Closing summary: Table Mountain or the Matterhorn
Bank of England chief economist Huw Pill wants a Table Mountain shape to UK interest rates. Pill contrasted higher-for-longer rates with the short, sharp peak of Switzerland’s Matterhorn.
In the US, a quicker turnaround in interest rate policy may be appropriate, given diminishing inflationary pressures, according to the reading of Ian Shepherdson, chief economist at Pantheon Macroeconomics, a consultancy. He said:
The bigger picture here is that it is becoming harder to dismiss the improvement in the inflation numbers as mere noise.
Our base case is that the year-over-year increase in the core PCE will fall to around 3% by the end of the year, setting the stage for rate cuts starting next spring.
But there are still other indicators that could push the Fed to hike further, argues Ryan Brandham, head of global capital markets, North America, at Validus Risk Management, an investment software company. He picked up on weekly jobs data, which came in better than expected. 228,000 new jobs were created, compared to an expected 235,000. He said:
While the US economy may be slowing, the labour market is showing signs of resilience. The Fed will need to determine whether they should take actions to weaken the labour market in order to get inflation down to 2%, or if the recent slowing is enough to feel confident that inflation is under control.
There is data still to come ahead of the September Fed meeting, but this result indicates another hike this year may still be on the cards.
The eurozone inflation upside surprise also offers a problem for central bankers.
Charles Hepworth, investment director, GAM Investments, an asset manager, said:
Just when everyone assumed eurozone inflation was going to continue its downward trajectory, data published today showed the consumer price index remained stuck at 5.3% over the year. Meanwhile, core inflation also stayed at the same level.
This presents somewhat of a problem for the ECB when it meets in two weeks to decide interest rate policy. A 0.25% hike is most likely on the cards after this data print, which will take the deposit facility rate to 4%.
In other business news:
Job cuts at Wilko’s head office and warehouses are to begin on Monday after a surprise £90m bid for the discount retailer fell through.
Marks & Spencer has launched a legal challenge against a government decision to block its plans to demolish and redevelop its store on London’s Oxford Street.
The former chancellor Nadhim Zahawi is in line to become chair of the Daily Telegraph and the Sunday Telegraph after brokering a deal between Middle Eastern investors and the Barclay family, according to reports.
The Adanis, a billionaire Indian family with close ties to the country’s prime minister, Narendra Modi, secretly invested hundreds of millions of dollars into the Indian stock market, buying its own shares, newly disclosed documents suggest.
The US has expanded the restriction of exports of Nvidia artificial intelligence chips beyond China to some countries in the Middle East.
You can continue to follow our live coverage from around the world:
In the UK, Grant Shapps appointed defence secretary as Claire Coutinho takes energy brief in mini-reshuffle
In the US, Hurricane Idalia brings intense flooding to Carolinas as Floridians count the cost
In US politics, Donald Trump is accused of inflating net worth by $2bn in New York civil case
In our coverage of the Russian war on Ukraine, Prigozhin’s ‘right-hand man’ in Wagner buried
Thank you for reading today on the official last day of summer. Join us tomorrow for the sequel: autumn. JJ
Slower inflation is making some people predict the Federal Reserve can engineer the much hoped-for “soft landing”, bringing down inflation while avoiding a recession.
Consumer spending in the US increased in July by 0.8%, but inflation figures came in as expected, picking up only slightly.
Paul Ashworth, chief North America economist at Capital Economics, a consultancy, said:
Despite the apparent strength of real demand, inflationary pressures continued to ease, with both the headline and core PCE [personal consumption expenditure] deflators increasing by 0.2% month-on-month.
Unfavourable base effects pushed core PCE inflation back up to 4.2%, from 4.1%, but the three-month annualised rate slowed to a two-and-a-half year low of 2.8%, from 3.3% the month before. That’s still above the 2% target but, factoring in the coming slowdown in housing inflation, a return to target by mid-2024 is now well within reach.
