Economy

(Reuters) – British finance minister Rachel Reeves plans to raise taxes when she presents her budget in three months’ time, but her options are limited by her promise not to increase taxes paid by “working people”.On Monday, Reeves said the Labour government, which won a landslide victory in the July 4 election, had inherited a hole in the public finances of 22 billion pounds ($28 billion).She has warned that taxes would need to rise in the Oct. 31 Budget, while sticking to Labour’s manifesto commitment that not to raise the rates of income tax, national insurance, value-added tax or corporation tax.Below are some of Reeves’ options:CAPITAL GAINS TAXCapital gains tax raised 15 billion pounds in the last financial year. While worth only around 4% of receipts from all taxes on income, Reeves may try to up that figure.CGT is charged at a much lower rate than the upper rates of income tax, reflecting past attempts to encourage entrepreneurship. But this led hundreds of thousands of people to convert ordinary income into capital gains to lower their tax bill.The Resolution Foundation think tank said Reeves could increase the rates of CGT but soften the blow by reintroducing indexation – meaning capital gains are taxed only after inflation. Together, these measures could raise 7.5 billion pounds.She could also increase tax paid on dividends.INHERITANCE TAXA politically sensitive subject, past governments have avoided major reforms to inheritance tax, which is currently paid after only 4% of deaths, raising about 7.5 billion pounds per year.IHT is paid at a rate of 40% on the value of estates above a threshold of 325,000 pounds – which has not changed since 2009. There are additional allowances for transferring family homes to younger generations.The system has increasingly favoured wealthier families.The Institute for Fiscal Studies thinks 2.7 billion pounds could be raised by making some IHT allowances – which exempt assets like family businesses, farmland, woodland and pension savings – less generous. PENSION REFORMSReeves could tweak pension tax reliefs to raise more money – such as the tax-free lump sum, which enables pensioners to withdraw 25% of their pension as cash without paying tax, up to a value of 268,275 pounds. The IFS estimates that removing this allowance completely could raise 5.5 billion pounds over the long run.She could also reduce the generosity of tax reliefs on pension contributions for higher-rate taxpayers, by introducing a flat rate instead. FUEL DUTYTax paid on motor fuels has been frozen every year since 2011 – except for a temporary cut in 2022/23.Past governments had always in theory planned to raise fuel duty – flattering the outlook for the public finances – but in practice they never followed through, fearing a backlash from drivers.Economists have long criticised this as a fiscal charade which Reeves could end on Oct. 31, burnishing the government’s green credentials in the process. In the March budget published by the previous Conservative government, the latest cancellation of the fuel duty rise cost more than 3 billion pounds in 2024/25.($1 = 0.7792 pounds) More

Standard DigitalWeekend Print + Standard Digitalwasnow $85 per monthBilled Quarterly at $199. Complete digital access plus the FT newspaper delivered Monday-Saturday.What’s included Global news & analysisExpert opinionFT App on Android & iOSFT Edit appFirstFT: the day’s biggest stories20+ curated newslettersFollow topics & set alerts with myFTFT Videos & Podcasts20 monthly gift articles to shareLex: FT’s flagship investment column15+ Premium newsletters by leading expertsFT Digital Edition: our digitised print editionWeekday Print EditionFT WeekendFT Digital EditionGlobal news & analysisExpert opinionSpecial featuresExclusive FT analysisFT Digital EditionGlobal news & analysisExpert opinionSpecial featuresExclusive FT analysisGlobal news & analysisExpert opinionFT App on Android & iOSFT Edit appFirstFT: the day’s biggest stories20+ curated newslettersFollow topics & set alerts with myFTFT Videos & Podcasts10 monthly gift articles to shareGlobal news & analysisExpert opinionFT App on Android & iOSFT Edit appFirstFT: the day’s biggest stories20+ curated newslettersFollow topics & set alerts with myFTFT Videos & Podcasts20 monthly gift articles to shareLex: FT’s flagship investment column15+ Premium newsletters by leading expertsFT Digital Edition: our digitised print editionEverything in PrintWeekday Print EditionFT WeekendFT Digital EditionGlobal news & analysisExpert opinionSpecial featuresExclusive FT analysisPlusEverything in Premium DigitalEverything in Standard DigitalGlobal news & analysisExpert opinionSpecial featuresFirstFT newsletterVideos & PodcastsFT App on Android & iOSFT Edit app10 gift articles per monthExclusive FT analysisPremium newslettersFT Digital Edition10 additional gift articles per monthMake and share highlightsFT WorkspaceMarkets data widgetSubscription ManagerWorkflow integrationsOccasional readers go freeVolume discountFT Weekend Print deliveryPlusEverything in Standard DigitalFT Weekend Print deliveryPlusEverything in Premium Digital More

