Closing summary
Before we close up for the day, let’s take a look at European markets, where the FTSE 100 is still being hammered by the strengthening pound.
- FTSE 100: -1.1% at 7,216
- Germany’s DAX: -0.1% at 12,527
- France’s CAC: -0.3% at 5,207
- Italy’s FTSE MIB: -0.1% at 22,253
- Spain’s IBEX: -0.5% at 10,308
- Europe’s STOXX 600: -0.3% at 381
The main event today was the speech by Gertjan Vlieghe, an external member of the Bank of England’s Monetary Policy Committee. Despite having voted yesterday to hold rates at an all-time low of 0.25%, the committee member once considered to be most dovish (in favour of low rates) said rates could rise in the “coming months”.
He also said the MPC was unlikely to stop at one rate rise. Economists and investors are now factoring the first UK rate increase in a decade in November, to coincide with the Bank’s next inflation report.
Vlieghe’s comments sent the pound to its highest level against the dollar since 24 June 2016, the day of the Brexit vote result. It touched $1.36, and is currently up 1.4% at $1.3585.
That’s it for today, thank you for all your comments. Have a good weekend, and please join us again on Monday. AM
Hurricane Harvey hits US industrial production
Industrial production fell 0.9% in the US in August, disappointing expectations of a 0.1% increase. Production was up 0.4% in July.
Manufacturing output was down 0.3%, again worse than the 0.3% increase forecast by economists. It was flat in July.
Paul Ashworth, chief US economist at Capital Economics says the Fed is unlikely to raise US rates against this year.
Industrial production unexpectedly declined, by as much as 0.9% m/m, in August, but the Fed estimates that almost the entire decline was attributable to Hurricane Harvey, which struck late in the month.
Fed officials aren’t going to panic about the weakness of retail sales and industrial production in August, since it appears to be mostly storm related. But September could be even worse when Irma is factored in. Furthermore, the Fed won’t want to commit to another rate hike until it is sure that activity is rebounding after the storm disruption.
That’s why, even though core consumer prices are showing some resurgence, we now expect the Fed to stand pat on rates for the rest of this year.
Wall Street subdued in early trading
US markets have opened roughly flat, with investors shrugging off concerns over the latest missile strike by North Korea:
- Dow Jones: +0.1% at 22,233
- S&P 500: -0.03% at 2,495
- Nasdaq: -0.04% at 6,427
It looks like Hurricane Harvey did disrupt US retail sales at the end of last month.
Roiana Reid, economist at Berenberg bank, explains:
US retail sales slipped 0.2% m/m in August, partly due to sluggish vehicle sales in the Houston region where Hurricane Harvey brought activity to a halt.
Excluding autos, retail sales advanced 0.2% m/m, helped by higher gas prices that pushed up the value of sales at gasoline stations (+2.5% m/m).
As long as consumer confidence and job growth remain favorable, expect retail sales and broader private consumption to be solid in the medium term, but expect near-term volatility from the hurricane effects.
Andrew Hunter, US economist at Capital Economics, says that while consumer spending growth may have slowed, the fundamentals for the world’s largest economy look positive.
The 0.2% decline in retail sales in August was worse than the consensus expectation and suggests that consumption growth has slowed a little in the third quarter, albeit possibly because of the disruption caused by Hurricane Harvey toward the end of the month.
Even so, strong gains in previous months still leave real consumption on track for third-quarter growth of around 2.5%, and the fundamentals point to a renewed acceleration before long.
With consumer confidence close to record highs and the labour market continuing to improve, we doubt this is the start of more sustained downturn and expect retail spending to bounce back over the coming months.
Nothing great about any part of those US numbers -
— Michael Hewson 🇬🇧 (@mhewson_CMC) September 15, 2017
US consumer not in any way near as strong as originally thought.
Breaking: US retail sales fall unexpectedly
US retail sales fell by 0.2% in August, the month when Hurricane Harvey hit America.
