European markets end higher
With Wall Street lifted by financial stocks after Morgan Stanley’s results, offsetting a dip in technology shares in the wake of the Google fine, European markets have ended the day in positive territory.
In the UK, the FTSE 100 benefitted from a drop in the pound following the unexpectedly static inflation figures. The final scores showed:
- The FTSE 100 finished up 49.95 points or 0.65% at 7676.28
- Germany’s Dax added 0.82% to 12,765.94
- France’s Cac closed 0.46% higher at 5447.44
- Italy’s FTSE MIB dipped 0.03% to 21,972.22
- Spain’s Ibex ended up 0.35% at 9753.2
On Wall Street the Dow Jones Industrial Average is currently up 74 points or 0.3%. Google owner Alphabet is up 0.44% despite the news of the European Commission’s €4.34bn fine.
On that note it’s time to close for the day. Thanks for all your comments, and we’ll be back tomorrow.
Federal Reserve chair Jerome Powell gave his second day of testimony to Congress, including a discussion on the current trade situation following President Trump’s tariffs. Reuters reports:
Powell, questioned by members of a House congressional committee, repeated on Wednesday that rising world protectionism would over time pose a risk to a U.S. and global expansion that appears largely on track to continue.
“If this process leads to a world of higher tariffs on a wide range of goods and services that are traded and those are sustained for a longer period of time, if it results in a more protectionist world, that would be bad for our economy,” Powell told the House Financial Services Committee. “It isn’t up to us to criticise (administration) policies. But the evidence is clear that countries that remain open to trade have higher productivity. They have higher incomes.”
Powell’s appearance largely retraced the testimony and questioning from a Tuesday hearing with the Senate Banking Committee.
In prepared testimony and an accompanying report Powell depicted a U.S. economy poised for perhaps years more continued growth, with the central bank close to its goals of maximum employment and inflation stable at around 2 percent.
But as with senators the day before, House members zeroed in on the possible economic consequences of the Trump administration’s imposition of tariffs, with threats of more to come, in the name of cutting better trade deals with both allies like Canada and rivals like China.
Powell has tried to walk a fine line in his responses, at once steering clear of direct criticism of the president who appointed him, while also making the economic consequences clear.
Powell said he thought the administration’s aim was to ultimately lower tariffs worldwide, and if there was disruption in the meantime “it might be worth paying a bit of a short-term price to get to a better place.”
At the same time, he and other Fed officials have been clear that businesses are telling them that they already are changing spending and investment plans because of the risks and uncertainties around a possible trade conflict.
Troubled UK outsourcer Capita has seen its shares fall around 2.5% after it said its finance director is stepping down.
It said Nick Greatorex would stay with the company for the next few months as it searched for a replacement. Capita, which is cutting costs as it attempts to cut its debt levels, appointed a new chief executive, Jon Lewis, in December.
The pound has pulled back from its lowest levels but is still down on the day.
Immediately following the unchanged UK inflation figures, which cast doubt on whether the Bank of England would indeed raise interest rates next month, sterling slid to a 10 month low against the dollar of $1.3011.
It is now at $1.3042, still down more than 0.5% on the day. Fiona Cincotta, senior market analyst at City Index, said:
The pound tumbled to a 10-month low versus the dollar after inflation in June failed to tick high...
These figures could give the BoE reasons to pause for thought over an August rate hike. With inflation steady at a one year low and average wages slipping, the central bank could have problems justifying the need for a rate hike. Policy makers could use the argument of recovering economic growth over the last few months, however the inflation figures show that growth is not at levels where it is starting to push up inflation. From whichever angle you look at this the data so far this week has not been supportive of an interest rate rise. Instead we are in danger of seeing a repeat of May, where weak data leading up to the MPC meeting prevented the widely expected rate hike. The market expectations of a rate hike slipped to 72% from 77% prior to the release.
Updated
Back with Google, and Michael Hewson, chief market analyst at CMC Markets UK, said:
In a way Google has become a victim of its own success in terms of its search and marketing capabilities, with little in the way of alternative search and browser options available. In terms of browsing there is Firefox, Opera and Microsoft Edge, however search options are more limited, with Yahoo and Bing the more well-known names.
The solution is likely to be something similar to the solution which Microsoft implemented a few years ago when it had to unbundle Internet Explorer from its operating system to comply with similar EU antitrust rules, allowing the user to choose their own search and browse options.
With Donald Trump’s visit to Nato and Russia hogging the headlines, his trade battle with China seemed to have gone a bit quiet. Now one of his advisors has been talking trade again. Reuters reports:
U.S. President Donald Trump’s top economic adviser said on Wednesday that Chinese President Xi Jinping was “holding up” a deal to resolve a “significant trade dispute” between the United States and China.
