UK borrowing surges ahead of budget, as Fed rethink hits stocks

The focus in the UK this morning is back to the UK’s debt load. Public sector borrowing jumped to £16.6bn last month, from £13bn in August, the highest level since April. Public sector borrowing may have been lower than economists expected, but it is the third largest September borrowing figure on record and was £2.1bn higher than a year ago. With just over a week to go before the UK budget, it lays bare the dire state of the UK’s finances and borrowing this year is on track to surge above forecasts.

This problem can’t be easily fixed as borrowing is driven by rising benefits levels and higher debt servicing costs. However, questions need to be asked. With quarterly GDP on track to be significantly less than 1% in Q3, all of this borrowing is not boosting UK productivity or growth, which is something the government needs to fix.

The Silver lining

There was some good news deep within the table of government finances. Interest payments were lower than they were in August and current expenditure has trended lower since the surge higher in July. Tax receipts have been broadly stable. However, the UK’s public finances are never a pretty read, and today’s data highlights the complicated plight the Chancellor faces next week, especially since there is a backdrop of rising sovereign bond yields.

GBP recovers back above $1.3000

The pound is back above $1.30 on Tuesday, after testing the air below this key level on Monday. The dollar ascendency may take a pause today, as global sovereign bond yields outpaced US Treasury yields. The prospect of a less dovish Fed is not triggering a sharper rise in Treasury yields since they are also attracting a safe haven bid. This is one of the benefits of being a reserve currency: the market can think that your central bank will scale back interest rate cuts, but demand for Treasury yields remain unharmed. The same is not true for elsewhere, which will be keenly felt by Chancellor Rachel Reeves as she puts the final touches to her Budget plans.  

The global bond market sell off

The bond market sold off sharply on Monday, and global sovereign bond yields surged. The 10-year UK Gilt yield rose by more than 8 bps, the French 10-year yield was higher by 12 bps and the 10-year US Treasury yield was higher by 2 basis points. Over the last 5 days, the 10-year US Treasury yield is up by more than 20 basis points. The 2-year yield is back above 4%, and is at its highest level since July, as the market re-thinks the outlook for Federal Reserve interest rate cuts.

Nvidia leads the way as global stocks take a breather

Stock markets across the world sold off at the start of this week, and gold reached a record high.  The Nasdaq bucked the trend and eked out a gain, led by a 4% rise in NVidia’s share price, which reached another record high, and surged to a $3.5 trillion market capitalization. Nvidia’s stock price is rallying because of some bullish analyst calls, and it is also trading with defensive qualities. The big tech companies have a proven track record of resilience to US interest rate hikes, thus, when the market is starting to doubt how far the Fed will cut rates, it’s natural that they out-perform.

Doubts creep in about Fed rate path

There is a growing kernel of doubt that the Fed will cut interest rates at their next meeting on 7th November. The market is currently pricing in an 11% chance of no rate cut next month. Although this may seem small, it was almost unthinkable a week ago, when there was a mere 2% chance of no rate cut, according to CME’s Fedwatch tool. Thus, the prospect of a pause from the Fed is a possibility, as US economic data continues to surprise on the upside. This helped the dollar to rise on Monday, and the dollar was the top performing currency in the G10 FX space. Overall, a shift in Fed expectations and earnings data will be key for market sentiment this week.