It followed a 0.3% rise in sales in July, and disappointed expectations of a 0.1% rise.
Over to Estonia now, where the latest Eurogroup meeting is taking place in Tallinn, and where Greece is topping the agenda. Helena Smith reports from Athens
Greece was never meant to top the agenda when eurozone finance ministers met in Tallinn today, but thorny issues that could define progress in prospective bailout negotiations will dominate talks.
The issues will range from the very public licensing row with Eldorado Gold - the Canadian mining company that has threatened to halt operations in Greece - to the unseemly spat over the country’s former statistics agency chief, Andreas Georgiou, who has been dragged through the courts accused of inflating debt figures in a row that has incensed international creditors.
Athens’ leftist-led government wants upcoming bailout talks to be completed by December so that, in the words of prime minister Alexis Tsipras, Greece can make a “clean exit” from international supervision when its third €86bn bailout program ends in August 2018.
Privatisations will be key to success. On Thursday, Greece took another step towards selling its ailing state assets, finally signing the deal to hand over its train company, TrainOSE, to Italy after four years of negotiation. The rail network was sold to Italy’s state run rail network Ferrovie Dello Stato for many have called a paltry sum of €45mn.
Andrew Goodwin, lead UK economist at Oxford Economics, questions whether the Bank of England is “crying wolf” or genuinely serious about an imminent rate hike.
He’s not convinced they mean it:
The early evidence suggests that the MPC’s hawkish shift has had the desired effect and triggered a reappraisal of interest rate expectations by markets. But we are sceptical that the data will evolve in a way that would allow the MPC to actually follow through on its threat to raise interest rates.
One reason why we think a near-term rate hike remains unlikely is the enduring softness of wage growth. Though this week’s data saw unemployment hit a 42-year low of 4.3%, wage growth remains anchored at just above 2%. This suggests that concerns about a build-up in underlying inflationary pressures are overblown.
Unless we see a decisive acceleration towards 3% [inflation], the MPC will find it hard to justify making a move given the lack of a compelling reason elsewhere. For one, there is unlikely to be a material improvement in the growth outlook for some time to come. And the potential downside risks from Brexit will continue to loom large for the foreseeable future, even if Theresa May adopts a more conciliatory tone in next Friday’s speech. So, as with several other instances in recent years, we think there is a strong chance that the MPC will again be seen to be crying wolf.
Allan Monks, economist at JP Morgan, says the Bank of England wants to “have its cake and eat it”, and that while the odds of a rate hike in November has increased, some of the data would need to show improvement first.
Vlieghe’s views are adding to expectations for a November rate rise. However, an important question is why the BoE didn’t raise rates in September – without even a tightening in the vote – if so many of the MPC see such a clear case for raising rates. We see two potential answers to this question:
One is the BoE’s communications have previously failed to prepare the market for an imminent rate rise. The BoE may well have been shocked by the market’s dovish reaction to its August Inflation Report, where it essentially warned the curve was too flat – only to then witness a further flattening. As we have argued, this reaction has made the BoE more agitated, the consequences of which we are now witnessing. Now the market is better prepared for a rate rise, the BoE may feel that it has the green light to deliver in November.
A second explanation for the BoE’s policy inaction yesterday is that it still wants to have its cake and eat it – i.e. effectively generate a some degree of tightening without actually changing rates.
One remarkable element of Vlieghe’s speech is his positive spin on what is still a significant disappointment in the wage data ... The odds of a November hike have increased significantly, but there are still some hurdles that the data must clear first.
As the Bank of England prepares to push the button on the first interest rate rise since July 2007, homeowners are facing the prospect of an increase in mortgage repayments.
But what would the effects be of a rate rise for the average household? Read a handy piece on the subject from my colleague Shane Hickey here.
Having touched $1.36 at one point, the pound is currently trading at $1.3584, up 1.4% or almost two cents on the day.