Larry Kudlow, head of the White House Economic Council, also said that he expects European Commission President Jean-Claude Juncker to bring a “significant” trade offer to Trump when he visits Washington next week.
The comments were made to CNBC:
"This guy, President Trump, has the biggest backbone," Larry Kudlow says of trade tensions with China. "He will not let go of this point... nor should he... China's going to have to come around." Follow all our #DeliveringAlpha coverage here: https://t.co/gcJmBKek9Z pic.twitter.com/KFzAZ1sgAF
— CNBC (@CNBC) July 18, 2018
"A lot of discussions are being held with the individual countries... right now," Larry Kudlow says of trade negotiations. Says Jean-Claude Juncker may bring "a very important free trade offer" to DC next week. #DeliveringAlpha https://t.co/gcJmBKek9Z pic.twitter.com/CvzSTCzcl4
— CNBC (@CNBC) July 18, 2018
Federal Reserve chair Jerome Powell gave his latest testimony to the US Senate yesterday, and shortly he will be up before the House of Representatives. His testimony is the same to both committees and can be found here.
On yesterday’s comments Jasper Lawler, head of research at London Capital Group, said:
In his appearance in front of the Senate Banking Committee Federal Reserve Chair Jerome Powell was unequivocal in his upbeat assessment of the US economy.
[He] continued with the Fed’s message to continue raising rates gradually as he sees several years of the jobs market remaining strong and inflation steady around 2%. This was music to the ears of the dollar, providing the greenback a welcome distraction from the trade war noise over recent weeks.
Wall Street opens higher
Overall US markets have edged ahead in early trading. The Dow Jones Industrial Average is up 19 points or 0.06%, while the S&P 500 and the Nasdaq Composite are both showing similar percentage gains.
Positive results from United Airlines and Morgan Stanley are helping to support industrial and banking shares.
The EC ruling on Google is “a bit misguided” but is likely to be a minor inconvenience in the short and medium term, says Colin Sebastian, senior analyst at investment bank Baird.
(Given the muted reaction from the company’s share price, the market seems to agree).
Sebastian adds:
Longer term, we see modest (but not unexpected) added risk from requirements to support forked versions of Android, and secondly, from the direct and/or indirect benefits of this ruling for Apple and Amazon.
Overall, this ruling should have a limited direct impact on Google since it ostensibly does not force a change to the Google search algorithm, and it also seems relatively straight-forward for Google to comply. The bigger issue here may be the obvious benefits to Amazon (and potentially Apple) from the ruling; first, even though Amazon already generates ~50% of commerce and product-related searches, the EC will require Android users to take another step before they can access an alternative product search engine. Secondly, to force Google to support distribution of forked-versions of Android (which Google does not control) could directly benefit Amazon’s Fire devices. To use the example cited by Margrethe Vestager in the press conference, the EC argues that Fire smartphones were not commercially successful because Google did not allow manufacturers to pre-install Google apps on those devices (forget the fact that the apps wouldn’t work as well, or at all, on a modified OS.)
In order to make an anti-trust argument, the EC needed to argue that Apple iOS (25% market share in Europe) is not a direct competitor to Android, and that Amazon is not a competitor to Google in search. In fact, the EC specifically cites Google/Android having 95% mobile OS market share (outside of China.) While convenient for an anti-trust ruling, we think these assumptions do not reflect the reality of the marketplace. In fact, as others have pointed out numerous times, Apple puts far more restrictions on network operators than Google does, including requirements to pre-install at least 3x as many apps as Google does, while Amazon continues to take share of product search.
Google parent Alphabet has said it will accrue the EC fine in the second quarter of 2018, in a filing to the Securities and Exchange Commission.
Meanwhile its shares have edged marginally higher - up 0.18% - after an initial dip.
Investors will be watching shares in Google parent Alphabet when Wall Street opens shortly. At the moment the pre-market price is showing limited damage from the EC fine, down just 0.25%.
Google CEO: We create competition
Sundar Pichai, Google’s CEO, has issued a statement decrying the EC’s decision, and confirming that the company plans to appeal against its fine.
Pichai argues that Google’s open source model (which allows manufacturers to modify Android to their purposes) has been good for competition.
He also accuses the Commission of favouring proprietary rivals (such as Apple, which keeps a tight hold on its own operating system).
Significantly, Pichai states that Google offers phone makers “the option of pre-loading a suite of popular Google apps”. The EC, though, accuses Google of using “tying practices” and “exclusivity payments” to prevent rivals app-makers getting a foothold on Android. That’s at the heart of today’s fine.
