# Diplomacy gathers pace; the Chancellor’s room shrinks _Iran’s seven-day offer, Xi at the White House and China leaning on Tehran: the diplomacy moved further this week than at any point since the summer. Plus five new AI models in two days and what their prices say, a Chancellor running out of headroom, and some Scottish data that horrified me._ Neil Woodford · 25 September 2026 · 13 min read ![Xi Jinping and Donald Trump walk past an honour guard at the foot of aircraft steps](https://cdn.sanity.io/images/v3acfbvo/production/8ce8b4a10558dbdd89970892ca0d0320a214e117-1734x907.jpg?w=1600&fit=max&auto=format) --- When I sat down to write this week’s update, I realised that there was so much going on that it would be hard to condense everything I wanted to comment on in one readable-length update. Given that the priority is to make these weeklies easily consumable, I have had to guillotine much of the content and have tried really hard to focus only on what I think are the most important issues. In order they are: - The conflicts in the Persian Gulf and in Europe and the impact of each on global energy prices, inflation, official interest rates and bond yields. - Despite the recently elevated oil and gas prices and last night’s reports of further exchanges of fire in the Strait of Hormuz, renewed diplomatic efforts have gathered momentum this week and China belatedly appears to be playing a much more engaged role. - The Trump–Xi summit in the US and what can be summarised from the first full day of diplomatic exchanges. - The latest AI frontier model releases and the leading companies’ pricing strategies. - Some parting comments on the latest media commentary on the narrowing options confronting the Chancellor ahead of this year’s budget. - A left-field observation on devolution. I was also going to comment on [a new ONS paper released last week](https://www.ons.gov.uk/peoplepopulationandcommunity/housing/bulletins/mortgagestatisticsuk/2025) on the UK mortgage market from 2006 through to 2025. It has some fascinating data in it (really), but given the length of this update, I thought it would be better to dedicate a separate paper to this subject, to be published early next week. I am confident that the report will slay some commonly held myths about the UK housing market and highlight why the UK’s most lunatic, self-harming tax is so damaging. _[Watch: Britain borrowed £3.5bn more than planned on Tuesday. Gilt yields fell the same day. Neil explains why. — Britain Borrowed £3.5bn Too Much. So Why Did Borrowing Get Cheaper?](https://www.noisecancelling.co/the-show)_ ## Wars and the energy price So, back to this week’s agenda, which starts with the ongoing conflict between the US and Iran. It’s been yet another round-trip period for the oil price in recent days. After dropping below $100 to its low since the first week of September, following [the restart of the Saudi East-West pipeline](https://www.usnews.com/news/world/articles/2026-09-22/saudi-arabia-restarts-east-west-oil-pipeline-to-resume-exports-from-yanbu-sources-say), which carries about 4mn barrels a day to the Red Sea port of Yanbu, the oil price subsequently climbed back up to $106. As usual there are as many theories about why this happened as there are commentators, but the most plausible is that after [several days of meetings at the UN General Assembly](https://www.aljazeera.com/news/2026/9/23/flurry-of-diplomacy-trumps-fiery-threats-us-iran-war-deal-still-elusive) in New York no deal had been announced, despite relatively positive mood music. ![Brent dipped below $100, then climbed back to $106](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-weekly-24sep26-brent-ecc2bae273f4-light.png) _Below $100 on 22 September for the first time since early September, back to $106 two days later, and lower again on Friday._ The very latest news today (Friday) is that progress has been made. The two sides are [exploring a phased deal](https://www.usnews.com/news/world/articles/2026-09-24/us-and-iran-discuss-phased-deal-to-reopen-hormuz-and-end-us-blockade-sources-say), and Iran has [offered to open the Strait of Hormuz fully within seven days](https://www.aljazeera.com/news/2026/9/25/whats-in-irans-seven-day-plan-to-reopen-the-strait-of-hormuz) if certain conditions are met, including the lifting of sanctions and the US blockade. In the meantime, flows through the Strait