The FTSE 100 has followed the lead of Wall Street: London’s blue-chip index is now up by 0.8% with just over an hour of trading remaining.
For investors it is all about treading the tightrope: will there be recessions as is widely feared? Will central banks have to tighten interest rates more than expected to tame inflation? Can they navigate the “soft landing” that avoids too much pain for the broader economy?
The US jobs numbers last week “blew away the fears of recession which had been sparked by the news that GDP had declined in both the first and second quarter”, said Rupert Thompson, an investment strategist at Kingswood, a wealth manager. But questions remain for the UK.
There are certainly more UK rate rises ahead, he said. The question is whether bleak forecasts from the Bank of England will come true:
The surprise was much more in the doom and gloom emanating from the Bank’s latest economic forecasts. It is now forecasting inflation to peak as high as 13% in October and a lengthy recession. GDP is expected to start contracting late this year and only emerge from recession in early 2024, falling a cumulative 2.2%. Meanwhile, the unemployment rate is projected to rise from 3.8% to 6.3% by 2025.
The hope is that this latest set of forecasts prove as wrong as its recent projections. Indeed, the Bank itself acknowledged the large uncertainties surrounding its estimates. It is also worth noting that the forecasts do not incorporate the additional fiscal support measures certain to be enacted regardless of whether Truss or Sunak becomes PM.
Economists think the UK economy is already contracting, according to a poll by financial data company Bloomberg. If that is correct the Bank of England’s forecasts are already wrong, points out Danny Blanchflower, a former member of the Bank’s monetary policy committee.
UK economy shrank in second quarter according to poll of economists – business live if so mpc forecast wrong in a week https://t.co/MOFZYPW940
— Professor Danny Blanchflower economist & fisherman (@D_Blanchflower) August 8, 2022
That’s it for today’s business live blog, but you can continue to follow our live coverage from around the world:
In our UK politics coverage, Labour claims No 10’s refusal of emergency budget shows Tories have lost control of the economy
In our US coverage, Biden visits flood-ravaged Kentucky after Senate passes $739bn healthcare and climate bill
In our coverage of the Russian invasion of Ukraine: Moscow-controlled Zaporizhzhia is set for vote on joining Russia, and the UN chief calls for access to the threatened nuclear plant there
Thank you to everyone who joined us today. Do join us tomorrow for more live coverage of business, economics and financial markets. JJ
Wall Street has gained ground on Monday morning trading, with the tech-heavy Nasdaq up by 1%.
It looks like something of a bounceback after a steep drop at the end of last week following very strong US jobs data. The Federal Reserve could be forced into more rate hikes if the US economy is running hotter than it thought.
So the US economy might be doing well, but with inflation rising that could make the Fed hike more aggressive.
Reuters reported:
Wall Street’s main indexes rose on Monday after last week’s blockbuster jobs data soothed some fears about an economic slowdown, but investors remained cautious as it also added to expectations of a hawkish Federal Reserve.
I think we can safely say that Twitter founder Jack Dorsey has no plans to expand any of his various businesses into China. At least, you don’t tweet, “End the CCP” if you want to do so.
Dorsey, who no longer has any direct involvement in Twitter, tweeted a news report by CNN that detailed Beijing’s strict lockdown rules.
End the CCP https://t.co/tFuxHOGXxX
— jack (@jack) August 6, 2022
Dorsey’s Block holding company, whose most prominent arm is payments company Square, does not operate in China, and the country also bans cryptocurrency trading for which Dorsey is an evangelist. That means he doesn’t have any direct interests in China. That door will likely be firmly closed now, for as long as the Chinese Communist party exists.
Oil prices drop as traders eye drop in demand if economies contract
The oil price increases of recent months have played an important part in the woes of economies around the world: higher global energy prices have fuelled rapid inflation, which is likely going to choke consumer spending in the coming months.
Crude oil futures prices have dropped by a dollar today, as investors look at the next part of the cycle: that fall in spending will likely drag down demand for oil (dragging down the prices that caused all the problems in the first place).
The Brent crude contract (the North Sea benchmark) dropped by 1% on Monday, down from nearly $95 to $93.92 at the time of writing. At its lowest on Friday it hit $92.78, the cheapest since mid-February, just before Russia’s autocratic ruler Vladimir Putin launched his invasion of Ukraine, a move that was seen as a threat to global energy supplies.
West Texas Intermediate, the North American benchmark, dropped by 1.1% to $88 on Monday - also nearly its lowest since the invasion began.
John Briggs, global head of economics and markets strategy at Natwest Markets, said the oil price declines came despite the strong US jobs data. The reason for the decline is not immediately obvious, he said, but demand concerns are likely behind it.
