Markets in a tailspin get a big dose of chill from the Bank of England

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All the UK government drama is keeping me from catching up on the only UK drama I really want to consume, which is Love Island Season 8, which I still haven’t finished (no spoilers please!).

But since this newsletter is supposed to be about the economy or whatever, I’m going to do my best to find out what in God’s name is going on with this whole…thing.

Here’s the deal: Following the pound’s sharp fall in value, the Bank of England launched emergency intervention on Wednesday to try to calm the panic in financial markets.

For days investors have been dumping UK assets, threatening to crash the massive bond market and creating volatility in areas of finance that are normally stable and, dare I say, incredibly boring.

KEY CONTEXT:

  • All of this chaos stems from the newly installed UK government’s radical tax cut plan. And when I say “radical,” I promise I’m not writing editorially: you’re unlikely to find a mainstream economist or analyst backing Prime Minister Liz Truss’s cuts, which will require huge sums of government borrowing to pay.
  • Not to be too specific, the International Monetary Fund has most unusually rebuked the UK tax plan, saying it would likely increase inflation and inequality. That’s what the IMF might say to an emerging economy – not a G7 nation with a track record of stable finances.
  • And Charlie Bean, a former deputy governor of the Bank of England, told my colleague Julia Horowitz that the government is making “really stupid” decisions.
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Anyway, where have we been? Oh right, the bond markets are melting together…

In Britain on Wednesday afternoon, the non-government Bank of England stepped in to manage the financial equivalent of a Valium in the form of bond purchases “to any extent necessary” to restore order.

That seemed to be working, at least for the time being: bond markets on both sides of the Atlantic reacted positively as yields tumbled off their peaks and investors breathed a sigh of relief. The US 10-year Treasury yield, which briefly rose above 4% for the first time in over a decade, reversed course and settled around 3.70%. US stocks, which had opened lower, rebounded Wednesday afternoon, enduring a six-day losing streak.

BIG PICTURE

The BOE may have eased market fears for now, but the Truss administration has so far only doubled down on its intentions to boost growth through tax cuts. The three-week-old government appears determined to implement its fringe policies at a time when the global economy is looking to stability.

Again, we can’t let the United States off the hook as the Fed’s most aggressive rate hikes in four decades bounce painfully through the global financial system. Rising interest rates strengthen the US dollar and help fight domestic inflation. But it’s forcing central banks around the world to follow suit, raising interest rates faster and higher as the dollar’s strength weakens their currencies, Julia writes.

The global financial system is “like a pressure cooker right now,” said Chris Turner, global head of markets at ING. “You need strong, credible policies, and any political missteps will be punished.”

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Volkswagen is pricing Porsche’s IPO at $80.22 per share, which will raise about $9.1 billion. That puts the deal at the high end of Volkswagen’s original estimate, valuing the company at around $73 billion.

The IPO could become one of the biggest ever in Europe when Porsche goes public in Frankfurt on Thursday.

Buying a car, which was no picnic before the pandemic, has become an even more difficult proposition in times of supply chain congestion and high inflation.

Once upon a time, the idea of ​​paying a sticker price at a retailer was ridiculous—a trap only fools would fall into. But now the average new car is selling well above the manufacturer’s suggested retail price as demand remains high and automakers are still trying to regain pre-pandemic production levels.

But, writes my colleague Peter Valdes-Dapena, the brand with the largest percentage markup on the total cost might surprise you.

It’s not the Jeep Wranglers with their cult followings, or those sexy Porsche sports cars, although people are certainly paying a premium for them.

No, the brand with the wildest markup is the always sensible, budget-friendly Kia.

The South Korean company’s sedans and SUVs are selling for about 6% above their sticker prices, according to data from Edmunds.com. Roughly tied in second place, averaging 4% above the sticker price, are Honda, Hyundai and Land Rover. (And in pure dollar terms, Land Rovers, which typically sell for $94,000, have the biggest premium, with customers paying nearly $3,700 for stickers.)

Still, Kia customers pay an average of $2,183 above the sticker, surpassed only by luxury Land Rovers in pure dollar terms. That’s particularly notable when you consider that a Land Rover costs about 2.5 times what a Kia costs.

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There are a few reasons for this.

  • Kia has won loyal fans by being a great value car. It’s not flashy. And in this economy, people in particular crave reliability and value for money.
  • The brand has also (rather successfully) shifted its marketing away from that budget car image. It wants to be associated with good design and ~coolness~, which is also affordable.
  • Kia sells a relatively large number of hybrid and electric models, giving it an edge at a time when consumers are concerned about the environment and high gas prices. People are usually willing to pay a little more for the electric and hybrid models in the expectation of saving money on gas.
  • The above sticker trend may not go away for a while as new car production is still hampered by supply shortages that are slowly easing.

But there’s a little bit of good news for buyers who aren’t in a hurry and aren’t fixated on a new car. Used car prices, which had skyrocketed at the start of the pandemic, have finally started falling.

“Speak to any (very) large used car dealer and you’ll hear the same thing – an absolute deflationary whirlwind is coming to used car prices.” tweeted Ophir Gottlieb, CEO of Capital Market Laboratories, earlier this month.

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