Government bonds have largely reversed earlier increases in their yields, or interest rates, but remain stuck at multi-year highs.

The yield on the 30-year gilt has eased to 5.409%, after hitting 5.472%, the highest since 1998, piling pressure on the chancellor, Rachel Reeves. The equivalent US Treasury yield fell by 1 basis point to 4.952%.

The Treasury will be “ruthless” over public spending cuts to help meet the government’s fiscal rules at this summer’s spending review, Keir Starmer said today.

The rise in UK government bond yields in recent days has driven annuity rates sharply higher (see post 8.03).

Stock markets are falling on both sides of the Atlantic.

In the currency markets, the US dollar is charging ahead, boosted by Friday’s strong labour market report, with traders dialling back their rate cut expectations. They are now expecting just one quarter point reduction this year.

Reflecting the bullish economic outlook, the dollar rose by 0.3% against a basket of major currencies to its highest level in more than two years. The pound is now down by 0.5% to $1.2140, a 14-month low, while the euro is 0.4% lower at $1.0202.

Oil prices have jumped by more than 1% after the US announced wider sanctions on Russian oil exports on Friday, which are expected to hit supplies to China and India. Brent crude is now at $80.74 a barrel, up $1 a barrel, to the highest since August.

Our other main stories today:

Thank you for reading. We’ll be back tomorrow. ATB! – JK

Over here, economists believe that, with government borrowing costs rising and the Treasury opposed to any futher tax rises, Rachel Reeves will have to announce further cuts later this year to ensure she continues to meet her fiscal rules.

During his Q&A this morning, Keir Starmer was asked four times if the economic situation meant further cuts might be needed. Generally, the prime minister refused to engage directly with the suggestion. But he never denied that further cuts were a possibility. He said the government would “absolutely” be sticking to its fiscal rules. And he said the Treasury was right to be “ruthless” as it approached the spending review.

In terms of the ruthless approach when it comes to finances and spending, yes, we will be ruthless, as we have been ruthless in the decisions that we’ve taken so far. We’ve got clear fiscal rules, and we’re going to keep to those fiscal rules.

On Wall Street, shares have fallen after the opening bell. The Nasdaq fell 251 points, or 1.3%, while the S&P 500 lost 0.8% and the Dow Jones edged 0.1% lower.

Moderna shares slumped by 24% after the company cut its outlook because of shrinking demand for its Covid-19 vaccine.

Traders have dialled back their bets on further interest rate cuts and at one point, weren’t pricing in even one Fed cut this year. They are now betting on one quarter point reduction by December.

David Morrison, senior market analyst at broker Trade Nation, said:

The robust labour market, along with the recent pickup in inflation, are both making it difficult for the Federal Reserve to justify further rate cuts.

Inflation had already started to creep up again, even as the Fed cut rates by a bumper 50 basis points in September - something that looks like a serious policy mistake, compounded by additional cuts in November and December.

Some calm has returned to bond markets, with yields – or interest rates – reversing the rises seen earlier in the day.

The yield on the 30-year UK government bond is now roughly flat at 5.41%, after rising by 6 basis points this morning to 5.472%, the highest since 1998. The 10-year yield is up just one 1bp at 4.85%.

In the US, the yield on the 10-year Treasury hit its highest level since November 2023 earlier, but has now edged 1 basis point lower to 4.763%, and the 30-year yield is down by a similar amount.

The increase in UK borrowing costs in recent days has piled pressure on the chancellor, Rachel Reeves, who could be forced to adjust her tax and spending plans, or risk breaking fiscal rules.

The pound is still down by 0.55%, though, falling to $1.2137, as the dollar is powering ahead against most major currencies, boosted by strong economic data on Friday. The euro is trading 0.36% lower at $1.0206.

Stocks are also heading lower. The UK’s FTSE 100 index has lost 53 points to 8,194, a 0.65% decline. The German and French indices are around 0.6% lower while the Italian market has slid by 1.2%.

As the cost of government borrowing continues to go up, with 30-year bond yields at a near-30-year high, the Liberal Democrats are calling on the chancellor to hold an emergency summit with banks to reassure mortgage holders that they won’t see a major spike in their mortgage costs.