Pichai writes:
Today, because of Android, a typical phone comes preloaded with as many as 40 apps from multiple developers, not just the company you bought the phone from. If you prefer other apps—or browsers, or search engines—to the preloaded ones, you can easily disable or delete them, and choose other apps instead, including apps made by some of the 1.6 million Europeans who make a living as app developers.
In fact, a typical Android phone user will install around 50 apps themselves. Last year, over 94 billion apps were downloaded globally from our Play app store; browsers such as Opera Mini and Firefox have been downloaded more than 100 million times, UC Browser more than 500 million times.
This is in stark contrast to how things used to be in the 1990s and early 2000s—the dial-up age. Back then, changing the pre-installed applications on your computer, or adding new ones, was technically difficult and time-consuming. The Commission’s Android decision ignores the new breadth of choice and clear evidence about how people use their phones today.
The EC have created this graphic to explain how Google has been unfairly keeping a grip on its Android operating system, hurting rival search engine and browser makers.
The French government has welcomed the EC’s move.
Government spokesman Benjamin Griveaux told reporters in Paris that it was a ‘excellent decision’, adding:
“No-one is above the laws that have been laid down in common for all....Not Google, nor any other entity.”
US tech entrepreneur Jason Kint has calculated that the EC has basically fined Google 4% of its annual revenues.
That happens to be the maximum penalty available under Europe’s new data privacy rules (even though this isn’t a data violation).
No idea how @EU_Commission @vestager calculated $5 billion as Alphabet's fine but I can see a warning sign to Google for its abusive data practices in my math:
— Jason Kint (@jason_kint) July 18, 2018
2018 Q1 revenues = $31.2B
x 4% (maximum fine under new GDPR rules) = $1.25B
x 4 quarters = $5 Billion.
Here’s a video clip of Margrethe Vestager denying she has a vendetta against America during today’s press conference:
European Commissioner for Competition, Margrethe Vestager: "I very much like the US. I'm from Denmark, and that's what we tend to do. We like the US."https://t.co/KJAMhr5nyz pic.twitter.com/3FYZff80yo
— euronews (@euronews) July 18, 2018
Full story: Google hit with record fine for abusing market dominance
Our news story about Google’s record fine for breaking Europe’s competition rules is now live.
Our Brussels correspondent Jennifer Rankin writes:
Google has been hit with a record €4.34bn (£3.8bn) fine by the European Union for abusing its market dominance in mobile phone operating systems.
The EU imposed the multibillion-euro penalty after finding that the US tech firm required smartphone manufacturers to pre-instal Google’s search and browser apps devices using its Android operating system, otherwise they would not be allowed to use its Google Play online store and streaming service.
Margrethe Vestager, the EU’s competition commissioner, said Google has used its Android mobile phone operating system “to cement its dominance as a search engine”, preventing rivals from innovating and competing “and this is illegal under EU antitrust rules”.
Vestager added: “The vast majority of users simply take what comes with their device and don’t download competing apps.
“Or to slightly paraphrase what [US free market economist] Milton Friedman has said ‘there ain’t no such thing as a free search.’”
Here’s Jennifer’s story:
Experts: This fine comes too late
Today’s ruling comes too late to affect the mobile phone market, my colleague Sam Gibbs says:
Here’s a flavour of his analysis:
The EC is demanding that Google cede some control over Android in its licensing. The EC is demanding that manufacturers should be free to use Android and include the Google Play Store without having to pre-install the Google Search app and Chrome.
It’s a similar strategy to that employed by the EC in 2004, when it forced Microsoft to release a version of Windows without Windows Media Player and later offer a browser choice screen, which allowed users to select a web browser other than Internet Explorer.
But as with the Media Player-free version of Windows, Windows XP N, for which there was no demand, consumers are unlikely to buy a version of Android without Google’s services.
“The EU’s stance is arguably six to eight years too late,” said Geoff Blaber from analyst firm CCS Insight.
“Android has already helped establish Google apps and services as essentials for consumers in the western world.
More here:
Q: Why does Google get fined in Europe, but not in the US and Canada?
Commissioner Vestager insists that the EC has been fair - it has investigated complaints and taken evidence in order to reach its decisions.
Q: Was today’s decision really taken outside the context of the political situation?
[a reference to Donald Trump’s attacks on the EU’s trade policies, and threats to impose tariffs on European exports, I think]
People more insightful than me say that the world is becoming more and more unpredictable, Vestager replies.
