Rumors rife about Starmer's future in London

Rumors about the future of the British Prime Minister and poor employment figures have reinforced the prospect of a rate cut in December. Gilt yields and the pound sterling are falling.

On Wednesday British Health Minister Wes Streeting denied any plans for a coup against Keir Starmer, calling rumors to that effect "totally counterproductive" and "false." These statements come after several media outlets reported on the possibility of an internal coup, which Streeting himself could lead, following the presentation of this month's budget.

According to these articles, Starmer's entourage assured that he would fight to remain leader of the Labour Party in the event of a challenge, with some already seeing Streeting as a potential successor. Streeting firmly rejected these speculations on Sky News: "I am not going to ask for the Prime Minister's resignation. I fully support him, as I have always done since his election as party leader."

Sterling and gilt yields fall

A barrage of gloomy statistics on the British labor market has reignited bets on an interest rate cut by the Bank of England. On Tuesday, short-term gilt yields hit their lowest level in over a year: the two-year yield fell to 3.716%, down 9 basis points, its lowest level since August 2024. This was due to a sharp slowdown in employment in Q3, with rising unemployment and stagnant wages. The pound fell, with traders now estimating the likelihood of an initial easing at the December 18 meeting at 75%, up from 62% the previous day, according to LSEG data from the swap market.

The euro was trading at GBP 0.8813 on Wednesday morning, not far from its highest level since April 2023, reached on November 5.

Expectations of monetary easing have extended until 2026, with three rate cuts now expected, compared with two on Monday. Several banks have revised their forecasts in this direction, despite warnings from Monetary Policy Committee member Megan Greene about inflationary risks. Investec now expects a cut to 3.75% as early as December, compared with February 2026 previously. J.P. Morgan forecasts a rate of 3.25% in mid-2025.

On the bond market, rates fell across all maturities: the 10-year gilt fell to 4.375%, again down 9 basis points, close to its annual low. This development could make Finance Minister Rachel Reeves' task easier as she approaches her budget decisions, despite a fragile social context. Investors will also be watching Wednesday's planned syndication of an index-linked gilt maturing in 2038.