London Quick Take – 19 September – Sterling gets the treatment as govt borrowing gets out of control

Not out of the woods: The Bank of England left rates on hold...move along nothing to see here was the message. Today’s borrowing figures – showing a huge jump ahead of official forecasts – lays bare the challenge.

Just as well the BoE is slowing gilt sales to £70bn and changing the maturity to sell fewer long-dated gilts to help the debt interest payments for the government. Yields at the long end actually rose, with the 30yr gilt yield touching 5.56%, its highest in a week though some ways off the 5.7% seen at the start of September. It’s picked up again this morning on those debt figs. It seems the market is expecting a slower pace of easing and chief economist Huw Pill wanted to keep the pace of gilt sales at £100bn. And, it will now actively sell £21bn of bonds this year vs £13bn last year

Sterling moved lower off its highs of the day as it was roundly offered and the dollar bid up on higher Treasury yields post-Fed, despite market pricing quite a hawkish outlook of just a one-in-three chance of another cut this year by the BoE. This looks too hawkish – December surely has to be in play if November isn’t. Either way, the BoE is treading a fine line between growth/jobs and inflation that is erring in the direction of stagflation. Let’s hope all these big tech investments from the US will boost not just jobs but also productivity. GBPUSD has been roundly offered today and Wednesday night’s Fed-induced spike looks like it might mark the top of the cycle.

Opinions differ on how deep the Bank goes and how quickly. “I continue to think that there will be some further reductions, but I think the timing and scale of those is more uncertain now,” noted governor Andrew Bailey, who suggested the UK is “not out of the woods” in terms of inflation...you don’t say!

I think they come round to the Fed’s way of thinking – prioritise the jobs market (in the UK it really is creaking badly, whereas in the US it’s more of an argument as to where it stands), and lower those debt interest payments. Bailey added: “We are also seeing softening in the labour market going on, and there is a risk that could, of course, get larger. It’s a risk rather than a central expectation.” I equate this to mean going beyond the 3.6% implied by the market.

The Bank of Japan kept the policy rate unchanged, but said it could raise the policy rate this year and would begin to unwind its holdings of Japanese stock ETFs and Real Estate Investment Trusts (REIT). Benchmark 2-year Japanese Government Bond yields rose to their highest level since 2008, rising two basis points to 0.91%. The Japanese yen strengthened across the board. Initial jobless claims dropped to 231k, surpassing the consensus of 240k and down from 264k. The four-week average remained stable at 240k, while continued claims declined to 1.92 million, edging below expectations of 1.95 million. Unadjusted claims fell by 10k to 194k, exceeding seasonal projections that anticipated a 17k decrease.

Japan's National CPI dipped to 2.7% in August from 3.1% in July, its lowest since October 2024. Electricity and gas prices notably declined, though housing and transport costs rose. Food inflation eased slightly, with rice prices growing minimally. Core inflation matched forecasts at 2.7%, as monthly CPI rose 0.1%.

Stocks

Wall Street rose to fresh record highs yesterday. Palantir rose 5%. European stocks rose Friday to extend their post-Fed gains.

Intel stock soared on news that Nvidia is taking a $5bn stake in the company and will co-design data centre and PC products. The administration had already taken a 10% stake in Intel. Huge changes afoot at Intel, and perhaps a sign of the way things are going with consolidation and cooperation in the tech space – driven by national security and trade policies emanating ultimately from the Trump White House. The US needs Intel or it’s reliant on Taiwan Semi. Ultimately, this could just be the start to greater pooling of resources, harnessing domestic tech and ensuring it remains focused on doing what the government requires of it. Further down the line, a Mag 7 mega-merger maybe, using profits to fund government programmes?

Reddit – one that I think could do well in a world of AI bots and Meta-based fake news – rallied on a couple of price target upgrades. Piper Sandler went to $290 from $210, and Citizens JMP went to $300 from $225.

Bank of America starts coverage of low-cost drone maker AeroVironment with a Buy rating – a big play on the future of defence. 

CrowdStrike – the cybersecurity vendor served up bullish long-term financial targets at its analyst day.