That means it’s important to do predictable things -- so if you breach antitrust rules you pay the penalty, she adds.
The press conference is now over.
Q: Currently, the mobile phone operating system is dominated either by Android or Apple. Do you really think that is going to change?
Commissioner Vestager says she isn’t going to guess how the mobile sector will develop.
But she insists that competition will develop, if the market is fair.
She says that Amazon developed a fork which they were very keen to roll out to manufacturers, but “it wasn’t possible because of Google’s illegal restrictions”.
Q: This is the biggest fine ever for antitrust violations, so is Google guilty of the biggest ever antitrust breach?
Vestager jokes that she loves all her children equally, so it’s not fair to make her choose which company has been the worst sinner against competition in the EU.
Q: Wouldn’t breaking up Google address these antitrust concerns?
Vestager denies that breaking up a company would be a ‘silver bullet’ to deliver competition.
Vestager: I don't hate the US
Q: Was Donald Trump right when he told Jean-Claude Juncker last week that “Your tax lady really hates the US”?
Vestager says she has fact-checked this statement. It’s true that she’s a woman, and that she deals with tax. But after that point, the US president’s claim becomes less accurate.
“I very much like the US”, Vestager insists, pointing out that she’s from Denmark, where people often have American friends and appreciate US culture and travel.
Q: Why is today’s fine twice as big as the one imposed on Google in 2017?
The fine reflects the scale of Google’s “very serious illegal behaviour”, Vestager replies.
Q: Do you think Google needs to be broken up to improve competition?
Vestager says she doesn’t know whether that would improve the situation. The EC really wants Google to allow proper competition at the mobile phone operating system level.
Q: Does the length of time these cases take limit their impact, as the market has moved on by the time the EU acts?
Vestager says that the case began in 2015, following a number of complaints. The EC sticks to ‘due process’, which limits how fast these cases can be wrapped up, she explains.
Q: What remedies will be available to existing Android phone users? Could Google be forced to send out a notification to customers, telling them they can change their search engine or browser?
Vestager says the EC is making a classical ‘cease and desist’ decision. It’s now up to Google to decide how to make amends in the future.
[I think that means that existing Android users won’t see any difference on their handset]
Updated
Q: Google now has an entrenched position in the mobile sector (with four-fifths of devices), so how can you enforce changes now?
Vestager says Google needs to take away the contractual restrictions that have held back competition on Android.
Q: Did you examine whether Google blocked rivals from collecting data on Android users?
Vestager says that rival search engines “never really” got a foothold on Android, due to Google’s restrictions (ie, the company didn’t have to actively block its rivals, as they weren’t there in the first place).
Q: Could your decision drive up the cost of mobile phone handsets?
Vestager says there are still various ways in which Google can monetising the Android operating system, rather than simply hiking prices.
Q: What will happen to the money (assuming Google pays up).
Vestager says that the fine will be returned to EU member states, based on how much each country pays into the EU budget. But that could take a while, if Google files an appeal.
Commissioner Vestager is taking questions about the Google fine now.
Q: Could this decision affect next week’s meeting between EC president Juncker and US president Trump?
Vestager says that the US competition authorities want fair competition, just as Europe does. As such, they expect the EC to do its job.
Q: Should Google apologise?
We want Google to end its illegal behaviour, Vestager replies. This isn’t a moral endeavour - we just want Google to play by the rules.
The size of Google’s fine reflects the “seriousness” and sustained natures of its violation of the EC’s antitrust rules, commissioner Margrethe Vestager tells reporters in Brussels.
The company must end its ‘illegal conduct’ within 90 days, by ending the restrictions it has imposed on mobile phone makers (as outlined here), Vestager explains.
Our decision stops Google from controlling which search and browser apps manufacturers can install, or which android operating system they can use, she says.
And if Google doesn’t comply, its parent company Alphabet could be fined up to 5% of its daily turnover each day.
Google to appeal EC fine
Newsflash: Google says it will appeal against the EC’s fine.
Google spokesman Al Verney argues that its Android operating system [which is used on 80% of phones worldwide] has been good for consumers.
Verney says:
Android has created more choice for everyone, not less.
A vibrant ecosystem, rapid innovation and lower prices are classic hallmarks of robust consequences.
We will appeal the Commission’s decision.
.@Android has created more choice for everyone, not less. #AndroidWorks pic.twitter.com/FAWpvnpj2G
— Google Europe (@googleeurope) July 18, 2018
EC: Google has abused market position since 2011
The EC says that Google has been abusing its market position for seven years.
Today’s ruling states:
Google has prevented device manufacturers from using any alternative version of Android that was not approved by Google (Android forks).
