And
Speaker 1: you've created such a such a small buffer that you
Speaker 1: end up creating policy instability because nobody knows how you're
Speaker 1: going to fill this hole. Should markets move against you,
Speaker 1: you may have to raise taxes, you may have to
Speaker 1: do spending cuts. You know that sort of completely undermines
Speaker 1: the sort of edifice of her project.
Speaker 5: Yes, so basically, you know, if you have a lot
Speaker 5: of pain inflicted by these rapidly rising barring costs, if
Speaker 5: you have razor thin buffers, which is what's happening. So
Speaker 5: the fact that the ten year and the thirty year
Speaker 5: really moved makes it so much more difficult for ratral Reeves,
Speaker 5: especially in a week where there's so many bond auctions.
Speaker 5: Why the UK does she need to now just find
Speaker 5: extra money.
Speaker 1: At the moment she does. I mean markets are fickle.
Speaker 1: It could all move back. And obviously, you know, we
Speaker 1: did have a big move in just the days after
Speaker 1: the budget. Actually, in fact, her entire headroom was wiped
Speaker 1: out within about three or four days, and then the
Speaker 1: markets came back in and readjusted again and she had
Speaker 1: much of her headroom was restored. And now they're going
Speaker 1: back again the other way and they've taken away even more.
Speaker 1: So she's now effectively indeficite. She has made it very
Speaker 1: clear that her fiscal rules are non negotiable. They're her
Speaker 1: iron clad fiscal rules. So she is going to have
Speaker 1: to on March the twenty sixth, if nothing else changes,
Speaker 1: when the fiscal update is presented by the OBI, she
Speaker 1: is going to have to have shown that she is
Speaker 1: repairing to some degree or replenishing the full ten billion
Speaker 1: of headroom she had, and that will require tax rises,
Speaker 1: it will require spending cuts, could require well welfare cuts
Speaker 1: as well, but she's going to have to do something.
Speaker 1: At the moment, they're sort of indicating that. You know,
Speaker 1: there's the spending review coming in June, and there the
Speaker 1: indication is that they'd rather do it through just trimming spending.
Speaker 2: I mean, as you're describing it. Therefore, we're talking about
Speaker 2: the kind of the buffeting of this government by by
Speaker 2: the markets. And you've got a story out and your
Speaker 2: first paragraph you say, six months into her job, her
Speaker 2: project is close to.
Speaker 4: Being in tatters. How did it go so wrong so quickly?
Speaker 2: You know, they talk so much in the election campaign
Speaker 2: about stability, fixing the foundation of the economy.
Speaker 4: Is it external shocks here? Is it?
Speaker 2: What's going on globally or is the blame really to
Speaker 2: be do we need to point the thing a really
Speaker 2: at her and her policies.
Speaker 1: I mean, there's a bit of both. But the I mean,
Speaker 1: the reason why that the project is, you know, in
Speaker 1: deep trouble is because the entire project is based on growth,
Speaker 1: generating the returns that will deliver the public finance, the
Speaker 1: improvement in public finances so that you know, you know,
Speaker 1: basically the debt coming under control. Also all of the
Speaker 1: money for public services. I mean, she did forty billion
Speaker 1: of tax rises, which was you know, the fundamental way
Speaker 1: in which we fixed the public services. That's the goal.
Speaker 4: But then.
Speaker 1: Because of the manifesto pledges that you couldn't just do
Speaker 1: broad based tax rises, she's had to effectively put it
Speaker 1: all on business employer, you know, through the payroll tax,
Speaker 1: which is then causing uncertainty and problems for business about
Speaker 1: how that then comes through the pipe. Will it come
Speaker 1: through in higher prices so it consumers like to pay
Speaker 1: more and that's inflationary. Will it come through in squeezing wages?
