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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden (until 2pm) and Nick Fletcher

Bank of England policymaker backs stimulus as UK economy worsens – as it happened

An aerial view of the Skyscrapers in the City of London financial district
An aerial view of the Skyscrapers in the City of London financial district Photograph: Alamy Stock Photo

European markets edge higher

Ahead of some key central bank meetings this week, notably the US Federal Reserve and the Bank of Japan, investors managed to hold their nerve. So despite oil prices slipping back further, stock markets in Europe (mostly) ended in positive territory, lifted by positive news from the likes of BT and GKN. But banks remained in the doldrums ahead of Friday’s European stress test results. Wall Street was marginally lower by the time Europe closed, as a spate of new data suggested a US rate rise could be on the cards again later in the year. The final scores showed:

  • The FTSE 100 added 13.90 points or 0.21% to 6724.03
  • Germany’s Dax rose 0.49% to 10,247.76
  • France’s Cac closed up 0.15% at 4394.77
  • Italy’s FTSE MIB edged up 0.03% to 16,697.01
  • Spain’s Ibex ended down 0.18% at 8560.2
  • In Greece, the Athens market added 0.22% to 566

On Wall Street, the Dow Jones Industrial Average is currently down 32 points or 0.18%.

On that note, it’s time to close for the evening. Thanks for all your comments, and we’ll be back tomorrow.

In sum, the US data seems to point to a possible rate rise this year, which has not been lost on the stock market. Wall Street has now lost ground, with the Dow Jones Industrial Average now down 80 points or 0.44%. Joshua Mahony, market analyst at IG, said:

A batch of particularly strong US data points highlighted the frustrating position [Federal Reserve chair] Janet Yellen & co find themselves in, where their domestic economy warrants another interest rate hike to normalise monetary policy. However, with global headwinds blowing more from the Atlantic and less from the Pacific, the Fed appears to have her hands tied for the time being. Despite markets largely disregarding the possibility of any actions from the Fed tomorrow, today’s outperformance in data spanning manufacturing, consumer confidence and new home sales seemed to raise the likeliness of a 2016 hike, spurring weakness in US stocks.

More on the rise in US new home sales. Reuters reports:

New U.S. single-family home sales rose more than expected in June, reaching their highest level in nearly 8-1/2 years, the latest sign that the housing market was gathering momentum.

The Commerce Department said on Tuesday new home sales increased 3.5 percent to a seasonally adjusted annual rate of 592,000 units last month, the highest level since February 2008.

May’s sales pace was revised up to 572,000 units from the previously reported 551,000 units. Economists polled by Reuters had forecast new home sales, which account for about 9.6 percent of the housing market, rising to a rate of 560,000 units last month.

More US data, this time fairly reasonable, and giving the Federal Reserve something to think about.

The July consumer confidence index came in at 97.3, better than the expected 95.9 and little changed from the revised 97.4 figure for June (down from an initial 98).

And the Richmond Fed composite manufacturing index came in at +10 in July, compared to -10 in June.

Back with the housing market, single family home sales rose 3.5% in June compared to no change in May.

Updated

On the services data Markit said:

July data suggested that growth in the U.S. service sector remained muted, with activity rising at the weakest pace in the current five-month sequence of expansion. A slower increase in new business was also recorded. On a more positive note, the rate of job creation picked up slightly and business sentiment improved markedly from June’s record low. On the price front, slower increases were registered for both input costs and output prices during the month.

Andrew Harker, senior economist at Markit said:

The U.S. service sector remained stuck in a low gear at the start of the third quarter of 2016, with growth of activity remaining subdued amid a slower rise in new business. This is particularly disappointing given the decent numbers posted by the manufacturing sector last week.

A bit more encouraging was the rebound in business confidence following June’s survey low, suggesting that a return to stronger growth will be possible once the current soft patch comes to an end. Whether this will be before the presidential election or not remains to be seen, however.

US service sector
US service sector Photograph: Markit
US composite PMI
US composite PMI Photograph: Markit

US service sector growth slows

Growth in the US service sector is slowing, according to an initial estimate for July.

Markit’s services PMI index came in at 50.9, down from the 51.4 level seen in June and below forecasts of a figure of 52.

But Markit’s composite index - taking in both services and manufacturing - was up from 51.2 in June to 51.5, the highest since April.

Wall Street edges up at open

US markets are marginally higher in early trading as investors keep their powder dry ahead of a host of big name companies reporting later, including Apple and Twitter, as well as Wednesday’s interest rate decision from the Federal Reserve.

So the Dow Jones Industrial Average is currently up just 11 points or 0.06%.

Oil continues to come under pressure on persistent concerns about a supply glut at the same time as demand weakens along with the global economy. Brent crude is currently dow 0.36% at $44.56 a barrel, having earlier fallen as low as $44.14, a level not seen since the middle of May.