LONDON (Reuters) -Corporate credit markets shrugged off last week’s equity wobble, setting aside any anxiety about the wider economy, allowing even low-rated firms to raise new debt with ease.For many investors, so-called junk credit is the canary in the coalmine. It is the first to croak if the economy runs into trouble, and it can also amplify any distress by upping fears of cascading defaults, bankruptcies and job losses.But there are few if any signs of that fear right now, which underscores how widespread the ‘soft landing’ consensus is. This also suggests the equity hiccup we saw last week was more about pricey megacaps and Big Tech corrections than a fundamental worry about growth per se.In fact, default rates are falling again. Deutsche Bank points out that trailing 12-month defaults for dollar high-yield bonds fell in June to their lowest point in almost a year – to just 3.1%. The default rate of the weakest “CCC”-rated segment fell for the third consecutive month to its lowest since July 2023.That’s below the 4% average default rate of the past four decades and only marginally above the 2.9% average of the past century, according to Schroders (LON:SDR).  Yield spreads – the U.S. junk bond borrowing premia over equivalent Treasuries – remain close to their two-year lows. At 353 basis points, they’re almost 100bp below levels seen this time last year, and spreads on ‘B’ and ‘BB’ segments are the narrowest they have been since the banking and credit implosion 15 years ago. What’s more, junk bonds are outperforming better-rated investment grade debt for the year to date.    And that long-feared ‘wall’ of maturing debts next year now looks more like a jump-able hurdle, as many companies are having no trouble smoothing out their financing schedules.In fact, many have been able to raise enough new debt to clear the decks ahead of any market disturbance that could arise around the U.S. election later in the year.High yield debt issuers have raised $176 billion so far this year – which is almost 80% ahead of last year’s pace. And the market has had no trouble absorbing this flood of issuance.This is partly because demand for high yield debt is high, but supply of new paper isn’t. Credit analysts at giant asset manager BlackRock (NYSE:BLK) point out that while a ton of high yield debt has been issued this year, only a minimal amount of new money has been raised. A whopping 75% of new debt sales this year have been earmarked for refinancing, the highest level seen in the post-2008 era and more than 10 points above June 2023 levels.Highlighting this ‘pull forward’ in debt sales in both the high-yield and investment-grade markets, BlackRock strategists Amanda Lynam and Dominique Bly reckon management teams are targetting maturities as far out as late 2025 and even 2026 and are keen to avoid any fund-raising difficulties around year-end.”Corporates may be looking to proactively raise liquidity and avoid potential volatility around certain events later this year – such as the U.S. election,” they wrote.REASSURINGLY EXPENSIVE?Is the appetite sustainable?Falling rates without a recession is a powerful combination for anyone wanting to move out of cash and lock in high yields. Some even argue that if you want to avoid Treasuries due to outsize post-election fiscal risks, then corporate credit may be the best middle ground.But some strategists caution that August and September are seasonally unkind to credit markets. And there is a continual fine balance between falling interest rates and recession risks.”Central banks are late – they usually are – making it important that the data hold up,” Morgan Stanley’s credit team told clients. But the U.S. investment bank remains positive and reckons “moderate growth, moderating inflation, moderating policy and robust investor demand” all justify the historical pricing for U.S. credit.”Spreads should be ‘expensive’ given this backdrop, and we think they stay that way,” they said.So while we may see a surge in volatility as the election nears, we’re unlikely to see a similar spike in defaults.The opinions expressed here are those of the author, a columnist for Reuters.(by Mike Dolan X: @reutersMikeD; Editing by Stephen Coates) More

Headline inflation in the euro zone unexpectedly rose to 2.6% in July, the European Union’s statistics agency said Wednesday.
Core inflation, which excludes more volatile energy, food, alcohol and tobacco prices, hit 2.9% in July, which was higher than expected.
The widely watched services inflation print came in at 4% for July, easing slightly from the 4.1% reading of June.

