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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Janet Yellen urges caution over rate rises, after Brexit fears hit City - as it happened

The skyline of the City of London.
The skyline of the City of London. Photograph: Daniel Sorabji/AFP/Getty Images

And finally, here’s our news story about Janet Yellen’s speech...and some more hawkish comments from other Federal Reserve policymakers:

Goodnight! GW

The odds of the Federal Reserve hiking interest rates this summer have just fallen.

That’s according to the latest market data from Wall Street:

Echoing the Bank of England this morning, Janet Yellen also warns that the economic outlook has deteriorated recently.

Yellen warns about China and oil

Fed chair Janet Yellen is also warning that China’s slowing economy is a potential threat to the global economy.

She says:

One concern pertains to the pace of global growth, which is importantly influenced by developments in China. There is a consensus that China’s economy will slow in the coming years as it transitions away from investment toward consumption and from exports toward domestic sources of growth. There is much uncertainty, however, about how smoothly this transition will proceed and about the policy framework in place to manage any financial disruptions that might accompany it. These uncertainties were heightened by market confusion earlier this year over China’s exchange rate policy.

Yellen also points to the recent fall in the commodity prices -and cautions against assuming it is unalloyed good news for Americans.

Instead, the world economy could suffer if oil producing nations slash spending or sack workers.

The Fed chief says:

For the United States, low oil prices, on net, likely will boost spending and economic activity over the next few years because we are still a major oil importer. But the apparent negative reaction of financial markets to recent declines in oil prices may in part reflect market concern that the price of oil was nearing a financial tipping point for some countries and energy firms. In the case of countries reliant on oil exports, the result might be a sharp cutback in government spending; for energy-related firms, it could entail significant financial strains and increased layoffs. In the event oil prices were to fall again, either development could have adverse spillover effects to the rest of the global economy.

The full speech is online here:

Yellen: Fed must be cautious about rate hikes

America’s top central banker, Federal Reserve chair Janet Yellen, is speaking to the Economic Club of New York right now.

And Yellen is dropping a hint that US interest rates are likely to only rise modestly in the months and years ahead.

She argues that the Federal Open Market Committee [FOMC] which sets interest rates can’t risk tightening monetary policy too fast, as it could be difficult to row back.

On the other hand, going too slowly is less risky as the FOMC could simply accelerate the tightening.

Or in Yellen’s words:

I consider it appropriate for the Committee to proceed cautiously in adjusting policy. This caution is especially warranted because, with the federal funds rate so low, the FOMC’s ability to use conventional monetary policy to respond to economic disturbances is asymmetric.

If economic conditions were to strengthen considerably more than currently expected, the FOMC could readily raise its target range for the federal funds rate to stabilize the economy. By contrast, if the expansion was to falter or if inflation was to remain stubbornly low, the FOMC would be able to provide only a modest degree of additional stimulus by cutting the federal funds rate back to near zero.

And that has sent shares jumping on Wall Street, as investors hail the idea of more low borrowing costs and cheap money.

FTSE 100 ends the day flat

After a choppy day’s trading, the FTSE 100 finished the session almost exactly where it started.

London’s blue chip index has closed down half a point, at 6105.90. Retailers led the risers, with Marks & Spencer and Associated British Foods both gaining 3%.

But that was cancelled out by falling mining stocks; commodity trader Glencore lost almost 5%, followed by Anglo American (-4.3%), and Rio Tinto (-3.8%). They were hit by the impact of the stronger US dollar, which pushes down commodity prices.

The markets had begun the day in decent enough spirits after Easter. But the mood darkened - rather like the weather - after the Bank of England’s latest warnings on the EU referendum and global risks.

Trustnet’s Tony Cross fears more volatility ahead:

The shadow of Brexit looms large over financial markets with investors, companies and the government unable to make cast iron decisions until the result is known. Much like the Scottish referendum this one looks set to go down to the wire, so expect market volatility to be heightened as we close in on the vote.

Over in America, consumer confidence has jumped unexpectedly.

The monthly Consumer Confidence Index jumped to 96.2 in March, beating forecasts of a small rise to 94.

Those interviewed said they were more optimistic about short-term prospects, which suggests the recent stock market recovery may have fed through.

Summary: Bank of England stirs the Brexit pot again

Mark Carney has been trying his best to avoid being dragged into the EU referendum issue.