are continuing to improve, with [a US official telling Reuters](https://boereport.com/2026/09/24/some-60-ships-passed-through-strait-of-hormuz-on-wednesday-us-official-says/) that 60 commercial vessels passed through on Wednesday carrying 22 million barrels of oil, the most in one day since July. [The independent trackers](https://www.lloydslistintelligence.com/resources/blog/strait-of-hormuz-brief-24-september-2026) count far fewer, but the direction of travel is unequivocal, as I have been arguing for weeks. _[Embedded media](https://www.aljazeera.com/news/2026/9/25/whats-in-irans-seven-day-plan-to-reopen-the-strait-of-hormuz)_ Whilst I understand why the media consensus is suggesting that Trump has lost this confrontation with Iran and that the Iranians have all the leverage in the negotiations, I think this is more than a little one-eyed. With these volumes of traffic passing through the Strait on a regular basis, it is clear that the point of maximum Iranian leverage on the oil price is past. It’s also clear that the US blockade of Iranian ports is exerting a lot of pressure on the Iranian economy and on the regime’s ability to function. Clearly these are fraught times and the energy market is obviously stressed, especially in some refined products like diesel, but my sense is that there is an increasingly clear path to a diplomatic solution to this conflict, and Iran’s Gulf neighbours seem to believe it’s worth investing time and effort in trying to achieve that, as, apparently, do the Chinese, who are now significantly engaged in this multilateral process. The fall in the oil price today and the rally in financial markets is a sign that there is some increasing confidence in a deal going into the weekend. The war in Europe feeds into energy prices through refined products rather than through the crude oil price. Ukrainian drone strikes on Russian refineries have helped to push [diesel futures to record highs in the US and Europe](https://money.usnews.com/investing/news/articles/2026-09-21/global-diesel-prices-hit-record-highs-further-rises-possible), and this is causing angst, especially in the US ahead of the midterm elections in November. That’s why [Trump has asked the Ukrainians to stop targeting Russian refineries](https://www.cnbc.com/2026/09/14/trump-ukraine-russia-diesel-prices-oil.html), which [Zelenskyy says he is ready to do](https://www.aljazeera.com/news/2026/9/23/zelenskyy-says-ukraine-ready-for-energy-truce-with-russia-after-trump-talks), but the Russian side is not ready for the quid pro quo. I am not expecting a breakthrough here, but clearly if agreement was reached this would do more for refined product prices than it would for the oil price. _[Embedded media](https://www.cnbc.com/2026/09/14/trump-ukraine-russia-diesel-prices-oil.html)_ ![US diesel futures closed at a record in September](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-weekly-24sep26-diesel-9ce8ec2982a2-light.png) _Refined products are where the war in Europe bites: diesel futures set a closing record on 15 September, above the 2022 peak._ The gas price is more important for UK household energy prices than the oil price, and here there is some relief this week. The UK natural gas price has fallen after spiking midweek and is now more than 25p a therm, or more than 12%, below the peak reached on the 14th of this month. ![UK gas has fallen back from its 14 September peak](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-weekly-24sep26-uk-gas-1e06ff6893ac-light.png) _The UK gas price matters more to household bills than the oil price, and it has come back from the 14 September peak._ ## Inflation and interest rates Whilst this raised tension is very unwelcome, it hasn’t changed my medium or longer-term views about where inflation and interest rates are headed. [UK CPI was 3.1% in August](https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/august2026) and core inflation was unchanged at 2.6%, and both are set to increase in September, unsurprisingly. Reflecting increasing central bank concerns about inflation, [the ECB](https://www.ecb.europa.eu/press/pr/date/2026/html/ecb.mp260910~314e508016.en.html), [the Fed](https://www.federalreserve.gov/newsevents/pressreleases/monetary20260916a.htm) and [the Bank of Japan](https://www.bbc.com/news/articles/cqn74jeek06no) have all raised rates, and “the market” (no one knows who this