It could be the end of summer driving season, it could be that recession and demand destruction fears remain (or the reaffirmation of the Fed’s commitment to destroy demand), I also heard some concern about lower Chinese demand.
Downward moves in the oil price could be good news in the short term for central banks and governments hoping to engineer a “soft landing” - reducing inflation without a painful recession. Briggs said:
The declines this week are interesting and we all know more would be very well received by the global central bank community as it may be the only realistic path to a soft landing for many economies.
Updated
Irish airline Ryanair has responded in typically punchy fashion to Hungary’s announcement that it will fine it on consumer protection grounds, saying it will appeal any ruling against it.
Hungarian justice minister Judit Varga revealed in a Facebook post on Monday that regulators had decided to fine Ryanair 300m forint (€760,000/£640,000) because of alleged breaches of a new law bringing in a special tax on businesses.
Reuters reported:
Nationalist Prime Minister Viktor Orban’s government in May announced the special tax measure targeting “extra profits” earned by major banks, energy companies and other firms, aiming to plug budget holes created by a spending spree that helped him gain re-election in April.
Hungary’s consumer protection authority found that Ryanair has “misled customers with its unfair business practice”, Varga wrote. She added:
War inflation and the war economic situation mean that multinational companies making extra profits should pay their share of the costs of protection and national defense! In Hungary, the laws apply to everyone. In the future, avoiding or repairing the extraprofit separator will be punished by consumer protection investigation and fines!
However, in an emailed statement to Reuters, Ryanair said:
Ryanair [...] will immediately appeal any baseless fine raised by the Hungarian Consumer Protection Agency.
No notice of any such fine has yet been received by Ryanair. If necessary, Ryanair will appeal this matter to the EU courts.
It may only be August, but already the prospect of a cost-of-living Christmas is lumbering into view, according to discount book retailer TheWorks.co.uk.
Analysts are on the look out for big profit warnings as the cost-of-living crisis hits consumers, and The Works said the slump in sales is already here, with no clear end in sight.
It said sales dropped because of a “challenging online performance” with a like-for-like sales decline of 28.6% during the quarter ending on 31 July, even as in-store sales edged up.
But it was the outlook that spooked the market, prompting a deep sell-off: its share dropped by 23% on Monday morning.
The company said:
The general market outlook has deteriorated since the beginning of the calendar year, with low consumer confidence and rising inflation being significant factors. It is not clear how long these market conditions will persist, which creates a heightened degree of uncertainty about how consumers will behave, particularly in the forthcoming Christmas shopping season, The Works’ most important trading period.
It also flagged “cost headwinds such as historically high freight costs, which are showing little sign of abating in the short term, as well as increases to the National Living Wage”.
The French utility group Veolia has agreed to sell the UK waste business of Suez to the Australian private equity group Macquarie for €2.4bn (£2bn) to resolve competition concerns.
Veolia, which agreed a €13bn deal to buy its smaller French rival last year after a bitter takeover battle, has been disposing of parts of Suez in a number of international markets to clear anti-trust concerns.
The deal, the last step in Veolia’s acquisition of Suez, follows objections raised by the UK’s Competition and Markets Authority (CMA) after the combination of the world’s two largest waste and water groups.
In May, the CMA said that the merger of the two companies’ businesses in the UK risked driving up council bills by cutting the choice of rubbish treatment and collection providers.
You can read the full story here:
An interesting perspective on the tax-cutting showdown between the two people aspiring to be the UK’s next prime minister, from Capital Economics’s group chief economist, Neil Shearing: “This is not a grown-up race for the Conservative party leadership.”
He points to the lack of focus on policies from the candidates, Liz Truss and Rishi Sunak, on measures that would improve the UK’s deeply unimpressive lack of productivity growth - rather than tax cuts that are not thought by many economists to have a strong link to investment.
Average output per hour worked in the UK increased by only 0.7% a year in the decade before the pandemic, down markedly from the average of previous decades - see the dotted steps down in this chart (before data went haywire during the pandemic on the right-hand side).
While it isn’t a problem unique to the UK, Shearing points to factors including falling public investment and lower business confidence since the global financial crisis - both of which demand a focus on ways to use government spending to find ways of kick-starting productivity growth once more.
He wrote:
A grown-up race would involve grown-up debate around the economic policies needed for the UK to secure sustainable growth in its future. Instead, we have the unedifying spectacle of two candidates battling almost exclusively on who can deliver the biggest tax cuts and when.
There has been almost no discussion about key issues such as post-Brexit trade and regulatory policy, energy and food security or long-term fiscal challenges.Most importantly, in articulating where they want to steer the UK as Tory leader and the country’s third prime minister in six years, neither Rishi Sunak nor Liz Truss has set out a plan to address the economy’s chronically low rate of productivity growth.