Speaker 1: I mean, there was these there's been a combination of
Speaker 1: sort of missteps because it's not clear exactly why, but
Speaker 1: obviously they were trapped set by the Tory Party during
Speaker 1: the election and then and then subsequent decisions that were made.
Speaker 1: But you know, ultimately, if she doesn't get the growth,
Speaker 1: it's going to be very difficult to fix the public
Speaker 1: services and all the pledges she's made on not putting
Speaker 1: taxes on working people, you know, that may have to
Speaker 1: be broken in the worst case scenario. And so the
Speaker 1: project does begin to look like it's can unravel.
Speaker 5: And I think it's it's a good reminder that the
Speaker 5: UK is a small, open economy and I think Mark
Speaker 5: Carney had said, you know, it relies on the kindness
Speaker 5: of strangers. This is an economy that's extremely dependent because
Speaker 5: of the amount of debt on foreign buyers of guilt.
Speaker 1: It's not just the debt actually, it's also that we
Speaker 1: have a we have a current account deficit to our
Speaker 1: trade position, so just paying to pay our way in
Speaker 1: the world, we require, you know, a lot of money
Speaker 1: from foreign foreign, foreign investors into the UK.
Speaker 4: So we've got this.
Speaker 1: I mean, in economics they call it, they talk about
Speaker 1: the twin deficit of the budget deficit and the current
Speaker 1: account deficits. So the government cannot find it itself without
Speaker 1: the kind of strange kindness of strangers that those overseas investors,
Speaker 1: and you know, just in general, like business and the
Speaker 1: way that the economy operates, it also needs that money
Speaker 1: from foreign investment as well. So if we if we
Speaker 1: spook those foreign of us, does they either will take
Speaker 1: their money away or they'll say we want to beat
Speaker 1: which we want to charge us a bit of a premium.
Speaker 1: And that's what's happening now because that's why we're seeing
Speaker 1: those borrowing costs going up.
Speaker 2: What's also struck me this week, FIRL is it is
Speaker 2: kind of what's going on in the real economy. We've
Speaker 2: had trading updates from some of the big bell Weather
Speaker 2: retailers talking about Christmas, you know, and it's this contrast
Speaker 2: because a lot of them have said, haven't they looked
Speaker 2: that we had not a bad performance next Mark Suspenser's
Speaker 2: sales up, But then they've thought they've had these very
Speaker 2: gloomy outlooks. They said, look, we're being piled on with
Speaker 2: extra costs from wages from the National insurance hike, uncertainty
Speaker 2: in the future, and that has caused the share prices
Speaker 2: to take to take fright a bit. So it is
Speaker 2: underneath the hood of the economy. There's a lot of
Speaker 2: trepidation from business and is that feeding through to people thinking, well,
Speaker 2: growth is going to be really challenging, and that makes
Speaker 2: Rachel Reeves's whole project much harder to achieve.
Speaker 1: Yeah, there's there's definitely a sentiment as she going on
Speaker 1: in the business world. I mean, in a way, I
Speaker 1: do look back to sort of post Brexit, where there
Speaker 1: was absolute ridiculous level of uncertainty, and you know, we've
Speaker 1: got a very small fraction of that level of uncertainty
Speaker 1: coursed by all these Knix rises in the national living
Speaker 1: wage going up, and obviously what happened is that business
Speaker 1: learned to live with that uncertainty, and this will be
Speaker 1: much easier to learn to live with than Brexit. So
Speaker 1: I'm a bit cautious about the amount of damage that
Speaker 1: all this will ultimately do to the growth potential, but
Speaker 1: certainly businesses are saying that they're worried, and that's it's
Speaker 1: and it's not helping sentiment. So labor does have a
Speaker 1: growth strategy, which is this big investment plan and basically
Speaker 1: the reform agenda to get planning obstacles removed. Probably with
Speaker 1: that it's a sort of temporal issue. You've got in
Speaker 1: the short term, you've got all these tax rises coming through,
Speaker 1: which will inevitably have some kind of dampening effect on growth,
Speaker 1: But then the investment comes through later, so you can
Speaker 1: then get the growth later on. And so the Office
Speaker 1: of Budget Responsibility is forecasting more optimistic growth trajectory in
Speaker 1: the back towards the back end of the forecast. But
Speaker 1: in the short term we're obviously facing this particular conundrum.
