Afternoon summary
With Wall Street closed for the Independence Day holiday, it looks like a quiet afternoon lies ahead.
So here’s a quick recap.
The Bank of England has raised the pressure on UK lenders not to offer credit recklessly. The central bank is demanding proof that loans are being made in a sensible fashion, following growing concern that an unsustainable credit bubble is building.
The BoE is particularly concerned about the growth in 0% teaser credit card deals, and PCP car loans. Both areas could trigger steep losses for lenders if the economy deteriorates.
The latest economic data shows that UK builders expanded at a slower rate in June, after a strong May. Economists say that political uncertainty, due to Brexit and the hung parliament, is putting clients off committing to new projects.
The split at the Bank of England over interest rates has widened yet further. Policymaker Ian McCafferty has argued that it would be prudent to raise borrowing costs now, but fellow MPC member Gertjan Vlieghe says it’s much better to wait, given the slowing economy.
European Central Bank chief economist Peter Praet has also sounded dovish, saying it’s too early for the ECB to declare victory and start unwinding its stimulus.
In the City, shares in payments group Worldpay have surged by 30%, after it received two takeover bids.
Europe’s stock markets are in the red, with North Korea’s missile test hitting sentiment. Worldpay, though, has dragged the FTSE 100 back up into the green....
That’s may be all for today, tho we’ll be back if anything dramatic happens....
Just in: The European Union has approved Italy’s bailout of the world’s oldest bank, Monte dei Paschi.
Bloomberg has the details:
Banca Monte dei Paschi di Siena won formal European Union approval to receive a €5.4bn ($6.1bn) capital injection from the Italian government in return for further restructuring of the world’s oldest bank.
The European Commission has approved Italy’s plan to support the bank’s recapitalization under EU rules, “on the basis of an effective restructuring plan,” the authority said in a statement, clearing the so-called precautionary recapitalization of a lender that needs state help to survive even though it’s been declared solvent by banking supervisors.
“This will help ensure the bank’s long-term viability, whilst limiting competition distortions.”
LATEST: The world's oldest bank wins formal approval for a $6 billion rescue https://t.co/HMk8NB28Uz pic.twitter.com/GCR7ahNodP
— Bloomberg (@business) July 4, 2017
ECB's Praet: Can't say Mission Accomplished in the eurozone, yet
Over in Rome, the ECB’s chief economist has added his voice to the cacophony of central bank policymakers offering guidance about how, and when, monetary policy might change.
Peter Praet’s view is that the European Central Bank’s stimulus measures are bearing fruit; but it’s too early to stop them.
He says:
As the economic prospects brighten, higher expected returns on business investment will make borrowing conditions increasingly attractive. This, in and of itself, will reinforce accommodation and make sure that inflation sustainably converges towards our objective of below, but close to, 2% over the medium term.
But our mission is not yet accomplished. We need patience and persistence. We need to be patient, because inflation convergence needs more time to show through convincingly in the data. The euro area’s economic environment is improving, and the fat negative tail to inflation expectations, which was so visible at the start of our asset purchase programme, has virtually disappeared.
This strengthens our confidence that headline inflation will gradually move towards the Governing Council’s objective. But measured inflation remains exceedingly volatile and metrics of underlying price pressures continue to be subdued. The entire distribution of inflation expectations still needs to shift a fair distance to the right.
And here’s what he means:
The ECB is currently holding interest rates at record lows, and buying €60bn of government and corporate bonds each month with new money.
Praet signed off his speech with a strong hint that the ECB should be cautious about unwinding this huge stimulus, despite pressure from hawkish policymakers to rein things in:
We need to be persistent, because the baseline scenario for future inflation remains crucially contingent on very easy financing conditions which, to a large extent, depend on the current accommodative monetary policy stance.
About that Greek bailout money....
Alarm bells are ringing over in Athens after foreign lenders signalled Greece would not received promised bailout funds before further prior actions – or reform measures – are taken.
The delay in disbursement has raised anxiety as the country must begin honouring debt repayments from July 17.
Our correspondent Helena Smith reports from Athens
Greece’s failure to implement four reforms - one as minor as failing to name the streets where stores can remain open for Sunday trade – now means that the European Stability Mechanism will put off its decision to disburse further loans to the cash-strapped country until next week.
Originally disbursements worth €7.7bn euro were expected in early July following the euro zone’s decision to throw Greece a new credit line of €8.5bn last month.