You can read more updates on the Conservative leadership campaign - and the argument about tax plans - here:
Updated
People in the UK withdrew a record amount of cash from post offices in July, including £800m for personal use, in what the Post Office said was a sign that people are turning to cash to manage their budgets amid the economic squeeze.
In total, a record £3.31bn in cash deposits and withdrawals were handled at post offices in July, £100m higher than in June, the company said. Personal cash withdrawals have been higher than the previous two years in every month of 2022.
The Post Office is keen to emphasise its own role as a provider of cash withdrawal and other banking services, but its long history nevertheless makes it a handy source of data on consumer behaviour.
The company pointed to two - somewhat contradictory - factors pushing up cash usage: the need for holidaymakers planning to stay in the UK, and the need for households to turn to cash for budgeting amid the inflationary pressures that are increasing.
Martin Kearsley, banking director at Post Office, said:
We’re seeing more and more people increasingly reliant on cash as the tried and tested way to manage a budget.
UK economy likely shrank by 0.2% in second quarter - poll of economists
The UK economy probably shrank between April and June, according to a poll of economists who are bracing for the cost-of-living crisis to become a broader economic downturn.
The UK’s gross domestic product for the second quarter probably shrank 0.2%, according to a survey of economists published on Monday by Bloomberg News. The Office for National Statistics plans to publish its first estimate of second-quarter economic activity on Friday.
It will be the first insight into the UK economy since the Bank of England last week warned of a coming recession that will last from the final three months of this year until the end of 2023.
The data are likely to show that the extra holidays for the Queen’s jubilee in June slowed growth compared to last year, but economic activity is faltering as inflation surges. The Bank has forecast it will reach 13% by the end of the year.
However, the Bank’s forecasts cannot take into account one key variable: the response of the government when a new prime minister takes office (probably in just under a month). Liz Truss (the strong favourite in the Conservative leadership race) or Rishi Sunak will likely feel strong pressure to stage a major economic intervention to try to soften the effect of a recession - even if most of the economic policy debate so far seems to have revolved around cutting taxes (not much help to companies who are losing money) or cutting salaries for workers outside London.
Writing in the Observer, former Labour prime minister Gordon Brown argued for immediate help for poorer households. He wrote:
The reality is grim and undeniable: a financial timebomb will explode for families in October as a second round of fuel price rises in six months sends shock waves through every household and pushes millions over the edge.
The UK’s accounting regulator has fined PwC £1.8m and reprimanded the firm and a partner for failures in its audit of FTSE 100 telecoms company BT.
PwC’s fine from the Financial Reporting Council (FRC) was cut from £2.5m after it quickly admitted the failure, while Richard Hughes, the partner in charge of the BT audit, will also pay a fine of £42,000, cut from £60,000.
BT found a fraud in its Italian operations in 2016, and in its 2017 financial results it was forced to make adjustments worth £513m to its previous accounts.
However, the FRC said: “the respondents did not approach the audit of BT’s treatment of the debt adjustments with the necessary professional scepticism and they failed to adequately document their audit work across the entirety of the BT Italy adjustments.”
The auditors’ breaches were not found to have been “intentional, dishonest, deliberate or reckless”, but the FRC said they were breaches of important standards.
Claudia Mortimore, the FRC’s deputy executive counsel, said:
In determining the financial impact of a major fraud detected within a business, difficult but important issues relating to appropriate accounting treatment and disclosures will need to be addressed. It is vital that these are subject to robust audit so that the users of financial statements can have confidence that the financial impact is properly and accurately stated in subsequent financial statements.
The sanctions imposed in this case, where certain elements of the adjustments following a fraud were not subject to the required level of professional scepticism, underscore this message and will serve as a timely reminder to the profession.
Shares in London-listed fashion retailer Joules have jumped by a quarter after it confirmed that it is in talks with the FTSE 100’s Next over a £15m investment.
Joules describes itself as a “contemporary country living” brand (although the Press Association previously summed it up as a “posh wellies” retailer).
The Guardian’s Mark Sweney reports:
Joules, whose share price has slumped by almost 90% over the last year, said it was in talks with Next about raising the sum in a deal that would result in the clothing and homeware retailer taking a strategic minority investment in the company.
Under the terms of the deal, Next could take a stake of about 25%, according to Sky News.
Last month, Joules hired KPMG to assist with efforts to improve “profitability, cash generation and liquidity headroom”.
Joules, which has about 130 stores and employs more than 1,000 people, also announced it was in talks to use Next’s online platform to run its digital operations. Next already sells Joules clothing through its own website.
The deal will involve the transitioning of Joules’s existing online operation, warehouse, distribution and logistics to use Next’s services, Total Platform, to run its retail websites and back-end operations.