When he testified to MPs three weeks ago, the BoE governor argued that Brexit was more than a financial issue, and wouldn’t give any forecasts about growth or employment after the vote.

But despite that, the Bank is clearly concerned about the EU referendum, in under three months. Today’s report shows that policymakers anticipate serious ructions if the public vote to leave the EU, and are taking precautions.

Here’s the main points.

The Bank of England has warned that Britain’s financial system looks less secure than three months ago. China’s slowing economy, the flow of capital out of emerging economies, and the recent fall in asset prices all show rising instability.

The BoE’s Financial Policy Committee singled out the Brexit referendum as the biggest threat to domestic stability. They warned that if Britain votes to leave the EU, the pound would tumble, banks would tighten lending, and the UK could struggle to finance its current account deficit.

Campaigners to remain in the EU urged the public to take the warning seriously.

But Brexit supporters argue that the UK economy would have brighter prospects outside Europe.

The BoE has also taken action against buy-to-let landlords. It is forcing lenders to apply tougher affordability checks, to ensure borrowers aren’t over-extending themselves.

One leading estate agent reckons the move is overkill. Landlords already face higher stamp duty costs from April, and some may struggle to cope with this new clampdown.

In other news....

City investors are waiting to hear from Janet Yellen. The head of the US Federal Reserve is giving a speech in New York, in a few hours time (from 4.30pm BST)

Workers at Port Talbot’s steel workers are poised to learn whether India’s Tata will support a rescue plan.

In the eurozone, new data has shown that bank lending has picked up. It still remains historically weak, though.

After a bright start, European stock markets have now lost their early gains.

And the oil price has continued to slide. Brent crude is down almost 3% at $39.18 a barrel, dragged down by pessimism that oil producers will ever agree production cuts.

Campaigners to leave the EU are (understandably) less alarmed by the Financial Policy Committee’s concerns.

Matthew Elliott, chief executive of Vote Leave, argues that Britain’s economy would be more, not less, secure out of the EU.

‘The biggest risk to the UK economy, a risk that even the Bank of England acknowledges, is Britain remaining in a declining political union where we are outvoted and our trade is held back.

Even pro-EU campaigners have admitted that after we Vote Leave on June 23rd we will secure a deal where the economy will grow and jobs will be created. The safest thing for our economic security is to spend our money on our priorities.’

Darling: Brexit is a serious threat

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Former Labour minister Alistair Darling. Photograph: Murdo MacLeod for the Guardian

Campaigners to stay in the European Union are seizing on the Bank of England’s warning that Brexit is a threat to UK financial stability.

And leading the way is Alistair Darling, Britain’s former Chancellor of the Exchequer.

He says the Financial Policy Committee’s “stark warning” should be taken very seriously.

In a statement released by the Britain Stronger In Europe campaign, Darling says:

The independent assessment that uncertainty around the UK’s membership of the EU is ‘the most significant near-term domestic risk to financial stability’ will be a major worry for everyone whose job and income depends on the long-term health of Britain’s economy.

“This assessment makes it clear our economy would be more vulnerable and less resilient if we vote to leave the EU – leading to higher mortgage rates for families and higher interest rates for Britain’s businesses.

“This is not a report Leave campaigners can simply dismiss as ‘biased’ or ‘scaremongering’. It is a serious piece of work that should make everyone think twice about irresponsibly gambling with people’s jobs and livelihoods.

“It is clear from this report that Britain is stronger, safer and better off remaining a member of the EU.”

Darling was Britain’s finance minister during the financial crisis, when he handled the bailouts of Royal Bank of Scotland and Lloyds Banking Group.

Jeremy Leaf, north London estate agent, isn’t impressed by the Bank of England’s new clampdown on buy-to-let lending.

Leaf, a former chairman of the RICS trade body, argues that recent measures announced by the UK government will cool the market.

The BoE should have waited to see the effect, rather than deciding to force lenders to enforce tougher affordability checks, he argues:

The changes the Chancellor has made to mortgage interest tax relief and higher stamp duty for landlords will have enough of an impact on buy-to-let without the need for further interference from the Bank of England.

Landlords will already be put off investing further unless the numbers add up and this is a case of kicking them when they are down.

Leaf also argues that rental costs could actually go up if BTL landlords quit the sector, as it would reduce availability.

On the other hand, that could also allow more renters to move onto the housing ladder....