is, by the way) is expecting further rate rises everywhere. Indeed, the Fed is now expected to raise a further three times over the next twelve months and the Bank of England is expected to [increase rates on four occasions](https://www.reuters.com/world/uk/bank-england-hold-rates-energy-shock-stirs-talk-hike-2026-09-16/) over the same period. As you may have guessed, I think this is mad. [The MPC next meets on 5 November](https://www.bankofengland.co.uk/monetary-policy/upcoming-mpc-dates), a week after the budget, and if by then some kind of peace deal has been worked out and implemented there may be no rate rises at all in the UK, either at that meeting or in any subsequent ones. As you can guess, it’s all down to the wars and peace deals. If we get a good outcome, central banks will be reversing engines quite soon in my view. ## Inflation leads, and Treasuries and gilts follow Bond markets everywhere have had a bad week, and [yields have risen everywhere](https://www.reuters.com/world/asia-pacific/japans-10-year-bond-yield-hits-30-year-high-after-us-treasury-selloff-2026-09-24/). By now, [regular readers will know why](https://www.noisecancelling.co/read/bond-hysteria-a-leaky-hormuz-and-fiscal-incontinence), and I don’t propose to repeat myself here for the umpteenth time. Suffice to say that the yield premium in the ten-year gilt over the ten-year Treasury has narrowed to under 20bps, and sterling has held steady against the euro. Both are robust indicators of the lack of distress in UK financial assets. Enough said. ![The gilt premium over Treasuries is below 20bps](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-weekly-24sep26-gilt-premium-a0913cca42a5-light.png) _Narrowing, not widening. Not what a market worried about UK fiscal risk would do._ My favourite economist sent me this note this week, which I thought was worth sharing: > Our very simple “model” of US ten-year bond yields says that yields rise when the Fed increases rates. Based on the chart below, the “predicted” ten-year bond yield based on a funds rate of 4% is 5.3%. Pretty close to where they are. ![Where the Fed funds rate goes, the ten-year follows](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-weekly-24sep26-fedfunds-tenyear-f5663e541197-light.png) ## Diplomacy gathers momentum, and China is now fully engaged The diplomacy has moved further this week than at any point since the summer. On Tuesday, the day President Trump told the UN he had to decide whether to “[annihilate](https://www.nbcnews.com/politics/trump-administration/trump-address-united-nations-general-assembly-iran-war-rcna599085)” Iran, his envoys Steve Witkoff and Jared Kushner held [three hours of mediated talks](https://www.jpost.com/middle-east/iran-news/article-909357) with Iran’s foreign minister, Abbas Araghchi. By Wednesday Iran had tabled [a written road map](https://www.thenationalnews.com/news/mena/2026/09/23/iran-us-meeting-new-york/): a region-wide ceasefire of up to 60 days, a phased reopening of the Strait, an end to the US blockade and a timetable for negotiations. Tehran has given Washington four or five days to respond. On Thursday [Reuters reported](https://www.usnews.com/news/world/articles/2026-09-24/us-and-iran-discuss-phased-deal-to-reopen-hormuz-and-end-us-blockade-sources-say) that the negotiators are exploring a phased deal, with Iran reopening the Strait in return for the US lifting its blockade. Some in Tehran deny any negotiation is under way, but [President Pezeshkian said](https://www.nbcnews.com/world/iran/irans-president-says-tehran-wants-deal-us-midterm-elections-rcna599638) he wants a deal before the US midterms on 3 November. President Trump told the UN he expects one “right after” them. The sticking point is sequencing: neither side wants to give up its leverage first. Nor has the fighting stopped. On Wednesday a bulk carrier, [the Cape Dao](https://www.seatrade-maritime.com/security/seafarer-dead-in-attack-on-uae-managed-bulker), was hit in the Strait, killing one of its crew. Last night brought reports of further exchanges of fire, though little had been confirmed by this morning: open-source monitors reported that Iran had fired two anti-ship cruise missiles at a vessel in the Strait, which has not been verified. What is on the record is that the Houthis claimed missile and drone attacks on Riyadh and on Aramco’s facilities at Yanbu, and