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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Pound heads for worst month since 2016 against US dollar; eurozone inflation hits record high – as it happened

United Kingdom ​​Rishi Sunak Bonds Liz Truss United States Inflation Bank of England Economy Refinitiv
Elevated view over London city skyline at sunsetUK, London, looking East of the city with view of the financial district and Canary Wharf against clear sky
An elevated view of the London city skyline at sunset Photograph: Shomos Uddin/Getty Images

Closing summary

Time to recap

UK assets have had a miserable August, hit by worries that Britain is falling into recession as inflation surges towards post-war highs.

The pound is on track for its worst month against the US dollar since October 2016, when Britain’s vote to leave the European Union was still hitting the currency.

Sterling has lost 4.5% versus the greenback in August, and has sunk to just $1.16, the lowest since March 2020.

Government bonds have also been hit this month, as investors sought a higher return for holding UK gilts.

Fears of a long recession and the likelihood of higher public spending to cope with the cost of living crisis has sent the interest rate on Britain’s debts soaring towards its biggest monthly rise in almost 40 years.

10-year bonds, the benchmark, are headed for their sharpest monthly fall since 1986, with five-year and 20-year bonds also seeing the largest rise in yields in decades.

Here’s the full story:

Former chancellor Rishi Sunak has warned that the markets could lose faith in the UK.

Sunak, one of the two candidates to succeed Boris Johnson as PM, told the Financial Times it would be “complacent and irresponsible” to ignore the risk of markets losing confidence in the British economy, saying:

“We have more inflation-linked debt by a margin than any other G7 economy – basically more than double.”

The cost of living crisis deepened this month, with shop price inflation hitting the highest levels since 2008.

The rapidly rising price of food including milk, margarine and crisps pushed prices up in the shops, in a bleak situation for consumers.

The government’s £400 payment to help families with their energy bills will not reduce inflation, after the Office for National Statistics decided it would treat the money as income.

Rising inflation has also hit UK business confidence, and is expected to end the UK’s house price boom.

John Lewis is to offer free food to all its workers, including temporary staff, during its peak Christmas trading period as a way to help with the cost of living.

The eurozone’s inflation crisis has deepened too, with prices rising at a record 9.1% in the last year.

Energy prices and food drove up the cost of living, with gas shortages and drought disruption hitting Europe’s economy. It raises the chances of another large interest rate rise from the European Central Bank, which meets next week.

Russia has tightened the pressure on Europe’s energy market, by starting a three-day shutdown of its Nord Stream 1 gas pipeline to Germany.

But UK wholesale gas prices have eased back from their recent highs.

The oil prices has dropped too, with Brent crude currently down 2.7% at $96.60 per barrel, on concerns that demand will slide if major economies fall into recession.

Jobs growth in the US was muted this month, according to the latest payroll report from ADP.

And European stock markets are ending August in the red, with the FTSE 100 down 0.8% at a one-month low.

Wall Street is a little stronger, though, with the Nasdaq index of tech stocks now up 1%.

The UK rail union has announced a nationwide 24-hour strike next month, which will coincide with the Labour party’s autumn conference.

And even the Panini sticker album has been hit by inflation – collecting the 2022 World Cup edition will cost you around £870.

Pound to plumb new depths, predicts analysts

Analysts at Capital Economics have warned that the pound will continue to slide in the months ahead, and could hit an all-time low in 2023.

In a new research note, they say:

Our forecast that the energy crisis will push the euro-zone and UK economies into recession while the US gets away with a milder slowdown suggests that the euro and the pound will weaken further against the US dollar.

Capital Economics forecasts the pound will fall from around $1.17 this week to around $1.05 by the middle of next year.

That would leave it below the levels reached before the 1985 Plaza Accord ($1.09), after the UK left the ERM in 1992 ($1.43), during the 2008/09 Global Financial Crisis ($1.38), after the 2016 Brexit vote ($1.21) and during the 2020 COVID-19 crisis ($1.21).

In fact, $1.05 would be an all-time record low.

Updated

European debt market hit by historic sell-off after rate rise bets

Europe’s bond market is on course for its worst month on record, the Financial Times flags.

Bond prices have weakened as investors have bet that soaring inflation will force the European Central Bank and Bank of England to make large increases in interest rates.

The selloff has continued today, as eurozone inflation hit a new record of 9.1%.