As we suspected, the Bank of England is keen to take the heat out of the buy-to-let mortgage market.

The BoE will push small mortgage lenders to enforce higher standards, including tighter checks on landlords’ income and the impact of new stamp duty rates on BTL mortgages.

Under the plan, lenders must that that borrowers have enough funds to cover interest payments, even if borrowing costs went up to 5.5%.

My colleague Sean Farrell is attending today’s briefing, and explains:

On buy-to-let lending, the committee said: “The FPC remains alert to potential threats to financial stability from rapid growth in buy-to-let mortgage lending.”

The committee, chaired by the governor, Mark Carney, said it expected measures announced by the Bank’s regulatory arm, the Prudential Regulatory Authority, to dampen the market.

The buy-to-let property market has leapt back into life over the past three years after slumping during the financial crisis. Last year, gross lending for buy-to-let property jumped to about £37bn, up from less than £10bn in 2009 and approaching the peak of almost £45bn in 2007.

More here: Bank of England clamps down on buy-to-let lending

Updated

Augustin Eden, analyst at City firm Accendo Markets, sums up the Bank of England’s message:

June’s Brexit referendum could both push up borrowing costs AND weaken Sterling, according to the Bank of England’s Financial Policy Committee. Of course, the reason for a rise in borrowing costs won’t be an interest rate hike by the central bank, it’ll be increased risk.

Update: That Brexit opinion poll is closer than you might think.....

Bang on cue, a new opinion poll has shown that European Union referendum battle has got tighter.

A poll for the Evening Standard newspaper gives the Remain campaign an eight point lead, at 49% vs 41% to Leave.

Last month, Remain was ahead by 54% to 36%, an 18% point advantage.

The survey also found that many people believe prime minister David Cameron should resign if the public vote to leave the EU.

Here’s the story: Half of public say Cameron must quit if he loses EU poll

UK government insiders are briefing that the Bank of England’s Brexit comments are an important contribution to the debate ahead of June’s referendum.

However, Sky News’s Ed Conway reports that the Bank doesn’t share this enthusiasm:

So who’s right?

Well, governor Mark Carney did brief MPs about the EU referendum earlier this month, when he labelled Brexit the biggest single domestic risk to stability. He also suggested that some banks could leave the City in the event of a Brexit vote.

However, I don’t recall Carney warning specifically that Brexit would make it harder to borrow. And anyway, this is the first time that the Financial Policy Committee has been so explicit about its concerns.

Updated

This morning’s stock market rally is fizzling out, in the face of the Bank of England’s gloomy prognosis.

The FTSE 100 is just 3 points higher (having jumped nearly 50 points at the start of trading).

Bank of England: Brexit vote could trigger credit crunch

Britain could suffer a credit crunch if the public vote to leave the European Union in the referendum on June 23, the Bank of England claims.

The BoE’e Financial Policy Committee warns that uncertainty over Brexit has already hit the pound, and driven up the cost of insuring against a sterling crisis.

It now fears that “any period of extended uncertainty following the vote could increase risks to financial stability.”

In today’s statement, the FPC says:

Looking ahead, heightened and prolonged uncertainty has the potential to increase the risk premia investors require on a wider range of UK assets, which could lead to a further depreciation of sterling and affect the cost and availability of financing for a broad range of UK borrowers.

BoE policymakers also fear that Britain could struggle to support its current account deficit if investors shun UK assets.

It says:

The financing of that deficit is reliant on continuing material inflows of portfolio and foreign direct investment. Those flows have contributed to the financing of the public sector financial deficit and corporate investment, including in commercial real estate. Heightened uncertainty could test the capacity of core funding markets at a time when the liquidity of these markets has shown signs of fragility across advanced economies.

And to complete the gloomy Brexit picture, the BoE also predicts that the eurozone would suffer too:

The impact of a decision of the United Kingdom to withdraw from the European Union could spill over to the euro area, driving up risk premia and further diminishing the prospects for growth there.

Updated

Bank of England warns on UK financial stability outlook and Brexit vote

Newsflash: The Bank of England is warning that the outlook for financial stability in the United Kingdom has deteriorated over the last four months.

In a new report, the Bank’s Financial Policy Committee cites the slowdown in the Chinese economy, weaker growth across the globe, and recent market turbulence.

It also singles out the upcoming EU referendum as the “most significant near-term domestic risk” to the UK.

