January 2025
Market Commentary
Once Again, Beware the Headlines
(4 min read)
14th January 2025
Over the last few weeks, the UK media has been on the attack over the sustainability of Rachel Reeve’s fiscal policy. The c£10bn wiggle room the chancellor left in her October budget has all but evaporated and to balance the books she needs either to cut public spending or increase taxation. Commentators from the broadsheets to the BBC and Bloomberg have highlighted the rise in the cost of funding the government deficit as measured by the yield on UK gilts. In addition, the commentary has latched onto GBP weakness. The weakness of the currency and the rise in gilt yields reflect the vulnerability of UK government finances and credibility of the administration’s economic policy.
This should be put into an international context. Since the recent low in bond yields in December, the UK 10-year gilt yield has risen from 4.20% to currently 4.88%, 68 basis points (see Chart 1), reflecting, so the commentators say, a deterioration in the UK’s credit rating and/or a re-pricing for future UK inflation. However, over the same period the US, Canadian, German, French and Italian equivalent have increased by 61, 54, 56, 62 and 60 basis points, respectively. Therefore, this has been a global move in higher bond yields led by the prospect of stubbornly above-target inflation in all developed economies, and a general concern that government deficits could spiral out of control. In terms of currencies, GBP has fallen versus USD from 1.27 to 1.22 over the same period, a depreciation of 4% although this is due to USD strength rather than GBP weakness, with the broader index, DXY, measuring the greenback against all major currencies appreciating by over 6%. GBP has fallen from a 2-year peak by 2% versus the EUR. Hardly a crisis.
Chart 1
UK 10 Year Bond Yield
Chart range 12 months from January 2024 - January 2025.
That all being said, the UK government does deserve criticism for its handling of the economy since coming to office. Firstly, Keir Starmer’s gloomy assessment of the economy when he first took power was very unhelpful and secondly the four-month vacuum between the election and the budget not only caused speculation but a hold on any decision making. The budget itself, with higher taxes, was outside of the ‘spirit’ of the government’s manifesto causing distrust and anti-growth, supposedly one of the administration’s top priorities. Chart 2 below illustrates that after a miserable time dealing with supply chains following the pandemic and the conflicts in Ukraine and the Middle East, since the end of 2023 the UK economy was showing strong momentum into last year’s election. This is measured by the Purchasing Manager’s Index (PMI), a good indicator of future economic growth. It is very noticeable that that strong momentum has dramatically fallen away since the middle of last year.
Chart 2
UK Purchasing Managers’ Index (PMI)
Chart range: 2012 - 2025
Source: JP Morgan, Bloomberg
The recent press coverage on the UK gilt and currency markets reflecting an imminent crisis may be somewhat disingenuous, but Rachel Reeve’s first budget was ideological in nature with higher taxation funding higher public pay settlements and without any growth strategy. The USD is the world’s reserve currency and EUR is the second largest in global circulation and therefore more able to deal with market attacks from vigilantes. The UK does not have this luxury and consequently policy makers will need to address fiscal sustainability and a growth strategy soon before the markets lose patience.
Peter Geikie-Cobb | Head of Investment Research
Montgomery Associates
Glossary of financial terms: www.montgomeryassociates.co.uk/glossary
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