Here’s the details:

The region’s market for high-grade government and corporate debt posted a fall of 5.3 per cent in the month to Tuesday, the biggest drop since the Bloomberg Pan-European Aggregate Total Return index began in 1999.

The decline has been broad, with UK, German and French debt all hit by heavy selling in a reversal of July’s gains.

Wall Street has opened cautiously after its recent losses.

The tech-focused Nasdaq has gained 0.5%, but the Dow Jones industrial average of 30 large US stocks is slightly lower, as anxiety over US interest rate rises weighs on the market.

UK wholesale gas prices are falling sharply for the second day running.

The day-ahead UK gas prices has dropped by 15% to 382p per therm, the lowest in over aweek (although still around three times more than a year ago).

The month-ahead gas price has dropped around 13%, having hit the highest levels since March last week.

The fall will be welcomed by energy-intensive businesses. They come after Europe pledged an emergency intervention in the energy market, and longer-term “structural reform” to stop soaring gas prices pushing up electricity costs.

If energy prices keep dropping, then it could mean the energy price cap rises by less than feared in January. But that decision is around three months away.

Inflation hits Panini 2022 World Cup sticker album

The 2022 Soccer World Cup sticker album, released by the publisher Panini.
The 2022 Soccer World Cup sticker album, released by the publisher Panini. Photograph: Sipa US/Alamy

Inflation has come for the football sticker album. Collecting and completing the official Panini Fifa World Cup Qatar 2022 album will cost fans an average of about £870.

Panini, which first produced a World Cup sticker album for the 1970 tournament in Mexico, has priced five-sticker packs for the Qatar 2022 album at 90p each. That is a 12.5% increase on the 80p cost of a five-sticker pack for the Russia 2018 album. For Euro 2016 a pack cost 50p.

There are a total of 670 Qatar 2022 stickers, which first went on sale last Thursday, to collect. However, because of duplicates, fans would – on average – need to buy 4,832 stickers to complete the album, according to calculations by Paul Harper, a mathematics professor at Cardiff University.

At 18p a sticker that works out at £870. The total average cost has increased from £770 in 2018 (when there were more stickers in the album).

Here’s the full story:

Back in the UK, the Co-operative Group has agreed to sell its petrol forecourt business to its supermarket rival Asda for £600m, saying it would use the money to reduce debt and open more convenience stores.

The sale includes 129 petrol stations with grocery stores attached located across the UK, representing 5% of Co-op’s retail estate of more than 2,500 outlets, as well as three planned petrol station sites that are yet to be developed.

Canada didn’t grow as fast as expected in the second quarter of the year, with its economy likely to have shrank last month.

Canadian GDP rose by around 0.8% in April-June, new data shows, making it the second fastest-growing G7 nation after Italy, which expanded by 1%.

Canada beat France and Japan, which both grew by around 0.5% in Q2, while Germany only grew by 0.1%, the UK economy shrank 0.1%, and US GDP fell 0.2%

But, analysts had expected Canadian GDP to grow around 1.1% quarter-on-quarter.

Statistics Canada estimates GDP fell 0.1% in July, unwinding a 0.1% rise in June.

US job growth slows, reports ADP

Ouch. US companies sharply slowed the pace of hiring in August amid growing fears of an economic slowdown, according to payroll processing company ADP.

ADP reports that US private payrolls rose by 132,000 this month, a slowdown on July’s 270,000, and below forecasts – suggesting the US jobs market isn’t as strong as thought.

ADP have just revised their methodology, because their payroll data has a poor record in predicting the official monthly jobs report – the Non-Farm Payroll, due on Friday.

India has posted its fastest annual growth in a year, although rising interest rates could slow the economy.

India’s economy grew 13.5% year-on-year in the April-June quarter, official data shows.

That’s a pickup on annual growth of 4.1% in January-March, but below forecasts of 15.2%.

There are fears growth could sharply slow this quarter and the next two as higher interest rates hit activity, Reuters says.

Over in the US, mortgage demand has fallen again as the once-hot American housing market keeps cooling.

Mortgage applications to purchase a home dropped 2% last week, and tumbled 23% compared with a year ago, as rising interest rates deterred people from trying to buy a home.

The prospect of UK inflation surging well above 10% in the coming months is hurting the pound and British government bonds.

Scotiabank’s chief FX strategist, Shaun Osborne, said money markets now point towards the Bank of England raising interest rates to 4.25% next year, up from a current 1.75%.