The FPC says:

Some pre-existing risks have crystallised, drawing on the resilience of the system. Other risks stemming from the global environment have increased. Domestic risks have been supplemented by risks around the EU referendum.

In a subdued report, the FPC flags up that emerging market economies have suffered capital outflows, following last December’s hike in US interest rates. There have also been “widespread falls in the prices of risky assets.”

And it also cites concerns over China’s economy, and the recent heavy falls in bank share prices.

Here’s the key section:

In an environment of low inflation and continued weakness in investment and productivity growth, prospects for global nominal growth are subdued.

This raises questions about resilience to future adverse shocks, particularly for emerging market economies where debt levels continue to rise and terms of trade have deteriorated. In this environment, the re-acceleration of credit growth in China is concerning.

In some advanced economies, lower nominal interest rates associated with weak growth prospects are restraining profitability in banking systems that are still in post-crisis repair and pose challenges for some banking business models. Globally, bank equity prices have fallen significantly and a material proportion of banks are now trading below book value.

More to follow....

Yellen speech to hint at rate rises?

Anticipation is building in the City, ahead of Federal Reserve chair Janet Yellen’s speech today (at around 4.30pm BST).

Yellen is due to deliver a speech called “Economic Outlook and Monetary Policy” at the Economic Club of New York luncheon.

In traders’ heads, that speech is subtitled “Here’s some hints about might the Fed raise interest rates again”.

Mihir Kapadia, CEO at Sun Global Investments, says:

The dollar has started to recover at least some of the ground it has lost in the last week. Investors now await Federal Reserve Chair Yellen’s speech this afternoon for more news on the possibilities of future US interest hikes.

Natural resource stocks aren’t sharing in today’s rally.

Instead, mining stocks are leading the fallers in London, as a stronger US dollar hits commodity prices.

Anglo American is leading the way, down 4%, amid concern that the recent recovery in the copper price is faltering.

Biggest fallers on the FTSE 100 this morning

Brenda Kelly, chief analyst at London Capital Group, says:

UK miners are enjoying their usual habitat – back in the red....

Weaker growth in developed markets and word that China is building inventories rather than utilising for construction coupled with the strong dollar would indicate that the 15% gain in copper since mid-January has been built on sand.

More here: Equities higher ahead of Yellen

Oversupply worries are dragging the oil steadily lower this morning.

Brent crude is now down almost 2% at $39.53 per barrel, with analysts citing the regular concerns about weak demand and an oversupply glut.

While Tata Steel’s board decides the fate of Port Talbot’s steelworkers, UK politicians have been bickering about whose fault it all is.

Over to the Press Association:

Business Minister Anna Soubry said the Government was prepared to consider “all options” to ensure that steel production continued at the South Wales site.

“We are looking at all manner of options that may or may not be available to us as a Government, all options,” she told BBC Radio 4’s Today programme

“It starts from a base of making sure that we continue to make steel in Port Talbot.”

She suggested that Liberal Democrat former Business Secretary Sir Vince Cable had not done enough to address the problems in the British steel industry during his time in office between 2010 and 2015.

“I think Vince could have done more, yes. Sorry, but that is my view. We were in a coalition then,” she said.

“When I was appointed the Prime Minister specifically said to me, ‘we know we have some very real problems in our steel industry and I want you to devote a large amount of your time to solving those problems as much as you can’.”

Her comments were dismissed as “utterly rubbish” by Lib Dem leader Tim Farron who said Sir Vince had protected the Redcar plant, which has subsequently closed, and the wider steel industry.

“This Government has no plan and is failing them,” he said.

Updated

Eurozone bank lending jumps

Hold onto your hats, folks. We have some encouraging financial data from Europe.

Bank lending to eurozone businesses rose by 0.9% in February, up from 0.6% in January. That indicates that companies are becoming more confident and looking to borrow to fund new plans.

And bank loans to eurozone households rose by 1.6%, which is the fastest growth since 2011. That could be another sign of economic demand picking up, after years of weak activity.

As this tweet shows, lending to consumers and firms hit a trough in 2014 as the single currency bloc slumped into deflation.

Anna Stupnytska, economist at Fidelity, reckons the European Central Bank’s latest stimulus package should continue to push lending higher this year:

Europe’s stock markets are up across the board:

European stock markets this morning

Updated

Shares in oil exploration firm Rockhopper have slumped by 10% after a United Nations commission ruled that the Falklands Islands fall within Argentina’s territorial waters.