🇺🇸Soft landing or turbulence? 🛬
— Gregory Daco (@GregDaco) August 31, 2023
✅Spending +0.8% in July
🟢Inflation-adj +0.6%
💵Disposable income +0%
🔻Inflation-adj -0.2% (⚠️first decline in 13months)
🏦Savings rate 3.5% (-0.8pt)⚠️not sustainable
PCE #inflation
🔼Headline: 3.3% y/y (+0.3pt)
🔼Core: 4.2% y/y (+0.1pt) pic.twitter.com/QyysedSuNi
The core measure of inflation, which strips out more volatile food and energy figures, came in at 4.2%, up from 4.1% in June, the US BEA said.
The Fed is also fond of the core measure because some policymakers believe it gives a better indication of underlying inflationary pressures – the kind of things that central bankers can target, rather than external shocks such as surging energy prices.
The lack of a big negative surprise – such as a stronger rise in inflation – could give the Federal Reserve room to pause its rate hike path.
Fed governor Jerome Powell did not give much away about his plans when he spoke about the path of interest rates last week at the annual central bankers’ summit at Jackson Hole, Wyoming. But interest rate derivatives markets suggest there is a 90% chance that the Fed will not hike at its next meeting on 20 September.
#PCE Price Index (YoY) came in pretty inline. Slightly higher than the previous read. Not much to see here. pic.twitter.com/Eynjgv7RAs
— Jesse (@Micro2Macr0) August 31, 2023
*NB, in the previous post I put the figure for core PCE. Please refresh to see the correction.
US inflation increases slightly in July as expected
US consumer inflation picked up slightly in July, but was exactly as expected, according to the measure that is known to be favoured by the Federal Reserve.
The personal consumption expenditures index rose by 3.3% in the year to July, the US Bureau of Economic Analysis said. That was bang on the consensus expectation from economists polled by Reuters.
*This post has been corrected to include the correct figure.
Updated
The take from Reuters is that today’s eurozone data have something for everyone:
Eurozone inflation proved unexpectedly stubborn this month although price pressures for underlying goods eased, providing ammunition for both supporters and opponents of another European Central Bank interest rate hike.
It reported that Robert Holzmann, Austria’s central bank chief and one of the most outspoken conservatives on the rate-setting governing council, told a Reuters conference that he was still leaning towards a hike but did not consider the inflation data a clincher:
I have not made up a decision because I don’t have all the data, but I would not exclude that I would go for a hike. We are not yet at the highest level (for rates); it could be that we do another hike or two.
Updated
Ahead of US inflation data, here is some analysis of the figures from the eurozone, which appeared to show inflation remaining stubbornly high.
Bert Colijn, senior economist for the eurozone at ING, a Dutch investment bank, said:
Inflation in the eurozone did not fall in August, which could tip the ECB in favour of a final [0.25 percentage point] hike at the governing council meeting in two weeks’ time. Still, overall inflation dynamics remain relatively benign, and we still expect inflation to trend much lower at the end of the year
Richard Flax, chief investment officer at Moneyfarm, a wealth manager, said:
The battle between the hawks and the doves is likely to heat up ahead of the next ECB decision. Nine straight rate hikes from the ECB have cooled economic growth, and amid concerns over deflationary pressures, markets have begun to price in a possible pause to eurozone rate hikes when the ECB meets in September. However, with inflation data still remaining at elevated levels, we cannot rule out further rate hikes before the year is out.
India’s economy grew at an annual pace of 7.8% in the first quarter of 2023, slightly faster than the 7.7% expected by economists.
It was the fastest growth in a year.
INDIA GDP QUARTERLY (YOY) (Q1) ACTUAL: 7.8% VS 6.1% PREVIOUS; EST 7.8%
— First Squawk (@FirstSquawk) August 31, 2023
An update on those $10bn in cost cuts by UBS after taking over its erstwhile rival, Credit Suisse: the bank will cut 3,000 jobs in Switzerland alone.
That is one in 12 Swiss jobs – a tricky prospect during an election year in the country.
8,000 people have already left Credit Suisse of its own accord, according to Reuters. The name is also due to disappear completely, 167 years after it was founded in 1856.
The Financial Times also has an interesting tidbit about UBS’s results (which the bank put out at the same time as the strategy announcement): UBS technically recorded the biggest profit of all time for a bank, at $29bn (£23bn) for the quarter.