It comes as experts warn that mortgage rates may rise in the coming weeks, as lenders respond to the turmoil in the bond market.

Expectations of interest rate cuts from the Bank of England are also being scaled back, with the pound sliding to a fresh 14-month low against the dollar today. This is because the dollar is powering ahead against most major currencies, including the euro, with recent data underscoring the strength of the US economy.

Liberal Democrat Treasury spokesperson, Daisy Cooper, said:

The chancellor’s budget has not worked and now many will be worried that they will have to pay the price through spiralling mortgage costs.

After years of Conservative economic vandalism including their disastrous mini-budget, it is a price that many cannot afford.

An emergency summit with the banks must be convened so that mortgage payers can be reassured that they are not going to be subjected to yet another bout of spiralling costs.

Rachel Reeves can no longer sit on her hands as this turmoil threatens to have real consequences for millions of homeowners.

Keir Starmer has said that Rachel Reeves, the chancellor, is doing a “fantastic” job and has his full confidence.

She is under mounting pressure following a sharp rise in UK borrowing costs and a decline in the value of the pound.

Talking about the government’s AI drive, the prime minister also faced questions about the economy.

Rachel Reeves is doing a fantastic job.

She has my full confidence. She has the full confidence of the entire party. She was given incredibly challenging tasks.

Brent crude has gone back above $80 again, currently trading at $81.26 a barrel, $1.50 higher on the day. The last time it was above $80 was a short-term spike in October, and for a longer period during the summer.

On Friday, the wholesale cost of petrol had risen 3p a litre since Christmas and diesel had gone up by 5p, according to the AA motoring group. If sustained, that would lead to a £1.65 increase to the cost of filling the typical petrol tank and £2.75 for diesel.

Petrol averaged 137.2p a litre over the weekend. In October, it had dropped below 134p a litre before starting to rise again. Diesel is back up to an average of 143.7p a litre, having been as low as 138.4p in October.

Luke Bosdet, the AA’s spokesman on pump prices, said:

Freezing temperatures and rising pump prices are a bad start to 2025 for drivers. Their vehicles are consuming more fuel due to engines having to work harder in winter conditions and any weakness in the pound won’t help because oil and fuel commodities are traded in dollars.

We will be watching carefully to see the extent the fuel trade takes advantage of upward costs. What happened heading into winter didn’t fill drivers with confidence.

Consumer confidence bounced in December as the impact of inflation-busting wage rises and the prospect of rising house prices lifted sentiment –- giving a boost to Rachel Reeves amid market turmoil that has pushed the pound to a 14-month low.

A monthly survey by YouGov and the Centre for Economics and Business Research (CEBR) found that an index of consumer confidence improved by 1.3 points to 112.2 last month, to give the highest score since August 2021 (112.9). Workers who responded to the poll reported an improved outlook for their household finances.

Workers said there were “significant gains in business activity over the previous 30 days (+3.0) and they were looking forward to year ahead (+1.5), revealing a more buoyant economy in the run up to Christmas than seen in the months immediately before and after Reeves’s October budget.

Homeowners were more likely to say the outlook for property values had improved – up by 2.9 points to 119.2.

However, Sam Miley, the CEBR’s managing economist said the improved mood among workers may be shortlived.

The first weeks of 2025 have brought considerable uncertainty, which could impact these metrics moving forward. The outlook for the economy is weakening, amidst expectations of continually high inflation and concern over the potential for further tax rises.

Meanwhile, the recent turbulence in government debt markets could hinder any potential reduction in mortgage costs over the coming months, impacting household finances and property prices. Whether consumers can ride out this wave of uncertainty by continuing to express net positivity will be key to the economy’s performance this year.

Britain’s energy regulator, Ofgem, has extended Jonathan Brearley’s term as chief executive for five more years, to 31 January 2030.

In 2023, Ofgem’s incoming chair Mark McAllister suggested that Blearley could be replaced, after a turbulent few years which caused staff morale to slump and supplier complaints to increase. The regulator admitted in 2022 that British households would have been better off weathering the winter gas crisis if it had acted sooner to crack down on financially unstable energy suppliers.