In order to be able to pre-install on their devices Google’s proprietary apps, including the Play Store and Google Search, manufacturers had to commit not to develop or sell even a single device running on an Android fork.
The Commission found that this conduct was abusive as of 2011, which is the date Google became dominant in the market for app stores for the Android mobile operating system.
Updated
Commissioner Vestager is now outlining how Google restricts manufacturers from creating rival ‘forks’ of its Android operating system.
In theory, a manufacturer can used the Android source code to create their own platform, as Google makes it openly accessible.
But in practice, Vestager says, device manufacturers who wish to obtain Google’s proprietary Android apps and services need to enter into contracts with Google, as part of which Google imposes a number of restrictions.
Commissioner Margrethe Vestager adds:
Google has used Android as a vehicle to cement its dominance as a search engine.
These practices have denied rivals a chance to innovate and to compete on the merits.
They have denied European consumers the benefit of effective competition in the very important mobile sphere.
And this is illegal under EU antitrust rules.
Why the EC has fined Google
Vestager is outlining the case against Google.
She says:
- Google required manufacturers to pre-install the Google search and browser apps on Android phones, otherwise they wouldn’t be allowed to use Google Play (its app service)/.
- Google paid manufacturers and network operators to make sure that only the Google search app was installed on devices
- Google has restricted the development of competing mobile phone operating systems, which could have provided a platform for rival search engines.
Commissioner Vestager says Google must make amends within 90 days, or the company will incur penalty payments.
EC fines Google €4.34bn
NEWSFLASH: The European Commission has fined Google €4.34bn for breaching EU antitrust rules.
The tech giant is being sanctioned for abusing its dominant position in the Android operating system for mobile phones.
The EC says Google unfairly took advantage of the popularity of its Android mobile phone operating system, and forced phonemakers to pre-install Google services such as its flagship search product.
Competition commissioner Margrethe Vestager is outlining the decision now.
More to follow!
Margrethe Vestager, the EC’s Competition Commissioner for Competition, is about to give a press conference in Brussels.
Presumably this is to announce the Google fine.
It will be streamed online here.
Over in Brussels, antitrust regulators are preparing to hit Google with a multi-billion euro fine.
My colleague Jennifer Rankin explains:
Google could be hit with a record fine by the European Union’s competition authorities on Wednesday for abusing its market dominance in mobile phone operating systems.
The company risks a multibillion-euro penalty for making the Google search engine the default on most phones using its Android operating system.
Citing people familiar with the case, the Financial Times reported that the fine is likely to exceed the €2.4bn (£2.1bn) penalty imposed by the European commission in 2017 when Google was found to have used its dominant search engine to build its internet shopping service.
Google is appealing against that decision. The EU regulator could fine Google up to 10% of its turnover, or some €11bn.
Reuters is reporting that Google could be fined around €4.3bn, or $5bn.
The decision could be just minutes away....
Britain’s retail sector has suffered another blow – meaty restaurant chain Gaucho is expected to file for administration today.
The move will threaten around 1,500 jobs, adding to the thousands being cut at high street chains such as House of Fraser, Poundworld, Marks & Spencer and Mothercare.
UK house prices growth hits five-year low
UK house price inflation has hit a five-year low.
House prices across the UK rose by 3.0% in the year to May, which is the slowest growth since August 2013.
Once again, falling house prices in London dragged the national average down.
The Office for National Statistics explains:
The lowest annual growth was in London, where prices decreased by 0.4% over the year. London has shown a general slowdown in its annual growth rate since mid-2016.
This is the fourth consecutive month that London house prices have fallen over the year.
Political uncertainty (ie Brexit) is hurting prices in the capital, says Guy Bradshaw, Director of Central London Sales and Lettings at UK Sotheby’s International Realty:
“As annual growth in the UK has continued to decline to the lowest rate we have seen since August 2013, it is unsurprising to see the London market has also followed suit.
We were never expecting to see a particularly buoyant market this year, with political uncertainty and stamp duty continuing to dampen sales. The ‘Spring Bounce’ is undeniably modest in comparison to previous years and whilst this may be due to the poor weather we encountered late into the year this may very well be setting the scene for the summer market.
Full story: What now for UK interest rates?
Here’s our economics correspondent Richard Partington on today’s inflation figures:
The chances of a rise in interest rates in August have dipped after British inflation remained at a one-year low last month.
Confounding expectations for the return of higher rates of inflation in June fuelled by the rising price of petrol, the Office for National Statistics said the consumer price index remained unchanged at 2.4% from the previous month.
