Markets swayed by ‘higher for longer’ message on rates

Today’s top stories

• UK prime minister Rishi Sunak confirmed the cancellation of the northern leg of the HS2 rail project in favour of other local transport schemes. He also announced education reforms and a raising of the smoking age in his keynote speech to the Conservative party conference. Sunak’s strategy makes opposition leader Keir Starmer the real election issue, says UK chief political commentator Robert Shrimsley.

• Kevin McCarthy was ousted as Speaker of the US House of Representatives, becoming the first leader in the history of the lower chamber of Congress to be removed from the position. The move highlights the sharp divides in the Republican party and threatens to bring in a new era of dysfunction in Washington. US national editor Edward Luce laments the return of American isolationism.

• Russia warned it would oppose efforts to reach a global agreement to reduce the use of fossil fuels, setting the course for a clash with the EU and US at this year’s UN climate summit. Sultan al-Jaber, president-designate of COP28, told the FT that the oil and gas industry must prepare for an inevitable “phase down” and not be seen to work against decarbonisation efforts.

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Good evening.

“No one knows when this is going to stop,” said Chris Turner, global head of markets at ING. “It feels like something is going to snap but I’m not quite sure what.”

Despite a partial recovery today after weak US private payrolls data helped temper concerns that continued domestic economic strength meant interest rates would have to stay higher for longer, analysts have warned that the sharp moves of recent days in global bond markets are likely to inflict damage on parts of the financial system. 

The sell-off began after the US Federal Reserve hardened its commitment to the higher for longer approach two weeks ago and was further fuelled by better than expected economic data, raising expectations of a “soft landing” for the economy. 

Prior to today’s payrolls data, bond yields in the US and Europe hit their highest levels for more than a decade.

Benchmark 10-year US Treasuries reached a 16-year high of 4.88 per cent before falling to 4.74 per cent, while German 10-year Bund yields — a benchmark for the eurozone — dropped back to 2.92 per cent after reaching 3 per cent in early trade, the highest level since 2011. Falling eurozone retail sales data today suggests higher borrowing costs are hitting consumer spending.

In the UK, the 30-year gilt yield passed 5 per cent this week, the highest since the aftermath of former prime minister Liz Truss’s “mini” Budget, before falling again. The rise in borrowing costs comes at a difficult time for chancellor Jeremy Hunt as he prepares his Autumn Statement on the public finances, which will take place on November 22.

And in Asia, Japan’s central bank this morning bought $12.7bn of bonds as yields also reached their highest levels in a decade.

The property market is one of the most visible victims of higher yields. US mortgage rates hit their highest levels in almost 23 years last week while home loan applications fell to the lowest point since the mid-1990s. European mortgage holders are also exposed, especially in the UK where interest rates are higher and where there are more people on short-term fixed-rate deals.

Investment strategist Edward Yardeni, the man who coined the term “bond vigilantes” in 1983, writes in the FT today that they are back with a vengeance, challenging Treasury secretary Janet Yellen’s policies by raising yields to levels that threaten to create a debt crunch. 

If yields pass 5 per cent, he says, Yellen needs to tell President Joe Biden that these vigilantes could also wreck his chances of re-election.

Listen to the Unhedged podcast on the “increasingly odd” bond market.

Need to know: UK and Europe economy

UK retail inflation fell to its lowest level in a year in September, according to trade body the British Retail Consortium. Shop prices rose at 6.2 per cent, down from 6.9 per cent. The services sector contracted less than estimated in September, according to updated PMI survey data. The original estimate two weeks ago caused a slide in the pound amid fears of an imminent UK recession.

The European Commission confirmed it was postponing key elements of its environmental policies including toxic chemicals regulation. Germany and France are trying to resolve a stand-off over nuclear power and help unblock reforms to the EU’s electricity market.

The EU is looking at export controls in sensitive technology in semiconductors, artificial intelligence, quantum computing and biotechnology as part of “de-risking” relationships with China and other authoritarian regimes.

The Russian rouble yesterday sank beyond 100 to the US dollar as western sanctions hit export revenues. Russia specialist Alexandra Prokopenko says oligarchs are losing out as Vladimir Putin courts a new class of loyal asset owners.

Ukraine’s accession to the EU would give Kyiv about €186bn over seven years and turn “many” existing members into net payers for the first time, according to modelling seen by the FT.

European house prices had their first annual fall since 2014 in the three months to June after banks increased mortgage rates and tightened lending criteria to put an end to almost a decade of rising house prices in the region.

Need to know: global economy

IMF chief Kristalina Georgieva told the FT she backed reforms that would give China more voting power, warning of “devastation” if the institution did not have enough resources to help struggling countries. Despite its importance to the world economy, China has just a 6 per cent share of the votes.

India and its neighbours are expected to grow more quickly than other regions this year, the World Bank said, “kind of the polar opposite” of China and east Asia. Growth in the south Asia region, including Pakistan, Bangladesh and Sri Lanka, is forecast to be 5.8 per cent, upgraded from 5.6 per cent.

Indian companies are beginning to make forays into Jammu and Kashmir, driving a revival of construction, tourism and entertainment, two years after the government cracked down on the northern territory, home to a decades-long separatist project.

Cars, watches and handbags could be targeted by new anti-money laundering controls in Singapore in the aftermath of a S$2.8bn (US$2bn) scandal.

After a brutal civil war, Ethiopia needs $20bn to rebuild. A Big Read assesses its chances of success.

Need to know: business

The FT revealed that the Premier League was revamping the sale of its TV rights in the UK in favour of fewer, bigger packages to drive proceeds.

Tesco, the UK’s largest supermarket group, raised its profit forecast for the year after a jump in pre-tax earnings in the first six months to £1.2bn.

Chinese electric-vehicle makers’ push into Europe has echoes of how Japanese car companies broke into the US in the 1970s, says Asia Lex editor June Yoon. To compete, European rivals need to drive down production costs using proven technologies, she writes, even if that means early models lack the character of their petrol counterparts.

Company ratings on ESG — environmental, social and governance performance — are coming under intense scrutiny for the first time from regulators and politicians. Here’s an FT deep dive into the debate.

A fall in Covid-19 infections has meant a reversal in fortunes for vaccine makers, with shares sliding on sales uncertainty and questions on their future growth.

The World of Work

UK migration advisers called for the abolition of the “shortage occupation list”, one of the main routes through which employers can hire overseas workers. The Migration Advisory Committee said the current system led to the driving down of wages and exploitation by bosses.

Smashing the class ceiling: the Working It podcast discusses what employers can do on social mobility and ensure people from disadvantaged backgrounds are not held back.

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Some good news

A vaccine-like drug administered once a year to prevent HIV could be ready just after 2030, according to drugmaker ViiV. The prospect could transform management of a virus that has led to the deaths of nearly 40mn people over more than four decades.