However, today McAllister said:

Jonathan has led Ofgem through unprecedented challenges over the past five years: the fallout from Covid-19, energy market turbulence and the price shock following Putin’s invasion of Ukraine.

He and his senior team have shown great dedication in stepping up to meet these challenges, whilst establishing the foundations required to create a clean power electricity system to get us to net zero by 2050 – the biggest ever transformation of the energy industry.

This has involved developing and executing vital changes in how we plan, build, and supervise the roll out of new energy infrastructure, at a pace not seen for decades, while also reshaping a retail market that can be innovative and dynamic for customers.

At the same time, Jonathan has taken tough measures to ensure suppliers meet the high standards consumers rightly expect, while stamping out bad practice wherever it exists.

Brearley said:

The government’s 2030 target for a clean electricity grid is tough but achievable, if everyone plays their part. We have plans in place to get there at the lowest possible cost for consumers and businesses, while unlocking the private investment needed to expand the grid and generate more clean power.

In financial markets, the pound and the euro are continuing to slide against the dollar, which has been boosted by strong economic data, while stock markets are heading lower, and oil prices have jumped.

Crude oil prices are rising for a third day, driven by wider US sanctions on Russian oil exports. The new sanctions, announced at the end of last week, include oil producers Gazprom Neft and Surgutneftegaz, as well as 183 vessels that have shipped Russian oil – targeting revenue that Moscow is using to fund its war against Ukraine.

This will prompt China and India to source more oil from the Middle East, Africa and the Americas, boosting prices and shipping costs, according to traders and analysts.

Tamas Varga, analyst at PVM Oil Associates, told Reuters:

There are genuine fears in the market about supply disruption. The worst case scenario for Russian oil is looking like it could be the realistic scenario. But it’s unclear what will happen when Donald Trump takes office next Monday.

Brent crude futures rose by more than 2% or $1.68 a barrel to as high as $81.68 a barrel, the highest since August, and is now trading at $80.81 a barrel, up by 1.3%.

US West Texas Intermediate crude touched a peak of $78.58 a barrel and is now at $77.69 a barrel, up by 1.5%.

Low- to middle-income families in Britain are far poorer than their counterparts in western Europe because of sky-high housing costs, according to an analysis by the Resolution Foundation.

The thinktank said that while prices in the UK were 8% higher than the average in the 38 member countries of the Organisation for Economic Cooperation and Development (OECD), less well-off Britons were more affected by the cost of housing, which is 44% higher in the UK than the OECD average.

Higher housing costs in the UK more than offset the benefit of food, another major area of spending for those on lower incomes, being 12% cheaper than the average in those developed countries.

When lower-income families’ tendency to spend more on necessities and less on luxuries is factored in, German families are 21% or £2,300 a year better off than their UK equivalents and the gap with Dutch families is even wider, at 39%.

As many as one in six workers in Britain are skipping meals to make ends meet as households remain under pressure from the higher cost of groceries, energy and other essentials.

Highlighting the impact of the cost of living crisis on working households, figures from the Trades Union Congress (TUC) showed 17% of full- or part-time workers had skipped a meal to reduce their spending in the past three months.

According to a survey of more than 2,500 working adults by YouGov in the week before Christmas, carried out on behalf of the trade unions’ umbrella group, as many as one in 10 said they had skipped a meal every day or most days.

The Post Office said separately that cash withdrawals at its branches topped £1bn in December, the first time on record that this has happened in a single month, as people relied on cash to manage budgets. About £979m of personal cash withdrawals were made, and £35m of business cash withdrawals.

Apple has asked shareholders to vote against a proposal to scrap its diversity, equity and inclusion programmes, as tech rivals scale back similar schemes before Donald Trump’s return to the White House.

The National Center for Public Policy Research, a conservative thinktank, wants the iPhone maker to end its DEI efforts because they expose companies to “litigation, reputational and financial risks”. The proposal will be voted on at Apple’s annual general meeting on 25 February.