People shopping at the downtown market, Cour Lafayette, in Toulon, on July 27, 2024.
Magali Cohen / Hans Lucas | Afp | Getty Images

Headline inflation in the euro zone unexpectedly rose to 2.6% in July, the European Union’s statistics agency said Wednesday, even as price growth in the services sector eased slightly.
In June, inflation had come in at 2.5%, easing slightly from the 2.6% of May. Economists polled by Reuters had been expecting the headline figure for July to be unchanged from June’s reading at 2.5%.

Core inflation, which excludes more volatile energy, food, alcohol and tobacco prices, hit 2.9% in July, versus a Reuters estimate of 2.8%. The figure compared with a core print of 2.9% in June.
The widely watched services inflation print came in at 4% for July, down from the 4.1% of June.
Harmonized inflation inched higher in several key euro zone countries, including in leading economies Germany and France. In both countries, inflation had been at 2.5% in June and picked up to 2.6% in July.
The inflation rates come just a day after the release of the zone’s second quarter gross domestic product, which the European Union’s statistics office said grew 0.3% in the three months to the end of June.
This was above the 0.2% growth that economists polled by Reuters had expected, and came even as the euro zone’s largest economy Germany reported a 0.1% contraction.

Investors will now weigh how the fresh data will impact the European Central Bank’s trajectory for potential future interest rate cuts. The ECB held rates steady when it met earlier this month after reducing them in June. At the time, it left open the option for another cut in September.
The ECB Governing Council said it would continue to consider the dynamics and outlook of inflation, as well as the strength of monetary policy transmission in its decision-making. It stressed that was “not pre-committing to a particular rate path.”
Julien Lafargue, chief market strategist at Barclays Private Bank, on Wednesday said that the latest inflation figures are unlikely significantly impact the outlook for interest rates.
“While the hotter-than-expected headline inflation could be seen as a setback for the ECB, we don’t think it necessarily changes the narrative. Indeed, economic growth remains subdued — including the Q2 GDP print — which should help inflation remain on a downtrend,” he said.
The ECB could therefore still cut interest rates in September, Lafargue noted. More

Earlier this month, Ukraine announced a preliminary deal with a committee of its main bondholders to restructure its near $20 billion worth of international debt.Prompted by Russia’s 2022 full-scale invasion, it will be its second such rework in a decade following a similar deal after the 2014 invasion of Crimea. A two-year payment moratorium on those bonds expires on Aug. 1.Bondholders still must approve the deal, which they are expected to do, though the technicalities behind it could take weeks.But a short-term default would have a less significant impact on its long-term borrowing prospects than a default with no deal in sight.The proposal would see a 37% nominal haircut on Ukraine’s outstanding international bonds, saving Kyiv $11.4 billion in payments over the next three years – the duration of the country’s programme with the International Monetary Fund, according to government statements. Ukraine also owes a $34 million coupon payment on its 2026 Eurobond due on Aug. 1, with a 10-day grace period. Ukraine’s finance minister Sehriy Marchenko earlier hailed the deal with bondholders. But he also told RBC-Ukraine outlet that the negotiations were not easy, citing “significant differences” in the assessment of the situation Ukraine finds itself in. More

