This week

From gilts to quilts, it’s been another busy period for domestic markets this week, with the combination of government turmoil and a potential winter fuel crisis leading investors to run for cover, in more ways than one.

Tuesday saw the British Retail Consortium (BRC) release its annualised retail sales data, painting a rather interesting picture of consumer behaviour, as shoppers anticipate what could be a very difficult winter. The report showed that consumer confidence continues to fall, highlighted by consumers shying away from large ticket items such as new computers, TVs and furniture. Interestingly, the data also hinted that many households are already preparing for higher energy costs this winter, with blankets, warm clothing, socks, and energy-efficient appliances all selling well.

High Street retailer, Argos, also confirmed the trend this week, remarking that they have seen a 342% increase in electric blanket enquiries, presumably from consumers looking to save on their heating bills. Even candles have been proving popular, especially after news of possible winter blackouts, seeing a near 10% rise in sales compared to this time last year.

Ironically such spending can’t hold a candle to the £65bn outlay on gilts the Bank of England has embarked on over the past few weeks. In an attempt to act as a safety blanket for both government borrowing costs and the pension space, the BoE has been buying long dated gilts up in a programme that is set to end on Friday 14th.

With the deadline looming, the end of the week really started to warm up as news emerged that the government was considering a U turn on some of the measures in its "mini-budget" that triggered the historic slump in gilts back in September. Whilst both consumers and investors have seemingly spent the previous month looking at everything from down jackets to down markets, the end of the week did at least offer some solace.

With Chancellor, Kwasi Kwarteng, reportedly flying back early from IMF meetings in Washington to receive his marching orders in favour of Jeremy Hunt, and with the PM now deliberating whether to scrap parts of the £43 billion in unfunded tax cuts he had previously announced, gilts staged something of a rally. Yields on 30-year government bonds, which have borne the brunt of the recent sell off were 33 basis points (bps) lower at 4.56% but remained around 80 bps higher than before Kwarteng’s announcement in late September.

Global markets also joined in the relief rally, especially in the US, as stocks surged to close more than 2% higher on Thursday. Having fallen earlier in the day after mixed inflation data, the S&P 500 enjoyed its biggest intra-day swing since the 24th January. Consumer Price Index data rose more than expected in September to 8.2%, as rents surged by the most since 1990, spurring core inflation to its highest annual rate in 40 years.

Although fuel prices fell by 4.9%, they were more than offset by rises in new car prices as well as insurance, household furnishings and airline fares. Interestingly, grooming and beauty costs also rose significantly, still, we all have our quilty pleasures.

Next week

Kwarteng having been spotted in Arrivals at Heathrow Airport, but according to all accounts, soon to be in the departures lounge at Westminster.

With his original Budget announcement having had a profound impact on the mortgage market, with many providers having withdrawn their products due to market instability, it will be interesting see what impact this has had on the overall housing market. Monday should give us some clues as Rightmove releases its Housing Price Index data, detailing the change in the asking price of homes for sale on its website. Although this acts as the UK's earliest report on housing inflation, the data actually tends to produce a relatively mild impact due to asking prices and selling prices not always being correlated.

With China’s 20th Communist Party Congress also landing next week, we can expect to see heightened volatility in Asian markets as President XI Jinping is widely expected to clinch his 3rd 5 year stint in charge, setting out his vision for the world’s second largest economy. Tuesday will also see China’s quarter on year GDP figures released. GDP is so important to economists as it acts as the broadest measure of economic activity and the primary gauge of the economy's health.

With the government’s search for a new Chancellor perhaps setting the tone for the coming week, domestic inflation data, released on Wednesday, could at least give those over in the Bank of England (BoE) some respite. With annual inflation sitting just below 10% and the cost of living crisis really having an adverse effect on the consumer, many will be hoping that it will be the BoE that will be reaching its own terminal rate soon.

The information in this blog or any response to comments should not be regarded as financial advice. If you are unsure of any of the terminology used you should seek financial advice. Remember that the value of investments can go down as well as up, and could be worth less than what was paid in. The information is based on our understanding as at 14 October 2022.