Any move by the euro zone’s bailout fund is now not expected until July 13th at the earliest – just days before debt repayments are due. The debt-stricken state owes over €7bn euro mostly to the European central Bank with a maturity date of July 17 for private bondholder repayments of €2bn.
The Greek media, citing a European Commission source in Brussels, said the EU was awaiting confirmation from the IMF that the last remaining prior actions had indeed been enforced before the process could be completed.
Experts: UK construction is suffering from uncertainty
Let’s get back to the slowdown in the UK building sector last month (see 9.36am for the data).
Mike Chappell, global corporates managing director for construction at Lloyds Bank Commercial Banking, says political uncertainty hurt the sector:
“This month’s reading may not come as a surprise as the industry has grappled with the outcome of the general election, particularly civil engineering firms dependent on steady pipelines.
“The headwinds prompted by the EU referendum a year ago continue to challenge the sector. Input price inflation is still an issue and there remain concerns about how the UK’s exit from the EU will affect construction firms, given their reliance on European labour.
Michael O’Shea, partner and construction specialist at law firm Gowling WLG, agrees that Theresa May’s precarious grip on power is weighing on the sector:
“This data is entirely consistent with conversations we are having with construction companies across the spectrum. While house building continues to grow, there are significant issues around securing labour and the rising cost of materials.
“At this mid-point in the calendar year, construction firms will be taking stock of their order book for 2018. If this isn’t in good shape - especially for those relying on major infrastructure projects - and the forecast looks less than positive, it will dampen confidence. To combat this, the government must take decisive action on such projects, including the nuclear sector. However, with the spectre of another general election still looming, there is an unhelpful amount of uncertainty in the market at present.”
Paul Trigg, construction specialist and assistant head of risk underwriting at Euler Hermes, fears that builders will struggle to find workers after Brexit:
“Migrant workers are the lifeblood of the sector and while the plan to provide more than three million EU citizens permanent residence is a good start, the ongoing movement of labour within the bloc is still a huge issue. Its loss will have a profound impact across the industry’s supply chain and profitability, so it’s unsurprising to see construction businesses urging the government to secure a transition deal with the EU at the very least.
Chris Williamson of Markit, which produced the report, flags up that confidence among builders is down -- matching a similar fall among manufacturing bosses yesterday.
UK #PMI surveys for both #manufacturing & #construction showed weaker growth in June, as well as a slide in optimism about the future pic.twitter.com/NEEObM9Zgt
— Chris Williamson (@WilliamsonChris) July 4, 2017
Worldpay shares surge as takeover battle begins
Takeover fever has hit the City today, as FSTE-100 listed Worldpay revealed it has received two separate approaches.
Shares in Worldpay, which is the UK’s largest payments processor, have soared by almost 25%. This has driven its market capitalisation up to £8bn, from £6.4bn last night.
Traders scrambled to buy shares after Worldpay revealed that US firm Vantiv, and JP Morgan, had both made approaches.
WorldPay was spun out of Royal Bank of Scotland following its taxpayer-funded bailout.
It offers credit card, online and contactless payment technologies - which are used in small firms around the UK.
Bank credit clampdown: What the media say
Bloomberg’s John Glover says the Bank of England is turning up the heat on UK lenders today:
The Bank of England told U.K. banks to prove that their policies on credit cards, personal loans and other types of consumer lending won’t leave them weaker in a downturn.
The BOE’s Prudential Regulation Authority said on Tuesday that firms need to show that they’re not underestimating the risks of consumer credit given the current “benign economic environment.”
The Financial Times’s Gemma Tetlow argues that the Bank could have gone further....
The Bank of England stopped short of tightening consumer borrowing controls on Tuesday but ordered banks to show they are addressing concerns about the growing riskiness of their lending.
Following a review of 20 lenders, the BoE’s Prudential Regulation Authority has raised concerns that some are being too complacent in their assessment of potential losses in their lending portfolios.
Officials at the Bank are worried that debt is growing at an extraordinary pace, which can only be achieved if lenders are taking more and more risks and giving out loans to households that are less able to afford the burden.
Ultra-low interest rates could also have lulled banks into a false sense of security, as customers can afford their debts right now but might get into trouble when rates rise.
UK consumers should take heed of the Bank of England’s concerns, says Hannah Maundrell, Editor in Chief of money.co.uk.