Not everyone is convinced by Gertjan Vlieghe’s arguments for why the time is approaching for a rate hike.
One of the reasons he gave was the potential for a pick-up in wage growth in the coming months.
Here's a chart of annualised m/m% growth in priv. sec. pay that Vlieghe uses to support his hawkish turn. Anyone see a strengthening trend? pic.twitter.com/jWzvD0Fv9K
— Samuel Tombs (@samueltombs) September 15, 2017
"Rising" UK wage growth
— Jamie McGeever (@ReutersJamie) September 15, 2017
Nov 16 +2.8%
Dec 16 +2.6%
Jan 17 +2.2%
Feb 17 +2.2%
Mar 17 +2.3%
Apr 17 +2.1%
May 17 +1.9%
Jun 17 +2.1%
Jul 17 +2.1% pic.twitter.com/Yv7HIGh4hw
BoE's Vlieghe: UK rates will have to rise more than once
Bank of England policymaker, Gertjan Vlieghe, has given the pound a further boost during a question and answer session after his speech in London.
He said rates would need to rise more than once if the economy develops as expected.
That contradicts the idea that for the time being, the Bank’s MPC would be satisfied with a single rate rise, to 0.5% from 0.25%, essentially unwinding their emergency rate cut in August 2016 in response to the Brexit vote.
Vlieghe:
It’s obviously more than unwinding last August. We are making that judgement over a three-year period, so it will depend on how the data evolves.
The pound keeps on rising.
It is now up 1.4% at $1.3585, the highest level since 24 June 2016, the day after the EU referendum when the Brexit vote became clear.
The pound is at the highest level since the days immediately following the Brexit vote:
Sterling is also at a two month high against the euro, at €1.1344 (up 0.9% on the day).
FTSE 100 falls 1% as pound strengthens
The pound’s gain is the FTSE 100 loss. The leading index of UK shares is now down almost 1% or 67 points at 7,227.
Markets elsewhere in Europe are roughly flat, but the FTSE is often dragged lower by a stronger pound because companies included in the index tend to be multinationals with a large proportion of earnings taken in countries outside the UK.
David Madden, analyst at CMC Markets, has this take:
The FTSE 100 is the worst performer in Europe thanks to the strong pound again. The British market started off in the red today because of the more hawkish than expected update from the Bank of England yesterday, and the speech from Gertjan Vlieghe, a short time ago, accelerated the move. Mr Vlieghe also hinted at a tighter monetary policy, which pushed the pound higher, and drove the FTSE 100 lower.
The FTSE 100 has dropped to its lowest level in over four months, and it is also trading below its 200-day moving average – which is widely viewed as bearish.
Pound surges above $1.35 as investors price in a November rate hike
The pound has surged 1.1% against the dollar at $1.3543. It is the first time above $1.35 since 27 June 2016, days after the Brexit vote.
Those comments from the Bank of England’s MPC member, Gertjan Vlieghe, have convinced traders that the first UK rate rise since June 2007 is coming in November.
The MPC had already signalled on Thursday (alongside its policy decision) that it was nearing the time to raise rates, and Vlieghe’s speech has added weight to that.
MPC members tend to use speeches as opportunities to clarify the committee’s latest thinking, and signal any shift in policy stance.
Here are Vlieghe’s key quotes:
Until recently, I thought the appropriate response of monetary policy was to be patient, given modest growth and subdued underlying inflationary pressure. But the evolution of the data is increasingly suggesting that we are approaching the moment when bank rate may need to rise.
He said a rise could come “as early as in the coming months”. Rates are currently at an all-time low of 0.25%.
Here is our full story on the speech:
Updated
Breaking: Pound jumps as Bank of England policymaker signals rate rise
Gertjan Vlieghe, an external member of the Bank’s monetary policy committee, has given the strongest signal yet that interest rates could rise as soon as November.