that Saudi Arabia, Turkey and Pakistan have called [an urgent meeting of their chiefs of staff](https://www.aljazeera.com/news/2026/9/25/saudi-turkish-pakistani-chiefs-plan-urgent-talks-amid-yemen-fighting) under their joint defence pact. The pressure on Washington is building. [US petrol is close to $4.50 a gallon](https://gasprices.aaa.com/national-average-climbs-nearly-5-cents-since-last-week/), diesel is at a record, and on Thursday a Senate resolution to limit the President’s war powers [failed by 49 votes to 50](https://www.npr.org/2026/09/24/nx-s1-5980318/senate-iran-war-powers-vote). The other change is China. On 16 September [Wang Yi hosted Araghchi in Beijing](https://www.fmprc.gov.cn/eng/wjbzhd/202609/t20260918_12025171.html), their fourth conversation in three months, and urged both sides to return to the Islamabad memorandum and reopen the Strait. On Thursday, at the White House, [Xi Jinping urged President Trump](https://www.mfa.gov.cn/eng/xw/zyxw/202609/t20260925_12031181.html) to settle the conflict through negotiation as soon as possible. China’s voice matters more than any mediator’s: it took more than 80% of Iran’s seaborne oil exports last year, [according to Kpler](https://www.reuters.com/business/energy/chinas-heavy-reliance-iranian-oil-imports-2026-03-21/). I would not overstate it. [The Wall Street Journal has reported](https://www.wsj.com/politics/china-iran-aid-xi-trump-summit-e6541ae8) that Chinese suppliers sent Iran’s defence ministry around 1,300 shipments that included dual-use components in the first half of this year. But a China that wants the Strait open, and says so in Tehran and in Washington, is a better backdrop for a settlement than the one we had in the spring, and it supports my view that the energy price spike will not be sustained, even if the timing is impossible to call. ## More jaw-jaw Thursday was the first full day of Xi Jinping’s first White House visit in more than a decade, ending with a state dinner at which President Trump said the two countries had [never got along better](https://www.bbc.com/news/articles/cxq63dqp93n1o). The two leaders have tea this afternoon before Xi flies home. _[Embedded media](https://x.com/WhiteHouse/status/2103203278465192194)_ The substance is modest, as expected. Scott Bessent said on Wednesday that the tariff truce agreed in Busan last October, due to expire on 10 November, [has been extended to 10 January](https://www.politico.eu/article/bessent-says-us-china-trade-truce-extended-by-2-months/), and that China has proposed “a bigger deal”. [Xinhua says](https://english.news.cn/20260925/372aaa5bab3f4ca6b06dd399c09113db/c.html) the two sides reached a new arrangement on trade, without details, and that Xi asked the US to handle Taiwan “with prudence”. On AI, Xi said development should stay [under human control](https://www.washingtonpost.com/technology/2026/09/25/trump-rejects-demands-ai-rules-while-xi-calls-human-control/), while President Trump said he wants to leave super-intelligence “[exactly where it is](https://thehill.com/policy/technology/6108574-trump-xi-ai-talks/)”. _[Embedded media](https://www.bbc.com/news/articles/cxq63dqp93n1o)_ The more important point is what has not happened, at least in public: no escalation on tariffs and no row over Taiwan. The truce extension keeps the trade relationship stable through the winter, which probably matters more than the warm words, the fine dining and the exchange of gifts. Whilst on the subject, the fact that [China’s exports rose 25% year on year in August](https://www.reuters.com/world/asia-pacific/chinas-exports-up-25-yy-august-imports-surge-282-2026-09-08/) is a sign of its increasing dependence on trade to drive growth in the economy. Domestically, [fixed asset investment and household consumption remain very depressed](https://www.stats.gov.cn/english/PressRelease/202609/t20260915_1965305.html), which clearly poses major challenges for the administration. The EU’s challenges are in some ways a mirror image of China’s. [A massive and growing trade deficit with China](https://www.politico.eu/article/eu-china-trade-deficit-has-hit-tipping-point-warns-von-der-leyen/) is a major headache for the EU, and for Germany’s economy in particular, [especially its automotive sector](https://www.euronews.com/my-europe/2026/09/17/germany-turns-on-brussels-as-chinese-car-sales-on-track-to-exceed-1m-in-2026). Quite