Although the cost of gas and electricity prices increased and the price at the pump hit the highest level for nearly four years, consumers benefited from the falling cost of computer games and the summer clothing sales. House prices across the UK also rose at the slowest pace in nearly five years.
Faced with falling wage growth, the latest snapshot from the ONS poses the Bank of England with limited grounds for raising interest rates next month. Sterling slid to a 10-month low against the dollar on foreign exchanges after the data was released.
More here:
The Resolution Foundation has warned that inflation could overtake earnings growth soon, which would mean real wages would start falling again:
Thread: Today's inflation stats: CPIH 2.3% CPI 2.4%. Unchanged from last month but drivers of inflation are shifting. pic.twitter.com/kubqQKwzwc
— ResolutionFoundation (@resfoundation) July 18, 2018
Imported (oil) inflation is driving price rises, as are rising utility costs. On the other hand the prices of imported goods (clothing, food) are dragging pic.twitter.com/rrmb97ZzdF
— ResolutionFoundation (@resfoundation) July 18, 2018
All this means that living standards are more closely tied to the price of imported goods. Key metric to watch going forward is price of imported materials and fuels pic.twitter.com/y5cmcxrB5O
— ResolutionFoundation (@resfoundation) July 18, 2018
Taking yesterday's pay stats and these inflation numbers together: it may not take much for prices to overtake wages again. Earnings growing at 2.7%, prices (CPIH) at 2.3% pic.twitter.com/jLwcNRk1ZO
— ResolutionFoundation (@resfoundation) July 18, 2018
Here’s the government’s response to today’s inflation data, from Financial Secretary to the Treasury and Paymaster General, Mel Stride:
“Inflation has fallen from its peak last year but we recognise the cost of living is still a challenge for some families.
That is why we are freezing fuel duty saving drivers £160 a year, cutting income taxes for 31 million people and increasing the National Living Wage to £7.83 an hour.”
The pound is acting more like the ‘Great British Peso’ right now, as it is buffeted by political tensions as well as economic data.
So says Bart Hordijk, Market Analyst at Monex Europe, who believes sterling is behaving increasingly like an emerging market currency.
Hordijk explains:
“As the dust settles on yesterday’s ‘Wild West’ style standoff in Parliament, UK macroeconomic data comes back into the spotlight ahead of the Bank of England rate decision in August.....
Sterling’s knee jerk reaction [to the inflation data], carving lows not seen since September 2017, evidences how over-inflated expectations were on the Bank of England’s upcoming decision.
Today’s soft inflation reading will do little to knock the Bank of England off of their implied course, but tail risk of the ‘unreliable boyfriend’ resurfacing has increased. Sterling looks to be in for a bleak day, especially as Theresa May will have to fend off grilling during today’s Prime Minister’s Questions.”
Professor Costas Milas of the University of Liverpool predicts that the Bank of England will hike borrowing next month, even though inflationary pressures are less intense than feared.
He thinks the BoE will be keen to get an interest rate rise through before Brexit becomes even more tense.
Despite inflation getting stuck at 2.4%, I sense that early August is a very convenient time for the MPC members to hike.
Why? UK inflation, at 2.4% in the second quarter of 2018, is fully in line with their 2.43% forecast recorded in the May Inflation report. So no surprises there.
This, together with the widespread expectation that GDP growth in 2018 Q2 will be higher than the previous quarter figure will encourage MPC members to raise the policy rate.
At the same time, with the Parliament moving in recess in less than a week’s time, May’s government will get a much needed ‘breathing space’ in terms of Brexit-related tensions. All this implies a very short ‘time window of opportunity’ for MPC members to hike in August rather than kicking the ‘interest-rate can’ down the road.
Updated
Cost of living squeeze continues
Inflation is still taking a big chunk out of UK workers’ pay cheques.
At 2.4% in June, consumer prices are rising nearly as fast as earnings, meaning real wages are only up around 0.3%.
Andrew Sentance, senior economic adviser at PwC, explains:
”UK CPI inflation remains steady at 2.4%, but it is still above the 2% target and is likely to be stuck close to 2.5% over the summer. The gap between wage growth (2.7%) and inflation remains narrow - just 0.3%.
So consumers are likely to remain cautious while their living standards are still rising very slowly.
Tej Parikh, Senior Economist at the Institute of Directors, warns that wages are unlikely to rise sharply this year.
“The unchanged inflation rate offers some reprieve for households at a time when wage growth remains uninspiring.
“Despite higher utility bills and petrol costs, consumers may have benefitted from offsetting seasonal discounts, particularly on clothing. The good news should however be taken with a pinch of salt. With the recent weak performance in pay packets, and high street bargains only temporary, the cost of living still remains high.