Updated

Over to the US, and as the Federal Reserve meets to decide its latest move on interest rates, there is a spate of economic data coming out for them to consider.

Markets are not expecting the US central bank to change rates, although there is a growing school of thought that it may raise borrowing costs before the end of the year if the economic picture seems to be heading in the right direction. Larry Hatheway, chief economist at asset management firm GAM, said:

The Federal Reserve is unlikely to announce a change in its target Fed Funds rate at the conclusion of this week’s Federal Open Market Committee (FOMC) meeting. A hallmark of the Yellen Fed, and its predecessors, is clear communication regarding policy decisions, avoiding surprises. Given the uncertainties the Fed had cited around ‘Brexit’ as well as the weakness of the May employment report, the Fed is widely believed to be ‘on hold’, a view it will almost certainly confirm this week.

That said, the FOMC statement is also likely to recognise that the much discussed concerns for capital markets, the world economy and – by extension – the US economy stemming from the UK ‘Leave’ result have not, for the most part, manifested themselves. Without saying so directly, the Fed is likely to conclude that the primary economic consequences of ‘Brexit’ will be felt in the UK, with little impact on US economic conditions.

So the latest data is likely to be scoured for signs of how the US economy is performing.

First off the block is some housing data, which shows prices rising less than expected but still indicating a fairly strong marke.t

The S&P Case-Schiller index rose 5.2% in May year on year, below the 5.4% figure in the previous month and the 5.5% forecast by economists polled by Reuters. David M. Blitzer of the S&P index committee said:

Overall, housing is doing quite well...In addition to strong prices, sales of existing homes reached the highest monthly level since 2007 as construction of new homes showed continuing gains.

Assuming Martin Weale is a bellwether, what might the Bank of England do next week to stimulate the economy?

Jeremy Cook of World First predicts an interest rate cut, a new bout of quantitative easing (QE; buying bonds with new money), and new measures to encourage banks to lend.

He says:

We are maintaining our call for a Bank of England interest rate cut by 25bps and an increase in QE by somewhere between £50bn and £75bn. Within the announcement we are also looking for something similar to the ECB’s TLTRO – Targeted Longer-Term Refinancing Operation – that allows banks to borrow at negative rates i.e. get paid for borrowing. This would be a subsidy to British banks that should insulate the financial system from the unwanted effects of negative deposit rates should the Bank see the need.

This is the kind of financial policy engineering that may allow for a near term pick-up in inflation expectations and, maybe more importantly, a calming of fears around financial stability.

But other economists are split over the chances of more quantitative easing, on top of the £375bn of bonds already held by the BoE.

Danielle Haralambous of the Economist Intelligence Unit points out that the Bank doesn’t have many conventional tools left....

Updated

President of the ECB (European Central Bank) Mario Draghi waves before a meeting.

We should have worn special hats today, as apparently it’s Mario Draghi Day.

No, the European Central Bank president hasn’t been honoured with his own holiday (yet). Instead, it’s the fourth anniversary of his pledge to do “whatever it takes” to save the euro.

That surprise promise, made in London in 2012, paved the way towards various initiatives to fight the eurozone’s slide into deflation.

Draghi’s pledge to buy unlimited quantities of bonds from struggling nations helped to drive down eurozone bond yields. And thanks to the splurge of quantitative easing, the ECB’s balance sheet has swollen dramatically.

However, but inflation remains worryingly low, growth is still quite weak and inflation too high.

Maybe we’ll have more to celebrate next year. In the meantime, check out the FT’s collection of graphs to show how the last four years have developed.

After a quiet morning in the City, BT is still the best-performing stock on the FTSE 100.

Its shares have now jumped by almost 5%, showing investors’ verdict on Ofcom’s decision not to split the company.

This table shows how significant Openreach is to BT’s financial performance:

Britain’s banks have turned up their noses at the latest offer of cheap cash from the Bank of England.

The BoE has allocated just £75m of liquidity in its latest weekly auction since the Brexit vote. This gives banks a chance to swap assets for ready cash, in case they are facing a funding squeeze.

Clearly they are not - £75m is the lowest take-up since the EU crisis began, down from £250m last week.

The Federation of Small Businesses is deeply alarmed about the prospect that firms could be charged negative interest rates by their banks.

Mike Cherry, the FSB’s national chairman, has urged the Bank of England to fully consider the consequences of cutting rates to fresh record low:

Today’s warning from Natwest and RBS will be deeply concerning to small firms. FSB’s latest research shows small business confidence is already at a four year low. Firms are less optimistic, cutting headcount and curbing investment intentions.

“When the Monetary Policy Committee meets next week to decide on interest rates, we would call on them to do everything possible to consider the implications of changing interest rates for smaller firms and the self-employed looking to maintain or grow their business.