how this is resolved is as yet unclear, but it seems that the deficit is the thorniest issue confronting both economies. My guess is that in 2027, a critical year for elections across Europe (France elects a new president, and Spain and Italy hold general elections), trade friction becomes a more obvious and greater challenge for the EU than for the US. ![China’s exports rose 25% in August](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-weekly-24sep26-china-exports-c7e9f725ce65-light.png) _Growth that depends more and more on selling to the rest of the world._ ## New frontier AI models and new prices [Last week](https://www.noisecancelling.co/read/the-fed-hikes-the-bank-holds-and-gilts-rally) I reported that Anthropic’s chief executive, Dario Amodei, had [called on the industry to slow the development of frontier models](https://darioamodei.com/post/we-must-pace-the-frontier). On Tuesday Anthropic released [Claude Opus 5.5](https://www.anthropic.com/claude-opus-5-5), the first model launch since that alarm bell was sounded. About 90 minutes later, OpenAI [announced the launch of its two new GPT-6 models](https://openai.com/index/introducing-gpt-6-sol-and-luna/), and [xAI](https://x.ai/news/grok-4-7) and [Xiaomi](https://mimo.mi.com/docs/en-US/news/latest/v2-6) had released new models the day before. Three frontier and two fast follower models in two days suggests the pace of development is not slowing at all. _[Embedded media](https://x.com/claudeai/status/2102435511222890900)_ The pricing is more interesting than the benchmarks, and it fits the pattern I described in “[Tokens are not money](https://www.noisecancelling.co/read/tokens-are-not-money)” earlier this month. At the top, prices are holding or rising: OpenAI launched [GPT-6 Astra](https://openai.com/index/gpt-6-astra/) in early September at $10 per million input tokens and $50 per million output tokens, two and a half times its predecessor’s price, and [Anthropic’s Claude Fable 5.1](https://platform.claude.com/docs/en/about-claude/pricing) sits at the same level. Below the top, prices are falling fast. Opus 5.5 costs $4 and $20, 20% less than Opus 5, and Anthropic says it matches Fable 5.1 on most work and costs about 40% less to run than its predecessor. OpenAI’s GPT-6 Sol costs $2 and $10, half its predecessor’s price and half that of Opus 5.5, and GPT-6 Luna $0.10 and $0.50; [OpenAI says these are permanent prices](https://thenewstack.io/openai-gpt-6-sol-luna-release/), not promotional ones. [Xiaomi’s open-weight MiMo V2.6 Pro](https://mimo.mi.com/docs/en-US/news/latest/v2-6) costs $0.435 and $0.87. ![$50 at the top; a fraction of that below it](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-weekly-24sep26-ai-prices-8eed6dceee66-light.png) _The frontier holds its price. Beneath it, prices are being competed away._ OpenAI’s [launch posts](https://openai.com/index/introducing-gpt-6-sol-and-luna/) compared its new models directly with Anthropic’s, on cost per completed task rather than price per token. The frontier is competing with the frontier, charging a premium for being genuinely at the top and cutting prices hard beneath it. For users, the cost of a given level of capability keeps falling quickly. For anyone valuing these businesses, the question is how much revenue sits in the top tier, where pricing is holding, and how much in the tiers beneath it, where it is being competed away. _[Embedded media](https://x.com/OpenAI/status/2102460975790137662)_ One item of UK interest: [Politico reported on Thursday](https://www.politico.com/news/2026/09/24/white-house-asks-openai-and-anthropic-to-hold-new-models-from-uk-testers-until-u-s-review-01091769) that the White House has asked OpenAI and Anthropic not to share new models with the UK’s AI Security Institute until the US government has tested them. If that sticks, I suspect Britain’s claim to a leading role in AI safety will be harder to sustain. _[Embedded media](https://www.politico.com/news/2026/09/24/white-house-asks-openai-and-anthropic-to-hold-new-models-from-uk-testers-until-u-s-review-01091769)_ ## The Chancellor will reap what his party has sown Finally, the budget. The media consensus this week is that the Chancellor’s options have narrowed sharply, and [the FT reported](https://www.ft.com/content/5deccbb2-7354-4856-a98b-c19c8c73d6ef) that the Treasury is open to accepting a smaller