“This would leave the BoE policy rate among the highest of the major economies but that may still not compensate investors sufficiently for inflation that is expected to run well into double digits early next year while the economy tilts into recession.”

Pound on track for worst month against dollar since 2016

The pound is on track for its worst month against the US dollar since the aftermath of the Brexit referendum in 2016.

Sterling has sunk by 4.5% since the start of August, falling from $1.216 to around $1.162 today

That’s worse than its fall in April, and the biggest monthly drop in percentage terms since October 2016.

Today’s losses mean sterling has hit the lowest point since March 2020, during the pandemic crash:

The pound vs the US dollar
The pound vs the US dollar Photograph: Refinitiv

Anxiety about the UK economy, which is expected to be driven into recession by the energy crisis, has hurt the pound this month.

The currency weakened despite expectations for more UK interest rate rises, as the US Federal Reserve is also expected to keep tightening policy.

Sterling’s weakness, and the fall in UK bond prices, underlines Rishi Sunak’s warning that international investors could lose faith in the UK economy. However, we should note that other sovereign bonds have also weakened, and the dollar has hit 20-year high against the euro this month too.

John Hardy, head of FX Strategy at Saxo Bank, says the selling pressure on the pound has ramped up, after Goldman Sachs analysts warned inflation could surge over 20%.

Pessimism built in sterling after Goldman Sachs hinted that peak inflation in the UK could reach 22% in early 2023 and downgraded its GDP forecast.

GBP-USD touched lows of $1.1622 before settling around 1.1660. EUR-GBP pushed higher to 0.8600, its strongest level since early July.

Hawkish comments from top Federal Reserve officials also hit sterling, points out Thanim Islam, market strategist at international business payments firm Equals Money:

Sterling continued its decline yesterday as risk sentiment took a hit, dragging equities lower after additional Fed speakers reiterated the need to raise interest rates further.

As the month of August draws to a close, there’s no let up for markets with European indices under pressure,

Victoria Scholar, head of investment at Interactive Investor, has summed up the moves:

The FTSE 100 is leading the declines, slumping by more than 1% with energy firms like National Grid, BP, Shell, SSE and Centrica dragging the index down heavily. Underlying oil and gas prices have fallen sharply dragging stocks in the sector into the red.

Brent and WTI are both down by more than 3% each amid concerns about the state of the global economy, the threat of higher interest rates and increased covid restrictions in the world’s second largest economy, China.

Gas prices are also under pressure thanks to German gas stores filling ahead of expectations.

The FTSE 100 is on track to shed almost 2% in August, reversing some of July’s positivity. Risk-off sentiment and fears about inflation have also hit the bond market with UK 10-year government bonds are on track for their worst monthly decline since September 1986.

British government bonds are continuing to sell off rapidly today.

The yield, or interest rate, on short dated two-year bonds has jumped over 3% for the first time since 2008.

The 5-year gilt yield has risen to the highest since April 2010, while 20-year gilt yields are above 3.2% for the first time since 2014.

Yields move inversely to bond prices; as investors ditch UK debt, the effective interest payment for holding the debt goes up.

Both the five-year and 20-year gilts are on track for their biggest monthly falls since data provider Refinitiv’s records began in the mid-1980s.

As explained earlier, the benchmark 10-year gilts are on track for their worst month since 1986.

FTSE 100 hits one-month low as markets slide

European stock markets are ending August firmly in the red, as economic anxiety hits shares.

In London, the FTSE 100 has droped by 90 points, or 1.2%, to 7270 points, a five-week low as all the gains in early August gains are wiped out.

Germany’s DAX and France’s CAC are also down 1%, dragging the pan-European Stoxx 600 index to the lowest since mid-July.

European stock markets, mid-morning, August 31 2022
European stock markets this morning Photograph: Refinitiv

Today’s jump in eurozone inflation to fresh record levels has disappointed investors, as Chris Scicluna, head of economic research at Daiwa Capital Markets, says:

“The most disappointing aspect of the inflation data is the core measure, where we have a bigger increase than in the headline measure.

“Even though we will get more support measures to help ease the gas crisis, inflation will move higher unless policymakers can get a better grip on gas markets in the euro area.”

Sri Lanka’s inflation rate has surged to over 64% this month, as its economic crisis deepens.

Consumer prices were 64.3% higher than a year ago, Sri Lanka’s statistics department reports, following a 60.8% jump in July.

Food price have climbed by a whopping 93.7%, while transport costs were a staggering 148% higher than a year ago, due to the surge in fuel costs.