Having voted to hold rates at 0.25% at the August meeting on Thursday, Vlieghe said in a speech in London that rates could rise “as early as in the coming months”.
The pound is up 0.8% above $1.35.
More soon.
Wetherspoon boss: EU leaders should take 'wise-up' pill
Tim Martin, the founder and chairman of JD Wetherspoon says companies in the EU will suffer more from Brexit than the pub group will.
Martin was a vocal supporter of Brexit, and in his latest comments on the subject alongside Wetherspoon’s annual results, he said EU leaders need to take a “wise-up pill” to grasp the reality of the situation.
Most plcs are expected to comment, in their results statements, on the UK’s prospects outside of the EU and on the likely impact on their individual companies. It is my view that the main risk from the current Brexit negotiations is not to Wetherspoon, but to our excellent EU suppliers – and to EU economies.
It is my view that Juncker, Barnier, Selmayr, Verhofstadt and others need to take a wise-up pill in order to avoid causing further economic damage to struggling economies like Greece, Portugal, Spain and Italy - where youth unemployment, in particular, is at epidemic levels.
Wetherspoon also cautioned that the strong start to its new financial year could not be sustained.
Read our full story on Martin’s comments and on the results here:
Updated
Markets dip after North Korea missile launch
European markets are down this morning as another missile launch by North Korea unnerved investors.
Having said that, the scale of the losses are modest, suggesting a muted response as markets become more accustomed to escalating events in Pyongyang.
- FTSE 100: -0.4% at 7,269
- Germany’s DAX: -0.03% at 12,537
- France’s CAC: -0.1% at 5,221
- Italy’s FTSE MIB: -0.1% at 22,250
- Spain’s IBEX: -0.5% at 10,312
- Europe’s STOXX 600: -0.2% at 381
Alan Clarke, economist at Scotiabank, has changed his forecast for the timing of the first UK rate rise, following the Bank of England’s hints on Thursday.
He now expects the Bank’s MPC to raise rates to 0.5% (from 0.25%) in November, to coincide with the next quarterly inflation report. Previously he was expecting the first hike to come in mid-2018.
Clarke says that a rise of 0.25 points would not necessarily be the first of many. Rather, it would unwind the 0.25 point cut from August last year, when the MPC was fearful the Brexit vote would deliver an immediate shock to the economy.
We doubt it would be the first of several hikes. Our judgement is that the MPC will use the current backdrop as an opportunity to take back last August’s emergency rate hike now that there is no longer an emergency.
We have our doubts that the data will stay sufficiently robust to provoke another hike at the subsequent inflation report meeting in February. Rather, we suspect the committee will await the crucial start of year wage inflation numbers before delivering a second hike at the May-2018 meeting.
The pound is currently up 0.3% against the dollar at $1.3442. That is the highest since 7 September 2016.
Against the euro, the pound is up 0.2% at €1.1262 - the highest since July.
The agenda: Pound extends gains ahead of BoE speech; US retail sales
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
The pound has held on above $1.34 this morning, its highest level in more than a year, after the Bank of England hinted on Thursday that a rise in interest rates might be coming sooner than people think.
The hints - which came as the Bank’s Monetary Policy Committee held rates at all-time low of 0.25% - prompted some investors and economists to predict a rate rise as soon as November.
It would be the first rise in interest rates since July 2007, when the world was blissfully unaware of the massive financial crisis ahead.
Also coming up today:
- At 9.50am, MPC member Gertjan Vlieghe will give a speech at the Society of Business Economists conference in London. Investors and economists will be looking for more clues on whether a rate rise in November is to be expected. MPC speeches are often used by the Bank to clarify messages on what the latest thinking is on policy and often move markets.
- At 13.30, US retail sales data for August will be published. Investors will be looking for signs of an impact from Hurricane Harvey, and for clues as to whether it makes another rate hike this year from the Federal Reserve more or less likely.
Updated