She predicts that lenders will now tighten their terms, meaning higher costs for borrowers:
“The regulators are worried we won’t be able to repay the money we’ve borrowed because lenders weren’t careful enough about making sure we could afford to pay them back if times get tight. They’re right to be concerned; it’s shocking to think some lenders may have been lax with their affordability assessments, pricing and risk profiling because this could land them and us in hot water if the economy takes a downturn.
“In a worst case scenario this could be the beginning of the end for widespread availability of very cheap loans, long term unsecured lending and lengthy 0% deals. Lenders will be left with little choice but to up their pricing and tighten their lending criteria if they can’t make the numbers add up.
“It’s a mistake to leave it to lenders to stress test your income though; do it yourself so you’re confident you’re only borrowing money you can afford to repay now and if other bills rise or the amount you’re earning falls in the future.
“It’s more important than ever you apply for new credit with your eyes open. Make sure your credit report is correct and check your chance of getting accepted before you apply if you can. Go for the cheapest option and borrow the smallest amount you need for the shortest time you can.”
The key charts
There are a few interesting charts in today’s announcement from the Bank of England.
This one shows how credit card write-offs are creeping higher, but much lower than after the financial crisis broke.
This shows how lenders have been offering 0% teaser rates for longer and longer, to lure customer to transfer their balances.
And this one shows the explosive growth in Personal Contract Purchase plans to finance new car deals:
My colleague Jill Treanor has emerged from the Bank of England, where selected media have been briefed about the consumer credit move.
She writes:
The Bank of England is stepping up its scrutiny of banks and other lenders on credit cards, personal loans and car purchases amid fears they are being lulled into a false sense of security by the current economic backdrop.
Threadneedle Street is writing to the firms it regulates after reviewing the consumer credit sector, where lending is growing at 10.3% a year – outpacing the 2.3% rise in household income.
The bank is calling on firms to look at the terms under which they are granting zero-balance transfers on credit cards and the basis on which they are issuing personal loans, and to consider the impact of a fall in value of a car when providing vehicle finance.
Its regulatory arm, the Prudential Regulation Authority, found that while the current pace of growth was not being driven by a relaxation of lending standards, it was concerned that to achieve their future plans they would have to do so...
More here:
Bank of England steps up scrutiny of lenders https://t.co/W6G6vA1mxg
— The Guardian (@guardian) July 4, 2017
What the Bank of England is demanding
Effectively, the Bank of England is firing a warning shot over the bows of the consumer credit industry today.
It is demanding that all firms with “material exposures to consumer credit” provide evidence that they are lending sensible, rather than enforcing tougher rules today.
It warns them that:
Firms are the first line of defence against the risk of losses on these exposures.
The BoE wants to see proof that:
- Credit-scoring adequately captures medium-term risk,
- Stress-testing approaches do not under-estimate potential downturn risk,
- Any ‘loss leader’ segments are explicitly reported and monitored.
- Consideration is given to whether, at the cut-off point for new business, a ‘prudent add-on’ is or should be applied
- The Consumer Credit Sourcebook (CONC) has been interpreted prudently in underwriting
- A borrower’s total debt (including secured) is taken into account in the underwriting process,
- Firms’ risk appetite, MI and governance frameworks are sufficient to oversee consumer credit portfolios, including controls embedded to prevent unintended drift in underwriting, overall asset quality or pricing-for-risk standards, and board oversight of this.
Click here to read the full statement from the Bank’s Prudential Regulation Authority.
BoE puts spotlight on credit cards and motor finance
The Bank of England has singled out some key areas of concerns in the credit market.
One is credit cards, where some lenders are “becoming dependent on long-term 0% promotional offers (including balance transfers) to attract new balances”.
Those deals are particularly vulnerable to economic changes, the Bank’s PRA says:
Where new business on 0% interest credit cards is only marginally profitable, it implies that firms will be facing losses if model assumptions turn out to be optimistic.
Another is motor finance, where Personal Contract Purchase deals are increasingly popular.
Under those deals, a customer can effectively lease a new car for a few years and then walk away - leaving the lender owning the vehicle. That creates a risk, if the value of the car has depreciated faster than expected.
The PRA warns that:
PCP creates explicit risk exposure to the vehicle’s residual value for lenders, who typically offer a guaranteed future value (GFV) for the vehicle.