Rockhopper has been drilling around the Falklands for several years, and in January it announced it had discovered oil off the northern coast.

But the Falklands’ nascent oil industry could now be disrupted, after the UN said it agreed that Argentina’s territory extended up to 350 miles from the coast. That would include the Falklands. Associated Press has more details:

The Argentine foreign ministry said its waters had increased by 1.7 million square km (0.66 million square miles) and the decision will be key in its dispute with Britain over the islands. Argentina lost a brief, bloody 1982 war with Britain after Argentinian troops seized the South Atlantic archipelago that Latin Americans call the Malvinas.

The UN commission on the limits of the continental shelf sided with Argentina, ratifying the country’s 2009 report fixing the limit of its territory at 200 to 350 miles from its coast.

The mood in the City right now:

Unions meet with Tata over Port Talbot

Port Talbot Steel Works.
Port Talbot Steel Works. Photograph: Gareth Phillips for the Guardian

Over in Mumbai, British union leaders have made a last-ditch attempt to persuade steel giant Tata to keep supporting Wales Port Talbot plant.

Community, the steel union, says the talks with Tata’s board were ‘open and constructive’.

They hope that Tata will back a £100m rescue plan for the site, which is reportedly losing £1m per day. But workers fear that Tata will decide today to mothball the site, which is Britain’s largest steelworks.

Tony Cross of Trustnet Direct suspects today’s rally won’t last long.

Following a slump on Thursday, which was induced by a strengthening dollar, falling commodities and a downbeat update from Next, this looks like an opportunistic bet by investors eager to make a quick buck and buy on the dips.

Given the index’s recent tumultuous form it is hard to see this being sustained...

European shares rise after long break

European stock markets have opened higher this morning as traders return to their desks after the Easter break.

The main indices have risen by at least 0.5% at the open, as traders ponder the strength of the recent rally since the turmoil of January and early February.

In London, the FTSE 100 has gained 47 points or 0.8% to 6154, in a fairly broad rally led by financial firms such as Barclays, Prudential and Standard Life.

The top risers in London this morning
The top risers in London this morning Photograph: Thomson Reuters

Investors have had a long weekend to chew over the state of the global economy, from the slowdown in China to the deflationary pressures in the eurozone.

But it’s still hard to say whether 2016 will be a good year for shares, given recent weak economic data and geopolitical tensions.

Philip Borkin, a senior economist in Auckland at ANZ Bank New Zealand Ltd, summed up the mood well in a note to clients:

“It is certainly not a global economic backdrop where one could say that a lot of clarity is on offer at present.”

And CMC Markets’ Michael Hewson says there’s little reason for investors to be particularly positive right now:

Over the last couple of weeks European markets have struggled to move meaningfully in either direction, contained by a stabilisation in commodity prices, slightly less concern about the Chinese economy, and commitments to slightly looser policy from the Bank of Japan, European Central Bank and the Peoples Bank of China.

And the oil market continues to be stalked by oversupply fears. That’s pushed the price of Brent crude oil down by almost 1% this morning, back below $40 per barrel.

The agenda: Bank of England stress tests and Port Talbot steel decision

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

It’s a nerve-wracking day for Britain’s steel industry. Top executives at India’s Tata are meeting in Mumbai to decide whether to continue supporting its operation in Port Talbot.

The Welsh factory has already suffered deep job cuts, in the face of slumping steel prices. Tata must now decide whether to invest more in the plant to ensure its future, or not.

At 11am BST the Bank of England will announce the details of the stress tests which Britain’s largest banks will face later this year.

The BoE may also signal that it is ready to clamp down on buy-to-let property owners, when it publishes its review of the sector.

A taxi and buses queue outside the Bank of England in London.
A taxi and buses queue outside the Bank of England in London. Photograph: Luke Macgregor/Reuters

Investors will also be watching for a speech by Janet Yellen, chair of the Federal Reserve, at 4.30pm BST. She may drop some hints about the prospects of US interest rate rises in the coming months.

Chris Weston of IG explains:

The interest rate markets see a further hike in June as a 36% probability, so in theory, Ms Yellen only really needs to acknowledge the improvement in inflation forces and we could see the US dollar rally.

The latest measure of US consumer confidence, due at 3pm BST, could also show whether America could stomach higher interest rates.

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

Updated

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