“The stickiness in prices will reduce pressure on the Bank of England to hike interest rates in August. The decision is certainly not set in stone, particularly as wage growth is a key component of inflation, and the recent data shows little promise of a sustained rise in salaries.”
UK inflation is still over the Bank of England’s target of 2%, meaning prices are rising much faster than the saving rates on offer from the banks.
Kate Smith, head of pensions at life insurance firm Aegon, says household budgets are still being squeezed.
“Financial pressure created by rising prices will continue to hit people on fixed incomes, such as pensioners, the hardest. As people live longer, with more years spent in retirement, it’s vital they protect their savings from the erosive effects of inflation.
Even at relatively low levels of inflation the spending power of £100 in today’s money could be halved in 20 years’ time.
June’s unchanged inflation rate is a huge surprise, says Tom Stevenson, investment director for Personal Investing at Fidelity International.
Inflation had been expected to bounce back up to 2.6% or even 2.7% on the back of higher fuel and energy prices. While these came through, they were offset by falling prices for clothes and games. Inflation remained at 2.4% for the third month in a row. Faster rising prices would have given the Bank of England cover for an interest rate hike next month.
Now it looks odds-on that the MPC will hold fire yet again. That’s particularly the case after yesterday’s wage growth data emerged weaker than expected at 2.5% including bonuses.
Stevenson suspects that the Bank of England will hold off raising interest rates until November, or maybe until 2019....
Pound pain: What the experts say
Economist Philip Shaw of City firm Investec says the pound is suffering from ‘political trauma’, as well as today’s weaker-than-expected inflation data.
Economic data join political trauma in hitting pound. Unch CPI reading at 2.4% weaker than consensus, pushing sterling close to $1.30. Note though that this was close to BoE estimates at 2.5%, so unlikely to derail August rate hike prospects. UK currency now recovering a little. pic.twitter.com/TvI4ShmEhU
— Philip Shaw (@philipshaw8) July 18, 2018
Jamie McGeever of Reuters predicts that sterling could fall through the $1.30 mark (which would be a new 10-month low)
UK inflation much softer than expected.
— Jamie McGeever (@ReutersJamie) July 18, 2018
Annual CPI +2.4% (exp. +2.6%)
Monthly CPI 0.0% (exp. +0.2%)
Core CPI +1.9% (exp. +2.2%)
Monthly core -0.1% (exp. +0.3%)
Sterling tanking, now at a 10-month low and a break below $1.30 seems likely. pic.twitter.com/9vowbZrhYb
Simon French of Panmure Gordon says that an August interest rate rise looks less likely, especially after UK wage growth slowed to a six-month low yesterday.
UK inflation rate flat in June at 2.4%. August rate hike chances having a bad 24hrs with wages & prices coming in below expectations. The lack of core inflation the most telling part - weak worker bargaining power & little retailer pricing power the most plausible explanation
— Simon French (@shjfrench) July 18, 2018
Pound hits 10-month low
The pound has hit its lowest level in 10 months, as traders react to this morning’s unexpectedly weak inflation data.
Sterling has dropped to $1.3011, its weakest level since September 2017.
The City is calculating that an August interest rate rise is now less likely, as there is less sign that inflationary pressures are building.
Michael Hewson of CMC Markets says the “political shenanigans in Westminster” are also weighing on the pound, following last night’s narrow victory for Theresa May over her customs plan (see earlier post).
This chart shows how Britain’s household heating bills, and petrol costs, drove the cost of living up last month.
Clothing, toys and computer games got cheaper, though, meaning inflation was flat month-on-month (rising by 2.4% year-on-year).
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Men’s clothing prices fell sharply last month, also helped to keep inflation pegged last month.
The ONS says:
Prices of clothing fell by 2.3% between May and June this year compared with a fall of 1.1% between the same two months a year ago.
Prices usually fall between May and June as the summer sales season begins, but the fall in 2018 is the largest since 2012. The effect came mainly from men’s clothing.
Rising prices for motor fuels and domestic gas and electricity produced the largest upward contributions to change in the rate between May and June 2018. Falling prices for clothing and games, toys and hobbies provided the largest downward effects.
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At just 2.4%, UK inflation remains at its joint-lowest level in 14 months.
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UK inflation unexpectedly low
Newsflash: Britain’s inflation rate remained at 2.4% in June, defying expectations that it would rise to 2.6%.
That’s good news for households, given the slowdown in wage growth in the last quarter.
It also takes some pressure off the Bank of England to raise interest rates next month.
More to follow!