In a notice to shareholders, Apple’s board has recommended investors vote against the proposal because, it says, it already has the right compliance procedures to deal with any risks and because the proposal “inappropriately attempts to restrict Apple’s ability to manage its own ordinary business operations, people and teams, and business strategies”.

DEI schemes are sets of measures designed to make people of all backgrounds – including ethnicity, class, sexuality and gender – feel supported and included in the workplace.

Last week, Meta, the owner of Facebook and Instagram, said it was terminating its DEI programmes immediately.

Senior bankers at Lloyds could be at risk of having their bonuses docked if they fail to follow company orders to be in the office at least two days a week.

Lloyds Banking Group – which owns the Halifax, Lloyds and Bank of Scotland brands – has confirmed it is reviewing office attendance as part of performance-related bonus targets for its most senior employees. That includes hybrid staff who, in 2023, were ordered to be in the office at least 40% of the time, which typically amounts to two days a week for those on full-time contracts.

Ged Nichols, the general secretary of the Accord union that represents Lloyds staff, said bosses needed to ensure they were sensitive to employees’ circumstances when considering the size of this year’s payouts.

“The inclusion of a metric on complying with the requirement for some staff to attend offices for 40% of their working time should not create problems if it is applied fairly, and is sensitive to individuals’ circumstances with mature and reasonable judgments applied,” Nichols said.

Bonuses for the 2024 financial year will be paid out next month, shortly after the chief executive, Charlie Nunn, announces annual results on 20 February.

Recruitment companies have warned about declining confidence across Europe and the UK, as political uncertainty adds to concerns about economic growth.

The FTSE 250 recruiter PageGroup said today that profits had dropped by nearly a quarter in Germany and 17% in France during the last three months of 2024, compared with the same period in 2023. Its UK profits fell by 14%, as companies grew more nervous about taking on new staff.

Morgan McKinley, another British recruiter, said the number of job openings in London’s financial services sector dropped by 12% year on year in the final quarter of 2024.

The recruiters’ gloom will add to concerns about the prospects for the economies of the eurozone, and the UK.

Europe’s largest economies are struggling with faltering growth. Germany, the EU’s largest economy, has oscillated between growth and contraction every quarter for the last two years, while narrowly avoiding a technical recession. The economic struggles contributed to the collapse of the three-way “traffic light” coalition and an early election next month.

France is also going through a period of political instability, with the centrist prime, minister François Bayrou, trying to lead the country’s fourth government of the last 12 months.

More on GSK’s acquisition of a rare cancer specialist firm, Massachusetts-based IDRx. It is paying $1bn upfront and a further $150m milestone payments if the firm’s lead treatment is successful.

It is working on a treatment for gastrointestinal stromal tumours (GIST), a rare cancer that develops in the digestive system and is diagnosed in 80,000 to 120,000 new patients worldwide every year. Two fifths of cases are driven by mutations in the KIT gene that lead to the growth of tumour cells.

IDRx’s experimental treatment, called IDRX-42 at this stage, targets those mutations. It has published promising data from an early-stage clinical trial in patients with advanced GIST.

Tim Clackson, chief executive of IDRx, said:

We are looking forward to working with GSK to advance IDRX-42 for patients with GIST given there have been no major advances to the standard of care for almost 20 years. Combining our experience to date with GSK’s expertise in GI cancers, global clinical development capability, and strong commercial presence in oncology will help to accelerate the development of this novel medicine for patients.

GSK has a growing portfolio in development targeting gastrointestinal cancers.

Tony Wood, the British drugmaker’s chief scientific officer, said:

We are excited by the early data from IDRX-42 and its unique ability to target all clinically relevant KIT mutations present in GIST, a major gap in the current standard of care. We look forward to accelerating its development in 2025 to redefine treatment.

There are no approved drugs, known as tyrosine kinase inhibitors, that inhibit the full spectrum of clinically relevant primary and secondary mutations in the KIT gene.

IDR-x was launched in Plymouth, near Boston, in August 2022 by entrepreneurs Ben Auspitz, who serves as chief executive, and Alexis Borisy, to develop precision cancer medicines. Christoph Lengauer acts as scientific adviser. The first financing round was led by the Californian venture capital firm Andreessen Horowitz and New York-based Casdin Capital.