Speaker 1: And so people, i mean markets are looking at the
Speaker 1: immediate what's happening immediately, and you know, the budget forecasters
Speaker 1: are looking what's happening what's longer term, And obviously the
Speaker 1: government is trying to think has always been trying to
Speaker 1: think longer term. It's a question of whether they can
Speaker 1: get to that longer term thing without being completely disrupted
Speaker 1: by the market moves.
Speaker 5: It Phil is as soon as you have, you know,
Speaker 5: big market moves and the market it's also almost a
Speaker 5: self fulfilling prophecy, right, And I know you wrote about
Speaker 5: the fact that you have these big move in borrowing
Speaker 5: costs in guilds but also pound and so you just
Speaker 5: have to make sure that investors don't completely lose faith.
Speaker 5: There's been a lot written about the speed of the
Speaker 5: moves and the fact that it was a little bit
Speaker 5: like the Loose Trust mini budget and that was like
Speaker 5: a horror show. Is the market much better placed now
Speaker 5: in terms of being strengthened since that budget or is
Speaker 5: it more like the nineteen seventies deck crisis.
Speaker 1: Well, Martin Wheel's the former Bank of England rate center
Speaker 1: who's drawn this nineteen seventy six analogy when the UK
Speaker 1: went to the IMF for a three point nine billion
Speaker 1: dollar loan. Obviously, the issue here is whether you know
Speaker 1: markets aren't going to basically just turn against the UK entirely.
Speaker 1: I mean, I'd be cautious to say either scenario is
Speaker 1: the outlook at the moment, because we had huge short
Speaker 1: term movements and they and they kind of catalyzed into
Speaker 1: massive catastrophes through the LDI crisis that we had. We're
Speaker 1: having smaller moves now. It's kind of orderly, I mean,
Speaker 1: as what I think at Deutsche Bank, ever, nota the
Speaker 1: foreign exchange desks suggested or they were saying that in
Speaker 1: a way, the fact that this is not an acute
Speaker 1: crisis like liz Trust, it is kind of worse because
Speaker 1: it's actually saying people are genuinely worried about some of
Speaker 1: the under underlying dynamics in the UK economy. But it
Speaker 1: does mean, it does mean that you can get this
Speaker 1: kind of chronic picture for you know, the UK trajectory,
Speaker 1: which can which which can then become a dominant narrative.
Speaker 1: But that's not as dangerous in terms of immediate risks
Speaker 1: as a kind of complete acute catastrophe overnight, which can
Speaker 1: absolutely as we saw in twenty twenty two, you know,
Speaker 1: destroy a premiership.
Speaker 2: Yeah, in some ways, are we still kind of living
Speaker 2: I mean, you know, after Chison I took over and
Speaker 2: Jeremy Hunt, they talked a lot about repairing the damage
Speaker 2: to Britain's reputation internationally from the trust to backle and
Speaker 2: you know what was it called the Moron premium on
Speaker 2: not UK bonds and all that, and that seems to
Speaker 2: have worked. But is the revival of these questions. Are
Speaker 2: we still kind of seeing the legacy of that, shaking
Speaker 2: of the foundational belief that Britain is a good place
Speaker 2: to invest.
