The markets react to Andy Burnham’s resounding win in Makerfield

The winds of political change look like they will be blowing in Westminster sometime soon, after a resounding win for Andy Burnham in the Makerfield by election. Although he has not formally announced that he will stand in a leadership contest, Burnham is already giving victory speeches and laying out his vision to get the UK economy moving again.

The main pledges he has said so far on Friday include:

• Re-industrialization  of the north of England.
• Using public procurement to buy products made in Britain, that offer young people work placements.
• Guaranteed work placements for 16–18-year-olds.
• A promise to bring down water bills, energy bills and rail fares.

There was little detail about how any of this would be done, and crucially we still don’t know if and when he will run for PM, but it looks very likely that he will stand. We also don’t know who his pick for Chancellor would be. In his victory speech he singled out Lousie Haigh for thanks, a far left MP. If she becomes his chancellor, we expect the bond market to sell off sharply.

Burnham follows Trump: State-sponsored industrialization policy  

Reindustrializing the north, by harnessing the government’s spending power and promoting domestic jobs, is to be commended. This is not a far-left policy, in fact it comes straight out of the Donald Trump playbook. Trump is also using government contracts to entice US firms to build critical components at home. For example, Intel and Apple are partnering up to build US-made and designed chips to sell to the Pentagon. Added to this, the US government currently has a 10% stake in Intel. Industrial socialism is alive and well around the western world, which may not spook markets too much.

Of much more concern is how long a leadership contest will take, and if Burnham is to be PM, who will be his choice of chancellor. We will be watching for updates on these points this weekend.

UK Gilt sell off leaves Burnham with limited choices

UK Gilts are selling off sharply on Friday, the 10-year and 2-year yields are both higher by nearly 8bps today.  Gilt yields had been falling earlier this week, however, they are now on track to post a weekly gain, even though inflation defied expectations and remains lower than CPI rates in the US and the Eurozone.

The prospect of more political chaos comes after UK public finance data showed another surge in borrowing last month. It was a whopping £23.3bn in May and borrowing in the first two months of the new fiscal year is already £9bn higher than a year ago. Spending on debt interest payments and benefits all increased this May vs. May 2025, which more than outweighed higher tax receipts.

This is unsustainable, and the rise in UK Gilt yields today tells us three things: 1, it is not all because of Andy Burnham, 2, you cannot borrow excessive amounts of money when growth is flat lining, and 3, Burnham faces extremely constrained circumstances if he does topple Starmer.

The bond vigilantes are keeping a watchful eye on Burnham

There is little Burnham et al can do to lower borrowing costs. Firstly, these are set by the BOE, and secondly, the BOE is currently concerned about global factors that are impacting inflation, and not domestic issues. The one area he can influence is benefits and spending on welfare. There have been reports that he is keen to cut benefits to fund defense, which could boost growth. The question is, will he do this and to what extent? We cannot expect Burnham to answer these questions now, but these are questions that bond investors desperately want answers for, and UK yields could remain elevated until we know who is PM and what their plan is to bring down debt.

A less spendthrift chancellor would be a welcome addition to the UK government. The bond vigilantes are circling, which Andy Burnham will be aware of.

As we move through Friday, GBP is stabilizing. GBP/USD is ticking higher and is back above $1.32. European equities are mostly flat as volumes remain low due to the US public holiday. The FTSE 100 is ticking lower, and the FTSE 250 is a weak performer and is down 0.8% so far today. This suggests that investors are concerned about the domestic outlook for the UK economy.

Andy Burnham may have won a resounding election result in Makerfield last night, but he has hard work to persuade financial markets that he is the right man for the job to grow the UK economy and get debt back under control.