UK engineering group Smiths is having a bad morning.
Smiths shares are down 7%, after it told the City that some of its medical products have lost certification under the EU’s new Medical Device Regulations.
In London, the FTSE 100 has gained 35 points in early trading, partly thanks to easyJet.
The budget airline’s shares have jumped by 3%, after it reported a 14% jump in revenues in the last quarter and also raised its profit forecast.
Richard Hunter, Head of Markets at interactive investor, says easyJet is benefiting from falling competition:
The demise of competitors such as Monarch, Air Berlin and Alitalia has opened up the field, ancillary revenue has increased due to a change in passenger behaviour (increasingly paying for additional baggage and allocated seating) and load factors remain high.
European stock markets have hit a one-month high this morning, led by technology stocks.
The Stoxx 600 has risen by 0.6% today, with the tech sector gaining over 2%.
Semiconductor firm ASML and telecoms equipment maker Ericsson are leading the rally, after both beating analyst forecasts this morning.
That follows a solid day in Wall Street yesterday, where the Nasdaq hit another record high. With Amazon hitting new peaks, and Netflix recovering from disappointing results earlier this week, the tech boom doesn’t appear to have ended yet.
Brexit 'cat-herding' weighs on the pound
The pound has dipped below $1.31 against the US dollar this morning, close to its lowest level of 2018.
Sterling slumped yesterday when the unemployment figures showed wages growth slowing, potentially making an August interest rate rise less likely.
The pound is also being dragged down by Brexit anxiety, after prime minister Theresa May was forced to threaten her own MPs with a general election to force them to back her Brexit plan.
Although May won a crucial vote on the customs union last night, she lost on a separate amendment which demanded that the UK remained under EU medicines regulation after leaving the bloc.
Given the PM’s precarious position, City investors aren’t convinced that May can drive her plans through the Commons.
Kallum Pickering of Berenberg Bank says the PM’s challenge is “Like herding cats”.
Once again, the Brexiteers have laid bare how difficult it is for UK Prime Minister Theresa May to hold her Conservative government together.
Although May had turned her plan for a semi-soft Brexit into the official line of her Cabinet last week, causing prominent dissenters to quit, Brexiteers led by MP Jacob Rees-Mogg forced her on Monday to accept an amendment that would make it even more difficult for the EU to endorse her proposed customs arrangement.
The strongly pro-EU House of Lords will probably reject the amendment. After the House of Commons barely passed it anyway (305 for, 302 against), the amendment may not survive a second vote.
The agenda: UK and Eurozone inflation
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Britain may be facing a new cost of living squeeze. Inflation figures due out this morning are expected to show that prices rose at a faster rate in June, hitting consumers in the pocket.
Economists predict that the consumer prices index rose by around 2.6% in June, up from 2.4% in May, partly due to rising energy prices.
Sue Trinh of Royal Bank of Canada says:
The rise in petrol prices in June should ensure that the transport category continued to make a strong positive contribution to UK inflation.
Added to that, a number of pre-announced utility price increases kicked in last month, including a 5.5% rise from the largest energy provider British Gas which came into effect at the end of May.
This comes as UK wage growth slows. Yesterday we learned that basic pay only rose by 2.7% in the three months to May, the weakest in six months.
If you include bonuses, then total earnings only rose by 2.5%.
Today’s inflation figures will help to influence whether the Bank of England feels confident enough to raise interest rates next month.
If prices are rising faster, then the hawks at the BoE will push for borrowing costs to be hiked. But dovish colleagues may worry that wage growth isn’t strong enough.
If you want a longer view, here's UK unemployment, wage growth and real earnings over past 15 years (TL;DR - unemployment lower than pre-crisis, wages haven't caught up, higher inflation after Brexit vote almost as bad as crisis for real pay) pic.twitter.com/Sb8mg9oMur
— David Milliken (@david_milliken) July 17, 2018
It’s also inflation day in the eurozone. Consumer prices in the euro area are expected to have risen by 2% in the last year, up from 1.9% in May.
Also coming up today
Google is bracing for a record fine from the European Commission today, over claims it has abused its dominant position in the mobile phone operating system market.
America’s top central banker, Jerome Powell, is returning to Capitol Hill later for a second day of questioning. Yesterday he told senators that the US economy was growing strongly, adding:
“The unemployment rate is low and expected to fall further. Americans who want jobs have a good chance of finding them.”
The agenda
- 9.30am BST: UK inflation date for June
- 9.30am BST: UK house price data for May
- 10am BST: Eurozone inflation data for June
- 3pm BST: Fed chair Jerome Powell testifying to the US House of Representatives
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