Sri Lanka’s consumer prices have now accelerated for 11 straight months, as the worst economic crisis since independence in 1948 have led to shortage of food, fuel and medicines.

ING: Gas supplies and droughts add to inflation shock

Transport vessels cruise past the partially dried riverbed of the Rhine river in Bingen, Germany, August 9, 2022.
Transport vessels cruise past the partially dried riverbed of the Rhine river in Bingen, Germany, August 9, 2022. Photograph: Wolfgang Rattay/Reuters

Suppy shocks, including the weaponisation of gas supplies and summer droughts, drove eurozone inflation to a record high of 9.1% in August.

Bert Colijn, ING’s senior eurozone economist, explains:

Global supply-side pressures have been easing in recent months.

Commodity prices have fallen, including food and oil, which has resulted in lower prices at the pump. Transportation costs have also moderated, and inputs are more widely available again. Still, specific European problems continue to push inflation higher.

The gas supply crisis and droughts are adding to persisting supply-side pressures on inflation at the moment.

Those droughts hit the Rhine River, where water levels dropped to levels that hit the distribution of coal, petrol, wheat and other commodities.

Colijn adds that demand-side inflation remains weak, with household consumption below pre-pandemic levels, retail sales on a declining trend since November, and no sign of a wage-price spiral.

As the economy is slowing rapidly – and perhaps already contracting at this point – the question is how much the ECB needs to slam the brakes.

This latest rise in eurozone inflation will add to pressure on the ECB to raise interest rate again, when it meets this month.

The ECB lifted rates by a chunky 50 basis points in July, in its first rate rise in over a decade.

Inflation has worsened since, so the governing council will consider another 50bp hike when it meets next week. Could an even larger rise, of 75bp, be on the table?

Naeem Aslam, analyst at Avatrade, says:

The data has pushed the ECB further on the edge and now it is time for an action and not talk otherwise inflation, which is already out of control, will create more damage.

Updated

Core inflation across the eurozone rose to a new high too, which will not please the European Central Bank one bit.

Core CPI, which strips out energy, food, alcohol & tobacco, rose to 4.3% in August, suggesting inflationary pressures broadened this month, up from 4.0% in July.

That’s more than twice the ECB’s headline target for inflation, of 2%.

Thomas Verbraken, executive director at MSCI Research says:

This more stable inflation measure could indicate broadening inflationary pressures across all sectors of the European economy – particularly as compared to other global economies.

Unlike the US, the eurozone is battling with soaring natural gas prices and the ECB has been far less aggressive in its monetary tightening

Updated

Eurozone inflation hits record high of 9.1%

Inflation in the eurozone has jumped to a new record high, as Europe’s cost of living crisis deepens.

Euro area annual inflation jumped to 9.1% in August, up from 8.9% in July according to a flash estimate from Eurostat, the statistical office of the European Union.

That’s higher than expected (economists forecast 9.0%), as inflation in the single currency bloc heads towards double-digit levels for the first time since the euro was introduced.

Soaring gas and electricity prices continued to have the largest impact on inflation, with energy prices 38.3% higher than a year ago (down from 39.6% in July), but unchanged month-on-month.

Other inflationary pressures accelerated.

Food, alcohol and tobacco inflation rose to 10.6% per year, up from 9.8% in July.

The prices of industrial goods jumped by 5.0%, compared with 4.5% in July, while services inflation rose to 3.8%, from 3.7% in July.

Updated

Oil falls as China's factory sector keeps shrinking

The Total Culzean platform in the North Sea
The Total Culzean platform in the North Sea Photograph: Andy Buchanan/AFP/Getty Images

Recession fears are hitting the oil price again, pushing Brent crude back below $100/barrel.

Brent, the international benchmark, has dropped to $97.87 per barrel this morning. Earlier this week it hit one-month highs above $105/barrel, but has weakened since.

Data showing that China’s factory sector kept shrinking this month hasn’t helped the mood.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, says traders are assessing the darkening clouds over the global economy and the expectation of weaker demand.

Worries have resurfaced about weakness in China, with the latest snapshot of activity showing all the hallmarks of an economy struggling to regain its footing.

The Purchasing Managers Index (PMI) revealed that manufacturing contracted for a second month in August, with slowing consumer demand denting orders.

It is important to note that today’s ruling on how to treat the £400 energy rebate in the inflation statistics has no impact on the direct position of consumers, points out Philip Shaw of Investec (and won’t bring down the inflation rate).

