Weekly Briefs
10 Oct 2022
6 min read

The week started off with the UK government announcing an embarrassing U-turn from its planned tax cuts that roiled markets the week before. Over in the US, soaring inflation is having an unnoticed positive consequence: public debt is shrinking fast when measured against the size of the economy. Elsewhere, the Elon-Twitter saga continues, with the billionaire head of Tesla offering to buy the social media firm at the initially agreed price of $44 billion. Speaking of Tesla, the EV marker delivered a record number of cars in the third quarter but still managed to disappoint analysts. Finally, OPEC+ agreed to make a large production cut in a bid to keep oil prices elevated but risks keeping inflation elevated throughout the world.


Britain dominated headlines last week after the government announced a series of tax cuts that sent the country’s bonds and currency tumbling. After a long and brutal week, the government finally listened to the market and announced an embarrassing U-turn on Monday, saying it’ll no longer go ahead with plans to cut tax for the country’s highest earners. The government previously wanted to scrap the 45% tax rate paid on incomes over £150,000, which would have amounted to a five percentage point drop in the top rate at a time when ordinary Britons are facing a cost-of-living crisis. What’s more, the proposed tax cut would’ve threatened to further fuel inflation and balloon the nation’s debt. So it’s no surprise that the U-turn was welcomed by investors who sent the pound and British government bonds higher on Monday.

Fiscal worries on the back of on-and-off plans for tax cuts have led to extreme volatility in the British pound. Source: FT

Soaring inflation’s been getting a lot of bad press this year, so much so that one of its more positive consequences has gone largely unnoticed: US government debt is shrinking fast. Now, it’s not dropping in absolute dollar terms (that’s still growing by the day), but it’s decreasing in the way it matters most: relative to the size of the economy, as captured using the debt-to-GDP ratio. That’s because US GDP has soared – in dollar terms – on the back of higher prices (inflation).

The graph below shows that the US’s debt-to-GDP ratio is set to post the biggest drop in at least two decades in 2022. A lower ratio reduces the perceived risk of US government debt, increasing its appeal to investors. What’s more, a lower debt-to-GDP ratio makes the borrowings more manageable and easier to pay back – a good thing for the government and the country’s taxpayers (who would otherwise have to foot the bill). The bad news is that thanks to inflation, the money bondholders will be repaid by the government will be worth a lot less than the money they initially put up.

The US’s debt-to-GDP ratio is set to drop this year. Source: Bloomberg, International Monetary Fund

Is this year’s drop in debt-to-GDP part of a long-term trend or just a blip? Most probably the latter. After all, most economists would agree that the outlook for the US economy involves a sluggish concoction of slower growth, lower inflation, and bigger interest payments for the government to make. Or in other words, a triple threat poised to send the US’s debt-to-GDP ratio rising again.


The Elon-Twitter saga continues. Quick recap: Elon Musk – the billionaire CEO of Tesla and SpaceX – initially agreed in April to buy Twitter for $44 billion. Just months later, in July, he said he intended to pull out of the deal, saying the company had misled regulators and investors over the number of fake accounts on its platform. Twitter sued Musk to complete the deal, with a trial set to begin on the 17th of October.

Probably sensing that the case was not going well and wanting to avoid a contentious courtroom fight, Musk sent a letter to Twitter this Monday offering to buy the social media firm at the initially agreed price of $44 billion. The news, which broke out a day after Musk’s letter, sent Twitter’s shares 22% higher on Tuesday. Musk also tweeted on the day that “buying Twitter is an accelerant to creating X, the everything app.” Based on the billionaire’s past comments, “X” could look a lot like the Chinese super-app WeChat, which allows users to chat, make payments, book rides, and loads more all in a single app.

Shares in Twitter surged 22% on Tuesday to $52 after news broke out that Musk is proposing to buy the social media firm at the previously agreed price of $54.20 a share. Source: Reuters

You might’ve been so caught up in Elon’s and Twitter’s takeover drama that you forgot about Tesla, the billionaire’s other little venture. Over the weekend, the firm announced the number of cars it delivered last quarter – one of the most closely watched indicators for Tesla since they underpin the carmaker’s financial results. The good news is that the firm delivered a record 343,830 cars worldwide in the third quarter, up 42% from the same time last year. The bad news is that the number of deliveries still came in below analysts’ forecasts and it was significantly less than the 365,923 vehicles Tesla produced in the quarter. That big gap between production and delivery numbers was due to ongoing problems with transport and logistics that are making it hard for Tesla to deliver its cars to customers.

Tesla delivered a record number of cars last quarter. Source: Bloomberg

Still, Tesla’s delivery issues appear to be temporary and analysts are looking past that, focusing instead on its growing sales and the recent extension of a $7,500 tax credit for buyers of EVs in the US – Tesla’s biggest market. In fact, of the 49 research analysts following the EV maker, 27, or about 55%, recommend buying the stock, according to Bloomberg data. Among the rest, 12 have hold ratings, while 10 have sells. The last time such a high percentage of analysts rated Tesla a buy was in early 2015.

Research analysts are most bullish on Tesla's stock since 2015. Source: Bloomberg


OPEC+ agreed to make a large production cut on Wednesday in a bid to keep oil prices elevated. The group of the world’s biggest oil-producing countries and their allies will reduce their collective output by 2 million barrels a day from November – equivalent to about 2% of global supply. The cuts will remain in place until the end of next year, unless the market changes, according to the Saudi Energy Minister. The outdated production baselines used to measure the cuts mean that actual oil supply will only fall by about half that amount, but it’s still the biggest cut since 2020 and risks keeping inflation elevated throughout the world.

OPEC+ cuts production by 2mbpd but existing output shortfalls versus target mutes some of the impact. Source: Tellimer Research

Next week

The third-quarter earnings season officially kicks off in the US, with PepsiCo reporting on Wednesday. But Friday is when things really get tasty, with financial heavyweights Citigroup, JPMorgan Chase, Wells Fargo, and Morgan Stanley all scheduled to announce their latest earnings. It will be interesting to see how much damage an inverting yield curve and a slump in financial market activity is causing to banks' earnings. On the economic front, we have the UK labor market report on Tuesday followed by the country’s August GDP report on Wednesday. That same day we’ll also get the minutes of the Fed’s latest meeting, which should give traders further clues on what the US central bank is thinking. The US also reports last month’s retail sales data on Friday. But perhaps the most important release of all is the US inflation report for September, which is due on Thursday.

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The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.

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