When Britain crashed out of the European exchange rate mechanism on Black Wednesday, prime minister John Major phoned the Sun editor Kelvin McKenzie to ask how the day’s events would be covered. McKenzie is said to have responded: ‘Prime minister, I have on my desk in front of me a very large bucket of shit which I am just about to pour all over you.’ With the Bank of England ending its emergency support for pension funds this afternoon, what newspaper editors are saying about the present Prime Minister by market close could come down to the ebbs and flows of these six graphs:
1. It’s all about gilts.
Yesterday gilts were going in the right direction. Five-year yields finished the day 0.31 percentage points lower than where they started. Ten-year yields dropped even more. As Ross Clark reported yesterday, this was probably down to confidence that pension funds had offloaded the gilts they needed to raise cash in the nick of time. Perhaps they had heeded Bank governor Bailey’s ‘you’ve got three days left now. You have got to get this done’ warning. Despite this, yields are still far higher than where they have been for most of the year. It shouldn’t be long before we know what direction they’ll travel in today.
2. Don’t forget the pound.
The pound has been all over the place since the mini-Budget. After falling to an all-time low of just above $1.03 following the budget, it recovered almost all of its losses. A couple of week later, it has been one of only a handful of currencies that had gained against the dollar. But then, after governor Bailey’s message that the gilt buying would stop, it crashed again. Now, it’s at a near-week high. What the pound does in the next few days could be the clearest sign of market confidence we have.
3. Growth, growth, growth?
With almost every forecaster in the City predicting recession in the coming months it’s important to keep an eye on where GDP goes. Truss and Kwarteng are targeting 2.5 per cent growth in the long term. But has the fact this is a long term plan been communicated clearly? If they make it that far they’ll be judged on what growth does next year, and for them, the forecasts are not looking good.
4. Is this just a UK problem?
It’s not just the UK economy that finds itself in hot water. Gilt yields have been rising sharply in the US and Germany too. American 30-year mortgage rates hit 6.8 per cent this week – their highest level in 16 years. The cost of producing goods in German industry soared some 46 per cent in August. The truth is a lot of the international turmoil would have caused problems in the British economy anyway. Kwarteng just made it worse.
5.Polling numbers are the most important.
Perhaps more importantly for Truss’s fate is the effect the market reaction has on the poll numbers. She started her term in office with a negative opinion rating and Labour has an average poll lead of 27 points. In some polls yesterday the gap was in the 30s. It’s those numbers more than any other that could spook the Tory party into acting against her.
6. If Truss were to go who, would replace her?
It was reported last night that senior Tories are gearing up for a Rishi Sunak and Penny Mordaunt ‘unity’ ticket. This would be not so much in the hope that they’ll turn the polls around and win the next election, but that they’ll lead to a loss that isn’t so great as to finish off the party for good. That would be in line with what gamblers think. Sunak is the current favourite to replace Truss with a 26 per cent chance. Mordaunt is fourth with a 13 per cent chance. One other market to keep an eye on: some bookies are offering 6 to 1 odds that a 60p lettuce with a ten-day shelf-life will outlast the PM.
One last possibility to consider: that markets have, to some extent, priced in reversals to much more of Truss and Kwarteng’s ‘mini-Budget’. The Bank, too, has been far from clear whether it really will pull its support for the borrowing markets. So if the markets get what they expect, and pension funds receive further central bank support, all these graphs could move in the right direction. But this is all far from certain. Today we’ll learn if markets may yet force the government and the bank’s hands.
You can track all the graphs mentioned above on the Spectator’s data hub.
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