fiscal buffer to limit tax rises on 28 October. [Deutsche Bank estimates](https://www.telegraph.co.uk/business/2026/09/24/healey-considers-smaller-budget-headroom-to-avoid-tax-rises/) that higher borrowing costs and inflation have cut the [£23.6bn of headroom left in March](https://obr.uk/efo/economic-and-fiscal-outlook-march-2026/) to about £8.5bn; [the Resolution Foundation](https://www.resolutionfoundation.org/press-releases/chancellors-positive-vibes-cant-hide-painful-budget-trade-offs/) puts it as low as £5bn once the government’s unfunded pledges, including extra defence spending, are included. The measures being floated are [a bank levy](https://www.telegraph.co.uk/politics/2026/08/29/healey-eyes-windfall-tax-on-banks-and-oil-companies/), [higher capital gains tax](https://www.independent.co.uk/news/uk/politics/budget-predictions-2026-burnham-healey-labour-tax-b3053576.html), a windfall tax on oil and gas and [a lower threshold for the so-called mansion tax](https://www.standard.co.uk/news/london/mansion-tax-john-healey-cut-threshold-andy-burnham-b1297581.html). _[Embedded media](https://www.cityam.com/autumn-budget-healey-weighs-slashing-fiscal-headroom-to-reduce-tax-hikes/)_ I have two observations. First, much of the lost headroom reflects the OBR’s conditioning assumptions for gilt yields and gas prices, set while both are inflated by a war. Gilt yields are following Treasuries and the oil price, not UK borrowing, and both could look very different by the spring. Raising taxes permanently to rebuild a buffer eroded by what may be a temporary spike would add to the damage, so accepting a smaller buffer is, in my view, the least bad option on the table. Second, every item on the list is a tax. There is no serious discussion of spending, even though [borrowing in the first five months of the financial year was £8.1bn above the OBR’s forecast](https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/bulletins/publicsectorfinances/august2026), mostly because of higher spending on benefits and debt interest. Until that changes, rebuilding the headroom will mean yet more tax increases, which I suspect will go down with the electorate like a bucket of cold sick. Neither will it be good for growth, which is the Chancellor’s defining mission, let’s not forget. Watching Mr Healey reconcile the actions with the rhetoric should be entertaining, if nothing else. ![Borrowing is £8.1bn ahead of the OBR’s forecast](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-weekly-24sep26-psnb-f58164416523-light.png) _Five months into the financial year, borrowing is £8.1bn above forecast, more than half of it benefits and debt interest._ ## A left-field observation on devolution Regular readers will have noticed that I am not a fan of the new PM’s obsession with devolution as a solution for driving growth across the country. My view is based on facts and data, whereas his appears to be nothing more than yet another political gesture. In summary, [the data shows](https://www.noisecancelling.co/read/governments-don-t-create-growth) that a quarter of a century of devolved government in Scotland, Northern Ireland and Wales has signally failed to close the income per capita gap with England. It’s also led to significantly worse educational outcomes for children in these regions, as I showed in [this report a fortnight ago](https://www.noisecancelling.co/read/oil-over-100-and-the-ecb-reaches-for-the-cricket-bat). This week I saw some data which horrified me, and highlighted again the failure, in this case of the Scottish government, to deal with [its own serious health challenges](https://www.nrscotland.gov.uk/publications/drug-related-deaths-in-scotland-2025) appropriately. _[Embedded media](https://www.bbc.co.uk/news/articles/cmwyz2pvw058o)_ ![Scotland’s drug death rate is 11 times the EU average](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-weekly-24sep26-drug-deaths-449d252e7687-light.png) _277 deaths per million in Scotland, against 25 across the EU._ ## What to look out for next week Iran’s window for a US response runs out this weekend. [Labour’s conference opens in Liverpool](https://www.bbc.com/news/articles/crz9z7y2ky0go) on Sunday, and the Prime Minister’s first conference speech as leader is the obvious place to look for signals on the budget. Early in the week I will publish the separate piece on the ONS mortgage data.