18 October 2022
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Reversal on UK tax cuts improves sentiment

By Daniel Richards

Jeremy Hunt, the new UK chancellor of the exchequer, announced a substantial reversal of the tax cuts outlined by his predecessor, Kwasi Kwarteng, in an effort to ease market anxiety over unfunded tax breaks. The UK government will now only provide its energy price caps until April 2023, rather than the two years initially planned, and will also scrap plans to cut income taxes at the lowest threshold. Hunt will also reversed cuts to taxes on dividends and VAT-free purchases for tourists. According to the chancellor, the pullback on tax cuts will amount to GBP 32bn. There was no apparent change on raising the threshold at which stamp duty on property applies and the chancellor’s statement also outlined that government departments will “be asked to find efficiencies,” in effect, spending cuts. Immediate market reaction to the statement from the chancellor was positive with GBPUSD rising to more than 1.1330 while gilt yields affirmed gains from the start of the day. 

China delayed the release of its third quarter GDP data, due to have been released today, seemingly no to coincide with Chinese Communist Party congress where president Xi Jinping is set to be elected for a third term. Growth is estimated to have come in at a bit more than 3% y/y, better than the near zero growth recorded in Q2 but well off historic levels for China.

The Empire Manufacturing index, which measures industrial activity in New York State, fell to -9.1 for October, well short of market expectations and a third month in a row of contracting activity. There were initial signs of job cuts according to the October index even as the labour market in the US still seems to be riding out the effects of tighter monetary policy.

Today’s Economic Data and Events

  • 13:00 GE ZEW Survey Expectations October: forecast -66.5
  • 17:15 US Industrial production m/m September: forecast 0.1%

Fixed Income

  • Gilt markets were the main event at the start of the trading week as UK government bonds responded positively to the substantial dismantling of prime minister Liz Truss’ economic plans. The new chancellor, Jeremey Hunt, rolled back essentially all tax cuts announced by his predecessor, reducing the hole in public balances. Yields on the 10yr gilt dropped 36bps by the close to 3.957% while the 30yr gilt yield fell 40bps to 4.36%.
  • US Treasures also received a lift overnight, at least on the front end of the curve. The 2yr UST yield dropped 5bps to 4.4433% while the 10yr oscillated but ultimately closed flat at the 4% handle.
  • Emerging market bonds generally had a bullish tone with yields on South African 10yr bonds down 3bps to 11.238% while the 10yr Turkey bond fell 26bps to 12.72%. Indian bonds were slightly stronger, with yields down 6bps to 7.412%.


  • The improvement in sentiment around the UK’s economic plans helped to spark a generally rally in FX pairs against the dollar with GBPUSD leading the way, up by 1.66% to 1.1358. The outlook for the UK economy though still looks soft and it seems unlikely to avoid a recession so bias is likely to still be downward. EURUSD added 1.2% overnight to close at 0.9841 while USDJPY extended its gains at the expense of yen, adding 0.25% overnight to close at 149.04.
  • Commodity currencies showed a decent rally with USDCAD down 1.2% to 1.3716, AUDUSD up by 1.48% to 0.6291 and NZDUSD adding 1.29% to 0.5634.


  • Equity markets enjoyed a strong rally to start the week as US equities bounced off a key technical level. The Dow Jones, the S&P 500 and the NASDAQ gained 1.9%, 2.7% and 3.4% respectively.
  • There were gains in Europe also. In the UK, the moves by the new chancellor helped the FTSE 100 to a 0.9% gain, but this was exceeded by France’s CAC (1.8%) and Germany’s DAX (1.7%).
  • Locally, the ADX dropped -0.4% but the DFM closed flat. Saudi Arabia’s Tadawul ended the day up 1.4%.


  • Oil markets had a choppy day of trading overnight with no material data catalyst. The sentiment from the Communist Party Congress in China seems to support still-restrained activity, and thus weaker oil demand in the short-run. Brent futures closed the day unchanged despite some wider moves intraday, settling at USD 91.62/b, while WTI slipped marginally to USD 85.46/b.
  • A US White House official said that they “don’t see a deal coming together anytime soon” on Iran’s nuclear programme, keeping one source of additional out of the markets.

Click here for charts and tables

Written By

Daniel Richards Senior Economist

Edward Bell Head of Market Economics

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