Households will receive the rebate whichever way the support scheme is treated within the national accounts and the accounting methodology itself makes no difference to real net household incomes.

But as flagged earlier, it will have an indirect impact, such as for households that have pensions or benefits that are inflation-linked.

Shaw adds:

Today’s decision by the ONS will also raise the cost (or at least not lower it) of financing government borrowing via index linked gilts, as the Energy Bills Support Scheme will not reduce RPI inflation either.

Updated

Here’s a good explanation of why the UK’s £400 rebate to offset households energy bills won’t lower the rate of UK inflation, as the Treasury had hoped, and why it matters, from Resolution Foundation’s Torsten Bell.

(see earlier post for details)

Economic woes weigh on the pound

The pound is trading around its lowest level since March 2020 this morning, as anxiety over the global economy and rising interest rates lifts the US dollar.

Sterling is slightly lower this morning at $1.164, near the 29-month low hit on Tuesday.

Neil Wilson of Markets.com says sterling does not have a “great outlook”, given yesterday’s warning from Goldman Sachs that the UK faces a recession in which inflation could hit 22%.

He adds:

PM hopeful Rishi Sunak is also out warning that rival Liz Truss’s policies could harm confidence in UK markets (see here and here)

There’s no let up this morning, as BRC says food price inflation rose to 5.1%, the highest since 2008 (see here).

French inflation eases as energy price rises slow

Inflation in France has fallen, as the Paris government continues to protect households from the full force of the energy price shock.

French consumer price inflation dropped to 5.8% in August, down from 6.1% in July, thanks to a slowdown in the rise in energy prices, official estimates show.

Statistics body INSEE reported that a weaker increase in energy brought the annual inflation rate down, while services prices rose at the same pace as in July, and food and manufactured goods costs accelerated.

INSEE adds:

Over one month, consumer prices should rise by 0.4%, after +0.3% in July.

The prices of manufactured goods should rebound in link with the end of summer sales and those of food should accelerate. The prices of services should slow down and the decrease in energy prices should be more marked than in July.

On an EU-harmonised basis, French inflation dipped to 6.5% compared to 6.8% in July.

France’s government has spent tens of billions of euros on an energy tariff shield which caps electricity and gas prices.

That has helped to keep inflation lower than in the UK (where it hit 10.1% in July), or the wider eurozone (8.9% in July).

Rail workers to stage new 24-hour strike in September as pay dispute escalates

Rail union leaders said they were “looking for support” from Labour MPs on the picket line as the Transport Salaried Staffs’ Association (TSSA) announced a 24-hour strike next month timed to coincide with the party’s autumn conference.

Thousands of TSSA members who work for Network Rail as well as nine train companies will strike from midday on Monday 26 September until noon the following day, bringing further disruption to Great Britain’s railways in a continued dispute over pay, jobs and conditions.

The leader of the TSSA union, Manuel Cortes, said he would be standing on the picket line in Liverpool, where Labour is holding its September conference, and urged those attending to join him.

Russia halted gas supplies to Europe for maintenance

Russia has tightened the screw on Europe’s economy, by halting gas supplies through the Nord Stream 1 pipeline for three days.

The temporary shutdown, which was announced earlier this month, means no gas will flow from Russia to Germany until Saturday 3rd September, when the pipeline is scheduled to resume service.

Gazprom says the disruption is needed to allow maintenance on the pipeline’s one remaining compressor.

But it will undermine Europe’s efforts to build up gas storage ahead of the winter.

Seperately, France’s energy minister has accused Russia of weaponising gas, after Gazprom stopped deliveries to French utility Engie, blaming a dispute over contracts.

Agnes Pannier-Runacher said in an overnight statement that France had anticipated the disruption:

“As we anticipated, Russia is using gas as a weapon of war and is using Engie’s way of applying the contracts as a pretext to further reduce French supplies.”

ONS: UK energy rebate won't bring down inflation rate

Speaking of inflation… the Office for National Statistics has ruled that the energy bill rebate being paid to households will not directly lower the UK’s inflation rate.

The stats body has concluded that the £400 discount, being paid over autumn and winter, will be treated as a current transfer from central government to the households sector, not a price cut.

That means it will not directly affect the inflation statistics, as it is classed as income support, not a price cut.

The £400 discount, administered by energy suppliers, will be paid to consumers over 6 months with payments starting from October 2022.