You can read the full story here:
SoftBank suffers losses of £18bn amid tech stock rout
Japanese investor SoftBank has reported investment losses worth £18bn between April and June, as its massive bets on technology companies were hit by concerns about rising inflation and recessions.
SoftBank said its Vision Funds, two investment funds backed by Saudi Arabia, suffered losses of ¥2.9 trillion (£18bn) during the quarter.
The company, controlled by the billionaire Masayoshi Son, blamed the “global downward trend in share prices due to growing concerns over economic recession driven by inflation and rising interest rates”.
SoftBank has been hoping to list Arm, the UK-based chip designer, on the Nasdaq stock exchange, but the conditions have proven tricky for its portfolio of startups, many of which lose money and will need to raise funds via intiail public offerings.
Some of the steepest losses for its publicly listed companies were from Japanese robotics company AutoStore, US office rental business WeWork, Korean online retailer Coupang, artificial intelligence company SenseTime and food delivery company DoorDash.
It has been a fairly strong start to a Monday in August on the FTSE 100. London’s benchmark index is up 0.4% in the first 25 minutes of trade.
Leading the pack is Hargreaves Lansdown, the investment platform, up 6% following upgrades by analysts at Barclays and Deutsche Bank. Otherwise it is mostly fairly gentle gains across a broad range of sectors.
China exports jump but economists warn of fading prospects
Good morning, and welcome to our live, rolling coverage of business, economics and financial markets.
China has reported a record trade surplus thanks to strong export growth, but economists suggest the recovery from coronavirus pandemic lockdowns could be short-lived.
Exports from China rose 18% year-on-year in July, well above economists’ average expectations of a 14% increase.
The Chinese economy has recovered rapidly in recent months, confounding predictions of a slowdown when many of its big consumers - particularly in Europe - are already braced for a recession. Yet there has been a sugar rush from the reopening following deep lockdowns and the untangling of much of the disruption at China’s main ports, according to Julian Evans-Pritchard and Zichun Huang, economists covering the country at Capital Economics, a consultancy. That will diminish, they argued:
Exports held up well last month, thanks to a backlog of orders still being cleared. But it won’t be long before shipments drop back on cooling foreign demand. Meanwhile, imports continued to trend down, pointing to further domestic weakness.
Although the main constraints on exports recently have been on the supply-side, we think that cooling global demand will soon deflate China’s pandemic export boom.
“The momentum from the reopening rebound is fading,” wrote Craig Botham, an economist covering China at Pantheon Macroeconomics, a consultancy.
We think the data suggest export growth should wane in the second half of the year, with sources of demand fading, but policy efforts to shore up manufacturing have the effect of subsidising exports, so the process is taking longer than we initially expected. Imports, meanwhile, are unlikely to impress, but should eke out continued single digit growth. The combination should exert gradual downward pressure on the trade balance in the second half.
There are also conflicting signs from the only bigger economy in the world: the US. Economists are torn as to whether it is heading for recession shortly, or whether it will take more intense tightening of monetary policy from the Federal Reserve, the US central bank, to tip it into a contraction.
Some economists had postulated that a recession was already happening, but US jobs data on Friday suggested it is still growing fast. The data also suggest that the Fed may have to raise interest rates even more than expected in order to prevent further inflation.
Stock market futures on Monday suggested that Wall Street shares could dip when trading opens, in anticipation of tighter monetary policy.
“The US economy simply cannot be deemed to be in a recession in a month when +528k jobs have just been added as payrolls showed on Friday,” wrote Jim Reid, a strategist at Deutsche Bank.
This still feels to me like a classic (albeit compressed), old fashioned boom bust cycle. The Fed has been aggressively behind the curve with monetary policy amazingly loose versus history. The Fed have tightened a bit but monetary policy operates with a lag and monetary policy was and is still very loose.
I still think recession by around the middle of 2023 is a slam dunk and that risk assets will go well below their June 2022 lows when we’re in it, but I’m still not convinced the official recession happens over the next few months.
It probably won’t affect the short-term economic outlook, but there was also a big political story in the US overnight. The Democratic party has managed to scrape through a bill, known as the Inflation Reduction Act, that will allocate $369bn (£306bn) to reducing greenhouse gas emissions and investing in renewable energy sources. The bill passed the Senate after a compromise deal agreed between Joe Manchin, a senator who held disproportionate power because of narrow majority, and will be voted on in the House of Representatives.
The bill, which is also aimed at cutting healthcare costs, will allow the administration of US President Joe Biden to claim a victory ahead of mid-term elections in November. It will also set the US on track to cut emissions by about 40% below 2005 levels, compared to about 25% without the act, according to several thinktanks’ analyses.
