Taxing flip-flops

• Many equity markets advanced, led by Europe (+2.8%) and Japan (+1.1%); but emerging markets (+0.4%), UK (+0.2%) and the US and Asia ex-Japan (+0.1%) were more muted (all in sterling terms)
• Gold added +2.1% in dollar terms

• UK bonds sold off (and yields rose): UK Index-Linked fell -1.1%, UK gilts -0.9% and UK corporates -0.6%
• The yen slipped -0.8% versus sterling

The cost of UK borrowing rose sharply by 0.14% at one point last week after Chancellor Reeves reportedly did a U-turn on raising income tax at the Budget. Although unpopular with the electorate, the rising cost signalled that bondholders would prefer policymakers to raise tax revenues to shore up public finances and avoid borrowing yet more to fund public services. The yield on 10-year gilts topped 4.58%. Tax and growth have a tricky relationship: a funding shortfall plugged by tax hikes may lead to weaker growth, in turn creating a further shortfall...and potentially further tax hikes…The Treasury suggested that the U-turn came after a better-than-expected forecast from the Office for Budget Responsibility (OBR). But this flip-flopping didn’t placate bond markets: how else to raise a reported £30bn without Reeves ditching her fiscal rules? The volte-face may have been explained by PM Starmer not wishing to anger the public or Labour MPs after a bruising week.

Apart from a “smorgasbord” of other tax tinkering, it’s likely the chancellor will freeze income tax thresholds beyond 2028, or lower the levels of basic, higher and additional rates of income tax. All remains speculation until the Budget itself.

Despite the OBR’s forecasts, the latest economic data showed UK growth slowed to 0.1% quarter-on-quarter to September – below the 0.2% expected and down from 0.3% growth over the prior quarter. A cyber-attack on Jaguar Land Rover hit car production and contributed to the fall. Month-on month GDP fell -0.1%. Although underlying growth may be better than these headlines, the economy lacks momentum. The services sector is expanding, but more slowly than the previous quarter, the unemployment rate rose to 5% over the quarter to September according to the Office for National Statistics (up from 4.8% in the three months to August) and wage growth is slowing.

Weak data won’t make good reading for the Chancellor but may trigger a December rate cut from the Bank of England. This still looks likely, but the prospect of smaller and messier fiscal tinkering will complicate the BoE’s job as it potentially seeks to offset growth-negative tax rises with rate cuts.

Crucial economic data will start to be released this week after the longest government shutdown in US history – 44 days – came to an end. The reports will provide policymakers an insight into the health of the US economy, in key areas including inflation and the labour market. The data-blackout caused uncertainty. During the shutdown, expectations of an interest rate cut at the US Federal Reserve’s December meeting fell from a near-certain 90% to a 50-50 coin toss today, despite there being no evidence of a strengthening labour market. 

President Trump signed a federal funding bill ending the shutdown after it narrowly passed the House of Representatives in a 222-to-209 vote, following the Senate’s approval. The legislation releases funds to continue government activities until 30 January 2026. But if Republicans and Democrats don’t agree on spending after this date, the government may shut down again. Funding covering food assistance, military construction and agriculture will continue through to 30 September 2026.

• Switzerland nears a US trade deal – Switzerland is close to a trade agreement that could see US tariffs reduced from 39% imposed in August to around 15%. Key Swiss exports affected include watches, jewellery, chocolate and pharmaceuticals
• London IPO pipeline builds for 2026 – Lazard’s UK investment banking head expects a resurgence in large and midcap stock market listing debuts in London in 2026. Potential listings include Visma, Revolut, Monzo and several private equity-owned companies like IVC Evidencia, Ardian and Indurent
• Bank of England softens stablecoin approach – The BoE’s latest consultation outlines a more flexible approach for integrating stablecoins into the UK payments system. The regime is set for implementation next year, aiming to give the UK a competitive edge in digital asset regulation
• Lloyds ranks among UK’s largest private landlords – Lloyds’ living division has over 7,500 homes worth roughly £2bn, spanning one-bed apartments to four-bedroom family houses, emerging as a major force in UK’s private rental market
• UK housing market pauses ahead of Budget – The RICS UK Residential survey for October showed buyers, sellers and landlords are delaying decisions ahead of the Autumn Budget. New buyer enquiries fell to -24% (from -21% in September), the weakest since April. Agreed sales also dropped to -24% (from -17%)
• Dow Jones hits new all-time high – The US index closed at a record high on Wednesday, marking its 16th record close of the year. Nasdaq tech stocks lagged as investors rotated out of higher-valuation tech and into established blue-chip companies
• US corporate earnings growth hit 4-year high – The median year-on-year earnings growth across Russell 3000 companies reached +11% in Q3, up from +6% in the prior quarter
• US small business optimism holds firm – The NFIB small business optimism index dipped 0.6 points to 98.2 in October but remained above its 52-year average of 98. The reading highlighted that businesses owners report lower sales and reduced profits and many firms still struggling to fill job openings citing labour quality being an issue
• US private sector hiring weakens – ADP employment change showed US firms cut an average of 11,250 jobs per week over the four weeks to 25 October. The trend points to slower near-term job growth
• US considers backing 50-year mortgage – The White House is reviewing a plan to support 50-year mortgages to improve housing affordability. The proposal aims to ease pressure from high interest rates and tight housing supply
• China’s Singles’ Day sales – sales during China’s biggest annual shopping period rose +14.2% year-over-year, down from +26.6% growth in 2024, despite retailers starting promotions early in mid-October. This signals more cautious consumer spending amid slower economic growth

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