Speaker 1: At the moment, you can't help but think that, right,
Speaker 1: I mean, the UK has historically been a safe Haven
Speaker 1: and suddenly you have that trust situation where you know,
Speaker 1: we can mess things up so badly that it causes
Speaker 1: a massive market panic, and you know, for a brief period,
Speaker 1: you know, George Osborne in twenty ten used to say,
Speaker 1: We've got to worry about our you know, our sovereign
Speaker 1: position because we you know, there's a Greek debt crisis
Speaker 1: and we could be like Greece. And it always seemed
Speaker 1: like a lot of nonsense and a lot of politics,
Speaker 1: and suddenly, you know, for a brief two week period,
Speaker 1: we kind of did look a little bit like Greece,
Speaker 1: and so that might have changed people's the way people
Speaker 1: view the UK. So I don't think it definitely don't
Speaker 1: think it has helped the problem with labor is that
Speaker 1: labor is always you know, starting off on the back
Speaker 1: foot with markets, and financial markets will be less sympathetic
Speaker 1: to policies that they undertake. So should the Tories have
Speaker 1: done exactly the same thing, it could be pretty sure
Speaker 1: that they would not be getting as sharp a backlashes
Speaker 1: as labor are just because of the history. Really, so
Speaker 1: it does make it just does make life a little
Speaker 1: bit more difficult for us and co.
Speaker 5: So feel going forward because of the market moves. Basically
Speaker 5: this week, it basically wiped out the spending buffer of
Speaker 5: around nine point nine billion pounds that Rachel Reeves has.
Speaker 5: Does it I mean if it continues, you she'll have
Speaker 5: to find extra money. Do we have an emergency budget budget?
Speaker 5: Is it too soon to say? And if we do
Speaker 5: have something that she needs to do quickly. She's ruled
Speaker 5: out tax hikes, so does she just have to cut spending?
Speaker 1: Yeah, So that in the moment they're doing the spending
Speaker 1: review conversation, So the departments are seeing Darren Jones at
Speaker 1: the Treasury. He's the chief secretary who helps set their budgets,
Speaker 1: and the message effectively is that the spending envelope which
Speaker 1: was set in the October budget cannot go higher, but
Speaker 1: it certainly can be smaller, and if they need to
Speaker 1: find a few billion quit, they can just basically trim
Speaker 1: it from the sort of you know, I think it's
Speaker 1: about seven hundred billion pounds of departmental spending and your
Speaker 1: departmental spending, so you know, in that scheme of things,
Speaker 1: it's not an awful lot of money. Personally, I would
Speaker 1: I would not be surprised if we see some fiddling
Speaker 1: of the aid budget, which has already dropped from two
Speaker 1: point seven to zero point five. And they obviously need
Speaker 1: to increase defense spending, so you know, they can some
Speaker 1: I don't know if they can change the accounting treatments
Speaker 1: and move more of it, you know, just move money
Speaker 1: out out of aid into defense. But they'll be looking
Speaker 1: for painless ways of doing this because one of the
Speaker 1: problems that you hear from you know, investors is that
Speaker 1: in a market financial market investors, is that there is
Speaker 1: a there was potentially a credibility problem if they just
Speaker 1: try and cut departmental spending, because that was exactly the
Speaker 1: fiscal fiction that nobody, nobody believed that the spending trajectories
Speaker 1: from the March budget. When Hunt did his final budget
Speaker 1: for the Tories, no one believed those spending trajectories. And
Speaker 1: that's what Labor had to fix, and that's what the
Speaker 1: forty billion pounds of tax risers was for. If you
Speaker 1: go back, if she pushes back and says, actually, now
Speaker 1: we're going to do We're going to cut those budgets
Speaker 1: from where we've put them in October, the markets may
Speaker 1: just think this is nonsense. You know, it's another physcical fiction,
Speaker 1: wer credibility. We're not gonna that's not gonna wash, and
Speaker 1: we're going to still turn against you because what you're
Speaker 1: doing is trying to trick us. And I think, you know,
Speaker 1: we've got to this point where you just can't trick
Speaker 1: the markets any any longer. They're kind of they've reached
Speaker 1: the end of the tether.
