Chapter 1: What is the main topic discussed in this episode?
Good morning from the Financial Times. Today is Wednesday, May 13th, and this is your FT News Briefing. UK gilt investors don't get to choose the country's next prime minister, but they are certainly making their voices heard. And some new numbers show just how tough things are for Blue Owl right now. Plus US inflation? Woof.
So far, since the Iran war began, households spent about $37.9 billion extra on gas as a result of the conflict.
I'm Mark Filippino, and here's the news you need to start your day. Hi, Ian.
Chapter 2: Who do UK gilt investors want to lead Britain?
Hey, Mark. Ian, let's talk about this idea of the bond market communicating through sell-offs, this idea of bond vigilantes. We've seen this in the past with former Prime Minister Liz Truss in 2022 when the bond market went through a massive sell-off and forced her to resign. What is their deal?
So this idea of bond vigilantes really describes the pressure that the bond market can put on a government through the fast rise in borrowing costs that I've described there. So at a certain point, these borrowing costs, if they continue to rise, will reach a level where they'll force the government to change tack. as effectively happened in 2022 with Liz Trust, as you mentioned.
So that is a moment when the bond market says, I've had enough. There's too much risk here. We're going to have to demand a lot more compensation to lend to you to a level that that becomes really problematic for the government and it has to respond.
Now, we should say that UK bonds weren't in a great place even before Starmer's leadership crisis, right?
Yeah, they certainly have been since the outbreak of the Iran war. What we've had now in the gilt market is a inflation shock coming from oil prices surging above $100 a barrel, mixing with a political shock as investors brace for the potential end of the premiership of Sakir Starmer. And the combination of those two things has forced up UK borrowing costs.
And investors have a list of priorities of the people they would prefer replace Starmer if he were to go. Lay out who the candidates are right now and which ones bond investors do prefer.
So we've conducted a kind of straw poll of big bond fund managers for who they would think would be the most market friendly, most market unfriendly of the potential challenges to secure Starmer in a leadership race. Of the 10 fund managers that we spoke to, nine said that Wes Streeting, the health secretary, would be the most market friendly.
He's viewed as a status quo centrist who might continue with the fiscal adjustment that is being conducted by Starmer and his chancellor, Rachel Reeves. The problem with Streeting is that he's not hugely popular in the parliamentary Labour Party and investors recognise this. He's viewed as close to Starmer, so less of a break from the current regime.
And the candidate seen as the most market unfriendly is Andy Burnham, currently the mayor of Greater Manchester. And he's someone that most investors in the market are more fearful of.
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Chapter 3: What are the implications of the bond market's reaction to political changes?
What impact could these higher fuel prices have on the economy down the line?
Well, this brown tracker, it's about the impact we've seen so far on gasoline and diesel prices. But if prices remain this high, you'd expect to see the impact seep through other areas of the US economy. For instance, food prices. A big aspect of those is transportation costs. Another impact of those is fertilizer prices, which have also soared as a result of the Iran war. So
If the war continues, in the months ahead, we'll see goods such as food impacted too.
Okay, so the war has caused inflation to skyrocket, and higher prices could ultimately lead to lower economic output. Can you explain this domino effect and how big of a hit to gross domestic product we could see?
So before the conflict began, you know, most people thought the Fed was going to cut interest rates by a quarter point twice this year. Now that we've seen inflation surge, that's off the cards. Now, lower interest rates mean more demand. That means more output in the US economy.
And without that increased demand and the boost that interest rates are going to give you, economists are predicting both at the Fed and elsewhere that something like $200 billion in lost output.
Wow. So you have this perfect storm here of a massive amount of lost output plus higher fuel prices, higher prices generally caused by the war in Iran. This is really tough for President Trump, who ran in 2024 on affordability. Given the economic impact that we're talking about, how big of a problem is it for him and the Republican Party in the run-up to this fall's midterm elections?
You know, I'm not a politics reporter, but it's certainly my impression that the affordability crisis was something that hit the Democrats very hard in 2024. And in light of that, I'd be very surprised if it doesn't impact Republicans again at the polls for the midterms in November.
Claire Jones is the FT's U.S. economics editor. Thanks, Claire.
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