“It is now vital that all finance providers holding deposits from small businesses do everything they can to update customers concerned about any changes to their Business Current Account (BCA) during this uncertain economic period.

Businesses warned on negative interest rates

Martin Weale’s new enthusiasm for a fresh stimulus package raises the prospect that UK interest rates are slashed to almost zero next week.

A interest rate cut would present challenges for the banking sector, as rates are already just 0.5%.

The Guardian revealed last night that NatWest is already warning business customers that it could impose negative interest rates – meaning they would be charged to leave money at the bank.

Clive Lewis, head of enterprise at the ICAEW, says businesses need to prepare for negative interest rates. He fears that it could encourage firms to take money out of the bank, raising the risk of theft.

Lewis says:

“It is vital that all customers, but especially small business customers, check all communications from their bank and monitor their accounts. Banks are well within their rights to do this, but for small businesses where cash flow is tight, this could cause significant problems if they are not prepared.

“The danger is that this could have a distorting effect by incentivising customers not to keep their money in the bank – either prompting unwarranted spending or causing them to store money in ways that are less safe”

UK mortgage approvals and business lending both fall

Lending to UK business and housebuyers has fallen, highlighting nervousness created by the EU referendum.

Mortgage approvals fell to 40,103 in June, down from 41,842 [corrected] in May, according to the British Bankers Association.

That’s the fewest mortgage approvals since March 2015, although more money was loaned than a year ago.

The BBA also reports that business lending fell in June for the first time this year, indicating that businesses delayed big projects before June’s Brexit vote.

BBA chief economist Rebecca Harding says we can’t read too much into this, though:

“Overall, business confidence was clearly fragile in anticipation of the outcome of the vote, but these results are not a verdict on the health of the economy post-Brexit,”

Updated

The pound has weakened against all other major currencies this morning, after Martin Weale threw his weight behind a new stimulus package for the UK economy.

Sterling is still down half a cent against the US dollar at $1.309. It’s down a similar amount against the euro too, at €1.192.

Traders are calculating that Weale’s change of heart is significant, as other policymakers may also be spurred into action by the latest economic data.

Man Group sounds alarm over Brexit

UK hedge fund manager Man Group has warned that the EU referendum is casting a shadow over the City.

Man posted a 3% drop in funds under management today. CEO Manny Roman says customers could be spooked by the Brexit vote:

The outlook, particularly cross border post Brexit, remains uncertain and accordingly the risk appetite of our clients has the potential to impact flows.

Updated

File photo of a BP logo at a petrol station in LondonA BP logo is seen at a petrol station in London, Britain January 15, 2015. REUTERS/Luke MacGregor/File Photo

Oil giant BP has warned that economic conditions are tough, after missing City forecasts in the last quarter.

BP made an underlying replacement cost profit of $720m in the second quarter of 2016, down from $1.3bn last year, as the low oil price continued to hit revenues.

BP Chief Executive Bob Dudley sounded cautious, telling shareholders that:

“As we look forward we expect the external environment to remain challenging,”

BP shares are down 1.7% this morning.

Updated

Next week’s Bank of England monetary policy committee meeting is Martin Weale’s last chance to influence monetary policy, as he steps down later in August.

He has a somewhat spotty record too – having voted to raise borrowing costs several times since the financial crisis due to (unwarranted?) worries over inflation.

Kit Juckes of French bank Société Générale comments:

He has attended 71 MPC meetings so far (if my maths is right) and has voted to leave rates unchanged 59 times and to hike 12 times. The MPC has never moved rates over that period but perhaps this time, he’ll be a bellwether.

Martin Weale’s warning about the weakening UK economy shows that the Bank of England is close to launching a stimulus package, say analysts.

Here’s Tony Cross of Trustnet Direct:

Although the Bank of England meet again to discuss rates next week, it had initially been thought that meaningful action would have to wait until we had a full quarter’s worth of post-Brexit data on the table, but opinions here may now be shifting.

Jeremy Cook of World First agrees:

With Weale now expected to vote for a policy cut in what will be his last meeting as a member of the Monetary Policy Committee it is now almost a guarantee that the majority will plump for a stimulatory increase in monetary accommodation. The exact make-up of that policy still remains in doubt.

Reuters’ Jamie McGeever is struck by Weale’s sudden change of view:

Tim Farron, leader of the Liberal Deomocrats.

Liberal Democrat leader Tim Farron has also blasted Ofcom for not splitting BT up, given the steady criticism over the telco’s broadband service.

He argues that the regulator has proved to be toothless, even though today’s ruling forces Openreach to work more closely with other service providers:

“It provides a poor service to customers and has been starved of investment. Giving more powers and investment to Openreach is better than nothing but the crucial thing is it will leave millions of customers with poor quality broadband.