Gross GFV exposure is estimated to be around £23 billion across the industry, and GFVs are typically set in the range of 85-95% of the vehicle’s expected future value (with a minority higher than that). PCPs written at the high end of this range are particularly exposed to a significant downturn in the used car market, possibly outside historic experience (used car prices fell by up to c.20% in the crisis, before recovering).
An initial fall in prices could lead to a surplus of used cars coming to the market, which could further weaken prices and cause material losses to lenders through their GFV risk
Updated
Bank of England orders lenders to show they're protected against credit risks
Newsflash: The Bank of England has launched its crackdown on risky consumer lending, by ordering British banks and other lenders to prove that they’re not taking too much risk.
The BoE’s Prudential Regulatory Authority is tightening thing up, following concerns that some lenders have been too gung-ho when offering credit to consumers.
Lenders have been told to prove, by September, that they are adequately protected against consumer credit risks.
But the BoE isn’t actually bringing in any new rules today -- instead, it’s warning companies that they need prove they’re not exposed to too much danger.
In a statement, the PRA warned that the consumer credit market appears to have deteriorated, saying:
In an environment of rapid growth in consumer credit, interest margins have fallen and there was evidence of weakness in some aspects of underwriting, so lenders are more vulnerable to losses in stress.
Overall, the PRA judges that the resilience of consumer credit portfolios is reducing, due to the combination of continued growth, lower pricing, falling average risk-weights (for firms using internal-ratings based models2), and some increased lending into higher-risk segments.
More to follow....
UK construction growth slows as uncertainty builds
Newsflash: Growth in the UK building sector slowed last month.
That’s according to Markit’s construction PMI, which has fallen to 54.8 in June, from 56.0 in May.
Any reading over 50 shows growth, so this signals that the sector cooled a little after a strong performance in May.
The building firms surveyed cited “renewed risk aversion among clients”, due to the economic outlook and heightened political uncertainty.
Another worrying sign - optimism among construction companies is now the lowest since December 2016.
Tim Moore of Markit says:
“Survey respondents commented on renewed caution among clients, in response to heightened political and economic uncertainty. Fragile business sentiment led to delayed decision-making on large projects and greater concern about the outlook for workloads during the next 12 months.
While construction firms remain upbeat overall about their near-term growth prospects, the degree of confidence fell to its lowest so far this year.
The pound is hovering around the $1.293 mark this morning, unchanged on the day.
McCafferty and Vlieghe’s divergent comments on interest rates have basically cancelled each other out.
Against the euro, the pound is flat too, at €1.139. That means one euro is worth 87.8p.
Kit Juckes of Societe Generale suspects that the pound will weaken against the euro in the months ahead:
Gertjan Vlieghe makes the dovish case that hiking too soon is worse than hiking too late, Ian McCafferty is quoted on news wires restating his view that to tighten would be appropriate.
Meanwhile, the slow deterioration of the economy continues against a backdrop of equally slow-moving Brexit negotiations. The road to EUR/GBP 0.90 and beyond will be rocky and slow, but we’re on it all the same.
As predicted, European stock markets have all dropped at the open.
The FTSE 100 has shed 22 points, or 0.3%.
Mike van Dulken of Accendo Markets blames “more North Korean sabre rattling”, after today’s missile test.
North Korea claims successful test of intercontinental ballistic missile https://t.co/6jyiiRYlNu
— The Guardian (@guardian) July 4, 2017
The takeover battle for UK modelmaker Hornby chugs on this morning.
Hornby has slapped down a takeover offer from its own majority shareholder Phoenix Asset Management.
Hornby, the firm behind Airfix planes, Scalextric cars and its eponymous trains, urged shareholders to reject Phoenix’s offer, as:
The Hornby Directors believe that the Offer does not reflect an adequate premium for control and significantly undervalues Hornby and its prospects.
It’s a tricky situation, though. Last week, Phoenix raised its stake in Hornby over 50%, meaning it had to offer to buy the rest of the shares. Shareholders can resist, but then they’re stuck holding share in a company whose directors are at war with their largest investor....
Hornby deal derailed? Hornby's directors advise its shareholders to reject takeover offer from Phoenix UK Fund.
— Sean Farrington (@seanfarrington) July 4, 2017
Despite the consumer slowdown, supermarket chain Sainsbury has beaten City forecasts with its sales growth for the last three months.
My colleague Sarah Butler has the details:
Strong sales of fresh fruit and veg and a dash for paddling pools, summer clothes and fans helped Sainsbury’s and Argos deliver a big jump in sales growth.
