James Smith of ING argues UK bond markets are being driven more by inflation, oil prices, and Bank of England policy than by leadership politics, even as a possible Labour leadership contest creates fiscal uncertainty.
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In this Reuters Macro Matters segment, the discussion centers on how a potential change in UK political leadership could affect the economy and gilts. The interviewer frames the situation around a possible challenge to Keir Starmer’s leadership by Andy Burnham, with Wes Streeting also mentioned as a possible contender, against a backdrop of a weaker-than-expected UK labor market and fresh inflation and cost-of-living concerns. James Smith, identified as a developed markets economist at ING, says the latest unemployment data should not be overread because it has been volatile, but he sees the broader UK jobs market as fragile: hiring and employment are falling, wage growth has slowed, and service-sector surveys have softened. …
Near term, UK bond pricing looks more sensitive to oil and inflation prints than to Westminster drama. The immediate risk is any escalation in Middle East tensions or fiscal looseness that pushes gilt yields higher.
Over the next several weeks, the base case is that gilts will follow the inflation trajectory and Bank of England repricing more than leadership headlines. A shift in the view would require either clearly softer inflation that pulls yields down or a leadership platform that materially changes borrowing expectations.
The structural message is that UK rates remain a macro-inflation regime, not a pure political regime. Bond markets will keep forcing fiscal discipline because energy shocks and credibility risk still dominate the long-run pricing of UK debt.
The UK jobs market is still in a fragile place despite the latest unemployment volatility.
Smith says not to overread unemployment but notes hiring/employment are still falling and wage growth has slowed.
The UK enters the Iran/oil crisis from a slightly fragile economic state.
He links weak labor data and softer services surveys to vulnerability heading into energy shock risk.
An Andy Burnham government might pursue more investment, social housing, defense spending, and greater state involvement in key industries.
Smith lists the likely policy themes he expects if Burnham becomes leader, while stressing uncertainty.
Let's set the scene for this race first. The rise in unemployment in particular made the UK economy look perhaps weaker than economists thought this week.
Smith says unemployment is noisy and should not be overinterpreted, but the labor market remains fragile, with falling employment, slower wage growth, and softer services surveys.
It looks like the frontrunner in this political contest at the moment is Andy Burnham. What do we know about his economic plans?
Smith says the details are still unclear, but likely priorities would include more investment, social housing, defense spending, and more state involvement in key industries, with possible tax reform.
What can he do to prevent a backlash from bond markets?
Smith says commitment to fiscal rules is crucial, because investors are sensitive to larger borrowing and gilt issuance. He warns no one wants a repeat of the 2022 mini-budget crisis.
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