That may seen an academic decision – BUT it will have consequences, as inflation figures will reflect the full impact of October’s 80% rise in energy prices this winter.

That means the inflation rate will be higher, which will have an impact on the interest payments on bonds linked to the RPI inflation measure.

It could also lift the costs of services whose price rises are linked to inflation, such as mobile phone and internet contracts.

On the other hand, inflation-linked benefits would also rise by more.

Cost of living crisis to end house price surge

The surge in British house prices is expected to end in 2023 as rising interest rates, and the squeeze on housholds, hits the property market.

A Reuters’ poll of 21 property market experts found that home prices are expected to rise 7.0% this year, but only 1% next year before picking up to 3.0% in 2024.

Aneisha Beveridge at estate agency Hamptons explains:

“Spiralling inflation is leading to a cost of living crunch which in turn has led to a new era of rising interest rates.

“As a result, we expect house price growth to steadily slow during the remainder of the year and into 2023 when the real impact on households is likely to be felt as interest rates peak.”

Lender Nationwide will release its August house price index tomorrow morning. July’s data showed UK house prices jumped 11% in the last year, and 0.1% in the month, but rival Halifax reported a small drop in July alone…

UK business confidence hit by rising inflation

Confidence among British businesses has sunk to its lowest since March 2021 the cost of living crisis hits businesses.

Lloyds Bank’s monthly business barometer dropped to 16% in August from 25% in July, with many companies alarmed by soaring prices for energy and raw materials.

Lloyds business barometer

The survey found that:

  1. Overall business confidence fell nine points to 16%

  2. 70% of businesses are most concerned about inflation, particularly related to raw materials and energy costs

  3. 38% of businesses expect to increase their headcount in the year ahead as demand for staff continues

  4. However, salary increase expectations stabilise

  5. Trading prospects see the largest decline (11 points) since March 2022

Lloyds business barometer report

Hann-Ju Ho, senior economist at Lloyds Bank Commercial Banking, said.

“Business confidence declined for a third consecutive month as firms continue to face economic challenges in the period ahead and as inflation concerns intensify,”

Some small businesses have reported that big energy firms are refusing to supply them with electricity and gas, on concerns that they could collapse:

UK food price inflation hits highest level since global financial crash

The strain on UK households has intensified, with UK food price inflation hitting its highest level since global financial crash.

Prices in shops rose by 5.1% in August, year-on-year, up from 4.4% in July, the highest since 2008.

The rapidly rising price of food including milk, margarine and crisps drove up shop price inflation, as farmers were hit by soaring prices due to the war in Ukraine.

Helen Dickinson, the chief executive of the British Retail Consortium, which collects the data, says:

“The situation is bleak for both consumers and retailers, but retail businesses will remain committed to supporting their customers through offering discounts to vulnerable groups, expanding value ranges, fixing prices of essentials and raising staff pay.

Here’s the full story:

Borrowing costs in Germany, the euro zone’s benchmark bond issuer, are set to end August with their biggest monthly surge in over 30 years, Reuters flags.

That’s another sign of investors bracing for a period of higher inflation and interest rates, with the European Central Bank expected to hike borrowing costs again this month.

Germany’s two year bond yield, trading steady at 1.14% in early trade, has soared over 85 basis points (bps) in August. That move puts it on track for its biggest monthly surge since 1981, according to Refinitiv data.

Germany’s 10-year bond yield was poised for its biggest monthly jump since 1990, up over 65 bps. It was last trading at 1.5%.

Two-year UK government debt is on track for its worst month since the mid-1990s, when there was a full-blown bond market crash.

Reuters’ David Milliken explains:

Sunak: complacent and irresponsible not to consider risks to public finances

Rishi Sunak gave a clear warning that the UK couldn’t risk losing the confidence of the markets, at a time when borrowing costs are under such pressures.

The Financial Times explains:

Big investors are betting on a fresh surge in UK borrowing costs because of fears that spiralling energy costs will force the BoE to sharply increase interest rates. The two-year gilt yield, which reflects market expectations for BoE policy, touched 3 per cent on Tuesday for the first time in 14 years.

“We have more inflation-linked debt by a margin than any other G7 economy — basically more than double,” Sunak said. “Because of the structure of QE [quantitative easing], we’re also particularly much more sensitive to an upward rate cycle than we have been.”

“My general view in life, you can’t take anything for granted,” he said.

He said that for a prime minister and chancellor it would be “complacent and irresponsible not to be thinking about the risks to the public finances”.