The firm’s pipeline including IDRX-42 was acquired through licence agreements with German drugmaker Merck and Massachusetts-based Blueprint Medicines.

With the US dollar charging ahead, the pound has fallen to levels last seen in the autumn of 2023.

Sterling has dropped by 0.76% to $1.2111.

The euro also extended losses against the greenback, falling to its lowest level since September 2022 against the dollar. The single currency slid by nearly 0.6% and is now worth $1.0185.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said:

The dollar is flexing more muscle amid expectations that borrowing costs will stay higher for longer, helping push down the pound to $1.21 levels not seen since October 2023. Sterling has also dipped against the euro to 1.18. It comes amid ongoing concerns about the outlook for the UK economy, with the spectre of stagflation hovering. Wednesday’s CPI data will be closely watched especially given that the reading is set to show consumer prices will veer further away from the Bank of England’s 2% target, making it less likely that policymakers will vote for a cut in February.

The UK government is attempting to wrest the narrative away from painfully high borrowing costs and a plunging pound. It’s going all out on an AI pitch with recommendations to unleash the power of the technology to help public services become more efficient and help boost growth via special development zones.

Traders are no longer fully pricing in an interest rate cut from the US Federal Reserve by the end of the year, Fed fund futures show.

Bets on further interest rate cuts have been scaled back sharply since Friday’s blockbuster labour market report underscored the strength of the US economy.

Economists had forecast that the economy added 155,000 jobs in December, but a reading of 256,000 blew past estimates, while the unemployment rate fell to 4.1%, while analysts had expected it to stay at 4.2%.

On Wednesday, the latest monthly figures are expected to show the inflation in the United States rose to an annual rate of 2.8% in December from 2.7% in November. Core inflation, which strips out volatile food and energy costs, is forecast to have stayed at 3.3%. Markets will also be watching producer price data, out tomorrow.

The US Federal Reserve has voiced concerns about core inflation trends, as Philip Shaw, chief economist at Investec, noted.

Note that the FOMC [Federal Open Market Committee] minutes last [week] contained the observation that core inflation trends had been disappointing recently and that several members feared that the disinflation process might have stalled.

UK rate cut expectations have also receded, with traders now pencilling in nearly 42 basis points of reductions by year-end. Until recently, they had fully priced in two 25bp rate reductions this year, which would take the Bank of England’s base rate from 4.75% to 4.25%.

The UK’s inflation rate is expected to have edged up to 2.7% in December from 2.6% the month before, followed by a bigger acceleration in price pressures in coming months. The figures will be released first thing on Wednesday.

China’s exports in December grew at a faster pace than expected, as manufacturers rushed to fill orders, faced with the threat of higher tariffs from the new Donald Trump administration.

Exports rose by 10.7% from a year earlier, according to official customs data. Economists had forecast that they would grow by about 7%. Imports also rose, by 1% year-on-year, against expectations of a 1.5% decline. With exports outpacing imports, China’s trade surplus grew to $104.8bn, and to just under $1 trillion for 2024 as a whole.

Lynn Song, ING’s chief economist for Greater China, said:

December’s trade balance data ended the year on a positive note, with both the monthly and annual data ($992.2bn) marking new record highs. The monthly trade surplus cleared the $100bn barrier for the first time on record, though the annual trade surplus fell a little shy of reaching the $1 trillion mark.

China’s consumption could see a modest recovery in 2025, depending on how effective policy support is, but it remains uncertain how much of this will translate into stronger import demand as policies look likely to benefit domestic producers more.

External demand has been an important contributor to growth momentum in 2024, not only through the record trade surplus but also the impact on manufacturing. However, with the looming prospect of increased tariffs and expectations for generally moderating global growth, external demand looks likely to soften in 2025. Our ING scenario currently has tariffs starting to take effect in the second quarter of this year, with tariffs on China potentially coming earlier.

UK bond markets have just opened, and yields are up again – by about 5 basis points across all maturities. US and German yields have also edged higher.