That is unacceptable in the modern age when the government claims to be creating a digital economy.

“If a watchdog yet again fails to bark, perhaps it is time to put it down.”

Updated

John Fingleton, the former head of Britain’s Office for Fair Trading, reckons Ofcom have blundered by not completing separating BT’s network arm from the retail side of the company.

BT shares jump 3% after Ofcom ruling

The BT logo.

BT’s bosses may be breathing a sigh of relief this morning after regulator Ofcom resisted pressure to formally split the company.

Shares in BT have jumped by 3% after Ofcom recommended that Openreach, its broadband network provider, should become a legally separate company.

Some BT critics had argued that Openreach should be completely split off, to prevent the company from failing to invest enough in the country’s telecoms infrastructure.

Those calls have not been heeded by the regulator, though, as my colleague Angela Monaghan explains:

BT will not have to sell off its Openreach broadband division despite concerns that it has been starved of investment and provides a poor quality of service.

The media regulator, Ofcom, has instead ordered BT to give more independence and investment powers to Openreach.

Ofcom said Openreach should be run as a legally separate company within BT Group, with its own board and its own brand.

“This model would provide Openreach with the greatest degree of independence from BT Group that is possible without incurring the costs and disruption – to industry and consumers – associated with separating the companies entirely,” Ofcom said, announcing the decision.

Updated

Shares in London are rising in early trading, partly thanks to the weakening pound:

Weale backs stimulus: What the experts say

Martin Weale’s decision to back fresh stimulus measures next week has caused a stir in the City.

Analysts at Royal Bank of Canada reckon that there’s only one ‘hawk’ left on the committee:

The Financial Times carries an interview with BoE MPC member Martin Weale that indicates he will now vote in favour of an immediate stimulus package at the August meeting.

In a speech last week said he wanted to “wait for firmer evidence before making any policy change” but following the sharp fall in the recent ‘flash’ PMI surveys he now thinks that news will be very material for next week’s decision.

The business survey evidence has been a lot worse than he was expecting. Of the MPC members to have spoken on the record since the referendum, that now leaves just Kristin Forbes as a hawkish outlier.

However, Weale is also getting some stick for this u-turn, given he was arguing against immediate stimulus measures last week.

Pound hit by Weale's stimulus hint

City traders are selling the pound with gusto, following Martin Weale’s hint that he’ll vote for a Bank of England stimulus programme next week.

Sterling has fallen by half a cent against the US dollar to $1.3092, which isn’t great news for anyone heading to America on their holidays.

That adds to Friday’s selloff, when the pound dropped by 1.5 cents after Markit’s PMI survey showed the economy shrinking at its fastest rate since 2009.

The agenda: UK rate cut close; BT Openreach decision

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

The big news this morning is that one of the Bank of England’s most hawkish members has warned that the economy is worse than he expected.

Martin Weale has been shaken into action by last week’s grim purchasing managing index (PMI), which showed that manufacturing firms and service companies had suffered falling orders and demand in July.

That report implies that the UK economy is probably shrinking this month.

And it means Weale is likely to vote for a new stimulus package, which may include an interest rate cut, at next week’s meeting.

Dr Martin Weale.
Dr Martin Weale. Photograph: LNP/REX/Shutterstock

Weale told the FT that last Friday’s PMIs were “a lot worse than I had thought” and showed “expectations have worsened sharply”.

He added:

“They are the best short-term indicator we have at the moment. I certainly feel they are very material for the decision we’ll be taking next week.”

Here’s a reminder of just how sharply the PMI slumped into contraction territory:

UK PMI, July 2016
UK PMI, July 2016 Photograph: Markit

It’s quite a change of stance from Weale- -- back on 18 July, he argued that we didn’t have enough evidence that the economy was suffering from June’s Brexit vote. Clearly a week is a long time in monetary policy....

Only one member of the Bank’s monetary policy committee, Gertjan Vlieghe voted to cut interest rates at this month’s meeting. But Weale won’t be the only policymaker to have clocked the importance of the PMIs, so the next meeting on August 4 could be rather lively...

Here’s the FT’s story:

Also coming up today....

Telecoms regulator Ofcom is announcing plans to restructure BT Openreach, the telco’s network arm. It will be split off into a ‘distinct company’, separate from the rest of the operation.

But will it be enough to allay concerns over service levels and broadband speed?

We’ll be watching the BHS scandal again today too, after MPs yesterday released a damning report into the collapse of the retailer.

Sir Philip Green, who came into particular criticism, is now threatening to sue MP Frank Field over comparison to Robert Maxwell.

There’s a flurry of company news this morning, with oil giant BP and fund manager Man Group reporting to the City:

But the major corporate news won’t come until late tonight, when Apple and Twitter reveal how well they performed in the last quarter.

We’ll be tracking all the main news through the day....

Updated

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