But the FT adds that Sunak, who has previously accused Truss of planning to borrow £50bn to fund her programme, toned down his criticism of his rival in the interview.

“Ultimately, you have to decide whether you think sustainable rates of borrowing are important or not,” he said. “I think they are.”

Introduction: UK 10-year bonds head for biggest monthly fall since 1986

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

British government bonds are on track for their worst month in over 35 years, as the financial markets brace for UK inflation to be driven higher by the energy crisis.

10-year UK gilts, the benchmark British government debt, have had a rough few weeks, heading for their biggest monthly rise since September 1986.

The yield (or interest rate) on 10-year gilts has risen to 2.747%, up from 1.84% at the end of July, as investors demanded a higher rate of return for holding UK debt.

The yield on 10-year UK gilts since 1980
The yield on 10-year UK gilts since 1980 Photograph: Refinitiv

Longer-dated debt has also come under pressure this month, with 20-year and 30-year gilt yields both hitting the highest level since 2014 on Tuesday. Yields rise when bond prices fall.

Shorter-dated two-year UK gilts touched the highest since October 2008, when the financial crisis erupted.

Gilts have come under pressure as UK inflation surged ahead of forecasts, hitting 10.1% in July. The cost of living crisis is set to worsen dramatically this winter, with Goldman Sachs warning yesterday that inflation could hit 22% if gas prices remained at extremely high levels.

Investors have swiftly priced in faster rate hikes from the Bank of England; Bank Rate is seen hitting 4% by next May, up from 1.75% at present.

Other government bonds have also weakened this month – with German bond yields set to end August with their biggest monthly surge in decades. Federal Reserve chief Jerome Powell added to the pressures, declaring on Friday that the US central bank would not let up in the battle to curb inflation.

But even so, the rise in UK borrowing costs is a concern. And Rishi Sunak, the underdog in the race to succeed Boris Johnson, has warned that it would be “complacent and irresponsible” to ignore the risk of markets losing confidence in the British economy

Sunak has told the Financial Times, that rival Liz Truss had made unfunded spending commitments that he fears could force up inflation and interest rates, and increase UK borrowing costs.

The former chancellor said he “struggled to see” how Truss’s promises of sweeping tax cuts and help for families struggling with soaring energy costs “add up”.

Also coming up

The latest eurozone inflation figures will show how the energy crisis drove the cost of living higher this month. Economists predict eurozone CPI rose by 9% in the year, up from 8.9% in July, which would be a new record.

India and Canada are reporting GDP data for the second quarter of the year.

The FTSE 100 quarterly reshuffle will be announced after the market closes for the day (so sometime after 4.30pm).

Generic medicines maker Hikma Pharmaceuticals, asset managment firm Abrdn and kitchen supplier Howdens were at most risk of dropping out of the blue-chip index into the smaller FTSE 250, with investment trust F&C, medical wound care group Convatec and North Sea oil producer Harbour Energy in pole position to replace them….

The agenda

  • 7.45am BST: French inflation report for August

  • 8.55am BST: German unemployment report for August

  • 10am BST: Eurozone flash estimate of inflation in August

  • 1pm BST: India’s Q2 GDP report

  • 1.30pm BST: Canada’s Q2 GDP report

Updated

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Beyoncé’s love for the American flag raises questions for Black people
The pop star has been draped in the star-spangled banner for her album. This pride in the flag is misplaced
The Guardian - US
The Guardian - US
Reese Witherspoon just made a Legally Blonde prequel announcement - and it's everything
What, like it's hard to get everyone on board?
Marie Claire
Marie Claire
Ashley Madison: Sex, Lies & Scandal review – jaw-dropping tales from the adultery site fiasco
When a dating site for people seeking extra-marital affairs was hacked, lives were ruined. Why did Netflix choose to turn their sorry stories into a comedy whodunnit?
The Guardian - UK
The Guardian - UK
Goodbye Body Shop? Buying Body Butter Can’t Save the World
After the company announced widespread closures, I visited a store for the first time in decades
The Walrus
The Walrus
Childish Gambino's new album and tour
Get in while it's good before Childish Gambino retires (for real this time)
Salon
Salon
Where’s the best place to raise a small child: New York City, or literally anywhere else?
In New York City, you get culture, diversity, mayhem and street smarts. In Tucson, where I live, you have space to breathe
The Guardian - US
The Guardian - US
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