Sales at stores open more than a year, excluding fuel, rose 2.3% in the 16 weeks to 1 July, up from 0.3% in the previous three months partly thanks to the warm start to the summer.
Mike Coupe, group chief executive, said: “We have delivered a strong performance, driven by our differentiated strategy, offering customers quality, value and choice across food, general merchandise, clothing and financial services.”
He said fresh produce had performed particularly well, outperforming the market with volume growth of 1% as Sainsbury’s cut the price of summer favourites including Jersey Royal potatoes and British strawberries. That helped boost total grocery sales by 3% compared to 0.3% growth in the previous three months.
Updated
McCafferty pushes for rate hike, but Vlieghe resists
Another day, another division among the Bank of England’s team of interest rate setters.
Ian McCafferty and Gertjan Vlieghe are the latest members of the Monetary Policy Committee to give opposing views on whether or not it’s time to raise UK rates, currently at an all-time low of 0.25%.
McCafferty, who was among three MPC members to vote for a rate rise at the June meeting, told the Daily Post in North Wales that it would be a “prudent” move to increase borrowing costs.
“We made the last interest rate cut from 0.5% to 0.25% last August after the EU referendum decision when it was felt that a stimulus was needed. Since then the economy has not slowed to the extent we feared it would last summer and meanwhile inflation has been high.
“I feel on the balance of monetary policy that there is a need for change. I think this would be justified and would be the prudent thing to do at this stage.”
Vlieghe on the other hand says it would be a mistake to raise interest rates now.
He’s one of the most dovish members of the MPC, and insists that it would be wrong hike borrowing costs when consumer spending is slowing.
“This is an environment where a premature hike would be a bigger mistake than one that turns out to be slightly late.
“I think the consumption slowdown is here, it’s not over. I don’t think there’s going to be a sufficient offset from investment and net exports to compensate for that.”
“What I want to emphasise is that I don’t think there is no risk from keeping rates on hold. I just think that we are still in an environment where one of those risks is bigger than the other one.”
It all shows that the next BoE interest rate meeting, in August, could be a real clash of wills.
Updated
The agenda: Bank of England to tackle credit weakness
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Consumer credit fears have been building in the UK for months. Squeezed families have been forced deeper into debt, and some borrowers have been loosening their lending criteria to keep the loans flowing.
And today, the Bank of England is expected to outline how it will rein in lenders who have been doling out credit to consumers too quickly.
This follows last week’s meeting of the Bank’s Financial Policy Committee, which flagged up concerns that the credit market – particularly to buy cars – was a concern.
Reuters has a good take on today’s upcoming announcement, saying:
The BoE said last week that a targeted review by its banking supervisory arm, the Prudential Regulation Authority (PRA), had found weaknesses in some aspects of underwriting credit and a reduction in the resilience of banks.
On Tuesday, the PRA will make a statement on its first set of specific actions or “expectations” from the banks it regulates regarding credit to consumers. It will look at a wide range of credit, including the financing of car purchases - though banks now account for a much smaller portion of this than in the past.
“Effective governance at firms should ensure that risks are priced and managed appropriately and benign conditions do not lead to complacency by lenders,” the BoE said last week in its twice-yearly Financial Stability Report.
The statement is expected around 9.30am UK time.
At the same time, we’ll also get a new healthcheck on the UK building sector. Markit’s Construction PMI is expected to drop to 55 points, to 56 in May, which would show that growth slowed in June.
The report could move the markets, says David Madden of CMC Markets:
Homebuilders like Persimmon, Redrow, Bovis Homes and Taylor Wimpey will also be sensitive to the UK construction data.
The house builders have benefitted from the Bank of England’s loose monetary policy, and should that policy change, we could see a reversal of fortunes for the sector.
European stock markets are expected to dip this morning; not helped by the news that North Korea has just claimed to have tested an intercontinental ballistic missile.
In a 'special announcement' on KCNA, North Korea claims its first successful test of an ICBM. @NBCNews pic.twitter.com/HtC6VLdUP3
— Janis Mackey Frayer (@janisfrayer) July 4, 2017
And it’s Independence Day in America, so Wall Street will be closed.
Here’s the agenda:
- 9.30am: Bank of England publishes Financial Policy Committee meeting minutes
- 9.30am: UK construction PMI released
- 10am: Eurozone producer prices report for May
Updated