The yield, or interest rate, on the 30-year gilt (UK government bond) has hit 5.472%, still the highest since 1998, up by 6 basis points on the day.

Stock markets have opened lower, with the FTSE 100 index in London falling 20 points, or 0.2%, to 8,228.

Germany’s Dax, France’s CAC and Italy’s FTSE MiB all lost 0.3% while Spain’s Ibex fell by 0.5%.

Analysts at Deutsche Bank led by Jim Reid said:

It’s hard to determine what’s icier at the moment, global bond markets or the weather across much of Northern Europe and even New York where sub zero temperatures have been the norm in recent days.

As the weather warms up a bit, whether the deep freeze in bond markets continues may be determined by how US CPI [consumer prices index] on Wednesday materialises after Friday’s blockbuster payrolls report.

Annuity rates have surged following the turmoil in the bond markets.

Annuity rates are affected by long-term gilt yields, which rose sharply last week.

The latest data from Hargreaves Lansdown shows a 65-year-old with a £100,000 pension can now get up to £7,425 a year from a single life level annuity with a five-year guarantee. This is up from £7,235 a year last week, and 48% higher than this time three years ago when it was £5,003.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said:

The turmoil in the bond markets has caused annuity incomes to soar, giving an extra boost to a market that has already enjoyed a stellar year. We could see further income rises in the weeks to follow and this could push incomes up to the highs we saw in the aftermath of the mini-budget.

Annuities continue to provide great value, and we can expect to see interest in them continue to increase, with many retirees deciding that now is the time to take the plunge and get a guaranteed income for life.

She said that it is important to check different providers because once bought, an annuity cannot be unwound.

There is no need to annuitise all your pensions at the same time – people can annuitise in stages throughout their retirement, she said.

This means your remaining pot can remain invested in income drawdown where it can grow while you get the potential to take advantage of higher annuity incomes as you age.

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

The pound is on the slide again, as Rachel Reeves, the UK chancellor, returns to her desk after her trip to China.

The dollar has jumped to the highest level in more than two years against a basket of major currencies, to peak at 108.98, extending last week’s rally, after a strong US jobs market report underscored the strength of the world’s largest economy.

Sterling fell more than 0.5% to $1.2128 against the dollar, the lowest in 14 months while the euro is at its weakest since November 2022 at $1.0275.

The pound had a rough ride last week, as UK government bonds, known as gilts, sold off, pushing their yields higher, reflecting investors’ concerns about the UK’s public finances.

Bond yields rose sharply for governments worldwide, before falling back on Friday, after the last jobs report of the Biden administration showed the US labour market grew strongly in December. This morning, US and German yields are edging higher again.

UK officials will be monitoring closely moves in the price of government bonds after last week’s turmoil in global markets, when the yield – effectively the interest rate – on the 30-year bond hit its highest level since 1998.

Expectations for Federal Reserve rate cuts have receded sharply, but also for UK rate cuts. Markets are awaiting US data on inflation on Wednesday.

If the bond selloff is sustained, it could force the chancellor to make adjustments to her tax and spending plans or risk breaking her fiscal rules. Reeves has vowed to stand by her “non-negotiable” fiscal rules.

We reported last week that the Treasury was considering steeper cuts to public services while the Telegraph reported that disability benefits faced billion-pound cuts.

GSK, the UK’s second-biggest pharmaceutical firm, has struck a deal to buy Boston-based firm IDRx, which is developing a treatment for a rare type of gastrointestinal tumours.

GSK is paying up to $1.15bn under the terms of the deal, which will strengthen its oncology portfolio. Chief executive Emma Walmsley has been making targeted acquisitions to boost key areas, after slimming down the overall drugs portfolio in recent years.

GSK’s chief commercial officer, Luke Miels, said

IDRX-42 complements our growing portfolio in gastrointestinal cancers. This acquisition is consistent with our approach of acquiring assets that address validated targets and where there is clear unmet medical need, despite existing approved products.

The Agenda

• 2.15pm GMT: Bank of England holds QT auction of short-dated debt

* The headline on the blog was updated after it wrongly said the pound fell to a 14-year low, as this post makes clear, it was a 14-month low