Speaker 2: Yeah, we'd say, obviously we've heard some you know, attempts
Speaker 2: to calm the markets, and you know, the Chief Treasury
Speaker 2: is saying that, you know, the market moves are all
Speaker 2: in all this stuff. But on the politics of this
Speaker 2: as well. The chance has gone off to China, hasn't
Speaker 2: she on a on a trip, and some discussion about
Speaker 2: whether that was the right thing to do.
Speaker 4: I I hesitate a.
Speaker 2: Little bit of I'm going to say anyway about remembering
Speaker 2: Kusa Quat and going off to Washington at the height
Speaker 2: of the trust to AKM. Of course, on his way
Speaker 2: back he didn't have a job. I don't think. I'm
Speaker 2: assuming you don't think we're quite there yet. But you know,
Speaker 2: is it wise the chance to fly to the other
Speaker 2: side of the world when the markets are convulsing like this?
Speaker 1: I mean, I don't think it's I don't think I
Speaker 1: don't think it's a problem. It's because it's not acute.
Speaker 1: It's because it's not like trusts. I don't think it's comparable.
Speaker 1: I mean, actually that that nineteen seventy six analogy is
Speaker 1: it's similar because Dennis Healy was on his way to Washington,
Speaker 1: he was the chancellor in nineteen seventy six, and he
Speaker 1: had to turn around at the airport and head back
Speaker 1: to the Labor Party conference at the time and tell
Speaker 1: them that they're going have to tighten their belts.
Speaker 4: But the.
Speaker 1: Yeah, I think she should go to China and she
Speaker 1: should be looking, you know, they should be looking beyond
Speaker 1: this because this is this is something which can be
Speaker 1: addressed in coming days. Obviously, you know, on Monday, if
Speaker 1: the market's convulsed massively, she should be back in time
Speaker 1: to deal with that.
Speaker 2: But you know it's I mean, just come back to
Speaker 2: your story field. You know, the project is close to
Speaker 2: being in tatus. If it becomes to be in tatus,
Speaker 2: can she can our first female chance to eight hundred years,
Speaker 2: survive in this job much longer?
Speaker 4: Has she become a victims.
Speaker 1: It's a good question. One question I've been asking myself
Speaker 1: if everything I mean, if the markets go app to
Speaker 1: turn absolutely violently against them and they have to rip
Speaker 1: up their manifesto commitment and actually start raising taxes. I mean,
Speaker 1: this is an extreme scenario which I don't think anybody
Speaker 1: thinks is going to happen, but it should that happen.
Speaker 1: Would she would she would? She be the sacrificial lamb again? Yeah,
Speaker 1: I don't know. You look back to nineteen seventy six
Speaker 1: Dennis Healy, he survived as chancellor for another three years.
Speaker 1: Labour doesn't have a track record of chopping and changing
Speaker 1: like the Tories do with their leaders. You know several
Speaker 1: know how many chancells it was, But I mean who's
Speaker 1: and who's there? Who would who would replace her? I mean,
Speaker 1: if Cooper might be a reasonable choice, I mean the others.
Speaker 1: I mean Analyst Dodds was ke Salmer's first choice for
Speaker 1: Chancellor in opposition, but he replaced her. You know Ed
Speaker 1: mullad Band Obviously he's a former Labor leader, so he
Speaker 1: potentially could do it. But you know, it's not clear
Speaker 1: that there's anyone better than racial Roaths.
Speaker 4: Bill.
Speaker 1: Thank you so much, Thanks very much, thanks for.
Speaker 5: Listening to this SPONUS edition of the In the City
Speaker 5: podcast from Bloomberg. It was hosted by me front Sine
Speaker 5: Lackwell with Dave Merritt, produced by Somersaudi production support from
Speaker 5: Moses and Em and sound designed by Blake Maples. Special
Speaker 5: thanks to Phil Aldrich. Please subscribe, rate, and review wherever
Speaker 5: you listen to podcasts.