(Reuters) – Benign inflation data and a cooling job market aside, U.S. credit conditions featuring tepid loan demand and stiff terms may also be bolstering confidence among Federal Reserve officials that price pressures are set to ease further, paving the way for interest rate cuts in coming months.U.S. central bankers will have the latest readings from a quarterly survey of bank loan officers in hand as they weigh monetary policy at a rate-setting meeting that wraps up on Wednesday. Although that report won’t be made public until Monday, analysts say other available data suggests it will show the same pattern as in recent quarters: Weakening demand for loans from consumers and businesses alongside tightening credit standards from lenders emblematic of an economy losing steam but not at the kind of accelerating pace that points to an approaching recession.”I think they like where credit conditions are – they like to see this slackening of demand, they like to see that banks have tightened a lot” as borrowing costs have risen, said Warren Kornfeld, a banking credit analyst at Moody’s (NYSE:MCO).The lending survey data Fed officials saw in conjunction with last July’s policy meeting showed conditions then at their most stringent in years – and demand at the weakest – across mostly all categories of credit for households and businesses.Kornfeld said loan demand more recently is still cooling, and credit conditions are tightening, but less sharply than before, meaning conditions are “getting closer to a neutral state,” he said. “It’s all set up at this point in time for a ‘soft landing,'” referring to a scenario in which the Fed tames inflation without triggering a painful recession or sharp rise in unemployment. LOAN GROWTH SLOWDOWNThe Fed’s rate hiking campaign, begun in March of 2022, prompted a rise in lending standards and slowdown in loan growth. Those trends continued even after the central bank’s last rate hike in July of 2023, but with less intensity than before. Other data show that loan growth for most uses has slowed but not reversed course.Meanwhile, demand for loans may actually be on the rise in some parts of the country. “The big picture is a soft landing on the bank credit side as well as the real side: still tight, but not tightening as quickly as before,” said Derek Tang, an economist at forecasting firm LH Meyer. The longer the Fed waits to lower the policy rate, though, the more anxious they will become over possible cracks “because recessions are nonlinear and hard to stop once they start,” he said. The cracks are hard to see so far, particularly on the real-economy side, with unemployment, at 4.1%, higher than it has been since the Fed’s rate hikes began but still low by historical standards, and inflation coming down slowly toward the Fed’s 2% goal.The U.S. household debt delinquency rate rose to 3.2% during the first quarter versus 3.1% in the final three months of last year, New York Fed data shows. That’s below the 4.7% seen at the end of 2019 before the start of the COVID-19 pandemic.Still, credit-card borrowers who have reached their borrowing limits – this group tends to be disproportionately younger and lower-income – have seen a particularly sharp rise in delinquency rates, New York Fed researchers found. “It does seem as though lower-income households are more strained in their personal finances and that will have a ripple effect,” Tang said. “September would not be too late to start easing the policy rate; actual interest rates will start to fall beforehand and this way the Fed can be a bit more sure about inflation before it begins.” More

NEW YORK (Reuters) – Higher debt payments and the possibility of a U.S. recession over the next 10 years could boost U.S. debt levels beyond recent forecasts and weigh on economic growth, an analyst at investment firm DoubleLine said.The U.S. government has expanded deficit spending during economic downturns over the past century, but since 2016 deficits have increased despite continued economic expansion and low unemployment, said Ryan Kimmel, a macro asset allocation analyst at DoubleLine. This raises the risk of deeper debt-funded deficits in case of an economic contraction, he said.”There’s finite demand for available capital out there to fund government debt issuance, and the only way you’re going to entice demand for government bonds is through higher rates,” Kimmel said. “Your interest expense goes up, which requires higher taxes, which then crimps economic growth, which again feeds through into further economic contraction … it’s a vicious spiral.”The warning from DoubleLine, a bond-focused firm managing $92 billion in assets, comes amid rising concerns in the bond market over the U.S. fiscal trajectory ahead of the November presidential election, despite Democrats and Republicans vowing to reduce deficit spending.Rating agency Fitch last year downgraded the country’s debt while Moody’s (NYSE:MCO) lowered its outlook on the U.S. credit rating. The International Monetary Fund last month said the U.S. should curb rising debt levels. DoubleLine’s CEO Jeffrey Gundlach, often dubbed “the bond king,” said in May he anticipates an eventual restructuring of U.S. Treasuries because of the growing debt burden.The nonpartisan Congressional Budget Office last month revised its deficit forecasts to reflect higher spending, but even the latest projections may be too optimistic, Kimmel said in a report this week.The CBO estimated the ratio of debt to gross domestic product (GDP), a key metric of a country’s fiscal health, to climb to over 122% by 2034, up from 99% this year. It projects the average interest rate on outstanding federal debt to remain at around 3.5% for the next 10 years, which is below current Treasury yields above 4% and the Federal Reserve’s policy rate, currently 5.25%-5.5%.In hypothetical scenarios with average interest rates of 4%, 5%, and 6% over the next 10 years, Kimmel calculated debt-to-GDP could spike to 126%, 136% and 147%, respectively, by 2034. Neither CBO’s estimates nor Kimmel’s assume a recession over the next 10 years, which could exacerbate the debt burden.Higher government borrowing would push investors to demand more compensation, lifting borrowing costs in various economic sectors, said Kimmel. Markets had a taste of that in October last year, when so-called bond vigilantes, investors who punish profligate governments by selling their bonds, pushed Treasury prices to 17-year lows.One way to avoid these outcomes would be reducing fiscal deficits by trimming government spending, he said.”While politically challenging, exercising fiscal restraint remains a viable option … A key question is, will politicians act before U.S. debt dynamics unravel into an unsustainable condition for the economy?” More

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