Reeves’ income tax U-turn shocks markets as longest-ever US shutdown ends
Rachel Reeves sent the markets into shock with a sudden decision to ditch plans to raise income tax in the autumn budget, instead opting to tinker with the thresholds at which the different rates kick in. The move hit investor confidence hard, sending government borrowing costs soaring and stocks tumbling on Friday.
Even though reports suggested the U-turn was thanks to improved forecasting from the Office for Budget Responsibility that narrowed the hole in public finances by £10 billion, investors saw things differently.
“The market thinks [the government] lacks credibility in terms of filling the black hole and raising headroom,” said Neil Wilson, a UK investor strategist at Saxo Markets.
The chancellor’s change of heart came at the end of a week of economic data that makes her challenge of boosting growth all the greater. Unemployment climbed to 5%, the highest since 2021, as companies held back on hiring amid spiralling costs and worries about the upcoming budget.
Official data released on Thursday showed growth across the UK economy had slowed to a near standstill in the third quarter, as weakness in manufacturing and faltering consumer demand dragged on output.
Meanwhile, across the Atlantic there was at least something to cheer. The longest government shutdown in US history was finally brought to an end following a narrow vote in the House of Representatives. Donald Trump signed off on a new funding package, ending a 43-day stalemate that had seen workers furloughed, welfare services disrupted and air travel thrown into chaos.
Let’s dive in to take a closer look at thes and other stories making the headlines in the last few days.
UK unemployment rose to its highest level in four years, with the number of payrolled employees falling and wage growth slowing ahead of the autumn budget. ·Danny Lawson – PA Images via Getty Images
The eye-watering figure for October, published by funds network Calastone, represented a threefold increase from the previous month. It also represented the longest unbroken run of net selling since the Brexit vote in 2016, at five months.
Talk of an AI bubble forming in stock markets has rattled investors, as big-name tech companies invest heavily in this space and have seen their share prices surge higher. According to Edward Glyn, head of global markets at Calastone, the other force driving investor behaviour is concern about the anticipated tax implications of chancellor Rachel Reeve’s budget on 26 November.
“For some, it’s a simple matter of crystallising capital gains in case rates go up,” he said, adding that this drove a “huge uptick” in selling this time last year.
Economic and political uncertainty have fuelled demand for gold (GC=F) as a safe-haven asset this year, propelling prices to record highs. Central banks lowering interest rates has also supported prices, as this reduces the opportunity cost of holding the precious metal, as a non-yielding asset.
Gold reached a record high of over $4,380 an ounce in mid-October, but then fell sharply as US-China trade tensions eased and investors booked profits from the rally amid concerns about overbuying in the market. An end to the US government shutdown this week and dialled back expectations of a December rate cut by the US Federal Reserve weighed on prices on Friday, with gold futures sliding nearly 3% to $4,075 an ounce at the time of writing.
Despite the recent slide, most of you believe the gold rally is far from done.
The cyber-attack that stopped production at Jaguar Land Rover contributed to a slump in the manufacturing sector that weighed heavily on third-quarter growth. It was partly to blame for an unexpected 0.1% contraction in GDP in September.
The data comes as chancellor Rachel Reeves prepares to raise taxes in her upcoming budget to help plug a gap in the public finances of as much as £30bn. The planned fiscal tightening threatens to weigh further on an economy already showing signs of strain, with unemployment now at 5% and hiring slowing across key sectors.
In this week’s Behind the Brand feature, Rod Gilmour meets Steph Vass, co-founder of The Agency UK (TAUK), a five-year-old platform that lets experienced local estate agents run their own businesses.
A conversation with Vass is littered with both property market statistics and plenty of enthusiasm about how she is challenging the industry. “I am fiercely passionate and proud to be an estate agent,” she says. “For far too long it hasn’t necessarily been a career that people can feel that way about and we constantly feature in the top five most-hated professions.
“I believe we are going to change the way the British public feel about estate agents and that it can be done in a credible and personal way.”
The labour market continued to lose momentum in the three months to September, in yet another blow to the chancellor ahead of her autumn budget.
The gloomy data will no doubt amplify calls for measures that support job creation, retraining, and business investment. It also makes a Bank of England rate cut in December more likely.
Alice Haine, a personal finance analyst at Bestinvest by Evelyn Partners, put the disappointing numbers down to “rising employment costs, economic uncertainty and trepidation over the future direction of tax policy”, all of which had put the brakes on hiring.
“With the autumn budget looming and scant positive economic data to latch onto, employers are understandably cautious about expanding their workforce as they brace for potential tax increases,” she added.
The central bank’s proposal would introduce a temporary £20,000 cap on individual holdings of what it calls “systemic stablecoins” – digital tokens designed to maintain a stable value that are usually pegged to a national currency such as the dollar or the pound. It is part of a wider consultation running until 10 February, is intended to manage potential risks as stablecoins become part of the mainstream financial system.
The BoE’s concern is that if too much money flows out of traditional bank accounts and into digital tokens, it could undermine banks’ ability to lend.
But critics say the £20,000 limit could stifle innovation and push users toward US dollar-based stablecoins such as USDT or USDC, both widely available on global crypto platforms.
The good news is we’re living longer, thanks to huge leaps forward in modern medicine. The bad news is that means saving enough money for a comfortable and more lengthy retirement becomes more of a challenge. Funding a 30-year retirement sounds daunting, but the earlier you can get started the better: How to plan for a 30-year retirement (and why you may have to)
The rumour mill is in full swing with predictions that the government plans to introduce property taxes and mansion taxes, abolish stamp duty and double council tax. None of this will be confirmed until 26 November, but the uncertainty creates an opportunity. While no-one likes uncertainty, but it does create opportunity for those willing to take a risk.
“When sentiment dips, competition tends to ease and some vendors, particularly those who need to sell now, are keen to agree a deal quickly and are therefore more willing to negotiate on price,” says Claire Whisker, founder of First In The Door:Why buying property before the budget might bag you a bargain
Economic data: The highlight of the week for UK investors will be Wednesday morning when official inflation data is released. The annual inflation rate remained steady at 3.8% in September, unchanged from the previous two months and below expectations of 4%. Analysts see this dropping slightly in October, potentially opening the door for a Bank of England rate cut. The retail price index will also be published on Wednesday, as will Eurozone inflation figures.
On Thursday, attention turns to the US where data on property sales and jobless claims will give some clarity on the state of the world’s biggest economy. After the government shutdown left the Fed flying blind in a data vaccuum, these key releases may finally provide some clues as to the likely direction of monetary policy.
The closely-watched S&P global manufacturing and services PMIs will round off the week on Friday. Look out too for UK retail sales data.
Company earnings: Nvidia (NVDA) earnings will be the big focus for investors in the week ahead, with a number of other companies across of a range of sectors also due to report.
Shares in chipmaker Nvidia have recently come under pressure over continued concerns about tech stock valuations and a potential AI bubble in markets. Expectations are high around Nvidia, which is currently the most valuable listed company in the world, so investors will be poring over its latest quarterly figures.
Another major US company due to report is Walmart (WMT), which as one of the world’s largest retailers, is considered to act as a barometer for consumer sentiment. Ahead of the results, Walmart announced that CEO Doug McMillon plans to retire at the end of January after more than a decade in the role.
On the London market, investors will be keeping an eye on half-year figures from engineering service firm Babcock International (BAB.L), which has seen its share soar this year expectations of increased government spending on defence.
Tobacco giant Imperial Brands (IMB.L) is another FTSE 100 (^FTSE) company set to report, with investors hoping the company can match guidance in its full-year results.
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