Don’t get too excited though: “its record $29bn pre-tax profit was almost entirely thanks to the accounting gain it recorded on the $3.4bn takeover,” the FT reported. “The previous largest quarterly bank profit was $14.3bn, reported by JP Morgan at the start of 2021.”
Wilko job cuts to begin after last-minute bid fails
Job cuts at Wilko’s head office and warehouses are expected to begin this week after a surprise £90m bid for the discount retailer fell through.
It is understood that about a third of the 1,400 staff at the group’s headquarters and distribution centres are to be made redundant after talks with M2 Capital collapsed because a failure to provide proof of funding.
Talks on a rival bid from the HMV owner, Doug Putman, continue. It is understood that he does not want to hold on to Wilko’s back-office function, only the brand and its stores.
Almost 12,500 jobs are at risk after Wilko called in administrators this month as it ran short of cash.
The UK government has proposed changes to heat pump regulations which it says could make it cheaper and easier for households and small businesses to install the green technology – but there may be a catch.
The proposals could mean varying the levels of grants – £5,000 for an air source heat pump or biomass boiler, or £6,000 for a ground source heat pump – depending on the customer’s property type or existing fuel source. The changes could make heat pumps “more affordable for even more households and small businesses”, the government said.
Heat pumps are seen by most experts as one of the most important technologies for the energy transition, replacing fossil fuels burned in the home with electricity which can gradually be switched to zero emissions sources.
However, the consultation shows that the government is considering ways to actually cut the grants on offer for some households in the future. The consultation said:
It is possible that heat pump costs will fall faster for properties currently with gas heating rather than those with oil heating. If this transpires then it may be appropriate, in future, to reduce the grant value faster for properties replacing gas heating than oil heating.
Other changes mean that houses will not have to meet a higher bar for energy performance (such as requiring proper insulation) to qualify for heat pump subsidies, which a Lords committee had found to be a barrier to installation for some people.
Subsidies could also be available to biomass boilers that can cook as well, under the proposals.
Jess Ralston, an energy analyst at the Energy and Climate Intelligence Unit (ECIU), a thinktank, said it was welcome that the UK government was realising that it is falling behind peers on heat pump installations.
She said:
This move would mean the UK’s levels of support for installing heat pumps becomes more closely aligned to other nations, including lots of EU countries, the US and Australia. The rest of the world has been slowly ramping up heat pump deployment for some time, so much so that there are now 20m installed in Europe and the US sold more heat pumps than gas boilers last year.
Wise shares, listed in London, are down by 1.8% after the sanctions announcement. They had fallen as far as 4% when the initial announcement came out.
You can see the share price move in the below chart. A big drop, followed by a sigh of relief in visual form as investors realised there was no monetary penalty:
Fintech Wise breached sanctions laws on Russia but avoids fine
Fintech firm Wise has broken UK laws on sanctions on Russia by allowing a person under sanctions to withdraw cash, the Treasury has said.
Wise escaped a fine because it was only a £250 withdrawal, and the company reported the breach itself.
The “nature and circumstances of this breach were assessed as moderately severe”, the Treasury’s Office for Financial Sanctions Implementation (OFSI) said in a report. The appropriate penalty was therefore “disclosure” – consider them punished.
The withdrawal was from a business account held with Wise, but was on a card issued in the designated person’s name on 30 June, one day after sanctions were imposed on 29 June.
There were 12 people newly designated for sanctions on 29 June 2022, according to the UK’s sanctions list, among them Russian oligarchs and leaders of the Wagner mercenary group. The person who withdrew the money was not named.
Wise matched the name on a sanctions database, but its policy was not to shut down access to debit cards immediately because of a lot of “false positives”, the Treasury report said. Someone checked the sanctions a day after the withdrawal was made, and it took another three days for the debit card to be blocked.
OFSI said:
Despite the low breach value, OFSI considered that Wise’s systems and controls, specifically its policy surrounding debit card payments, were inappropriate. This factor made the case moderately severe overall and enabled funds to be made available to a company owned or controlled by the designated person.
A Wise spokesperson said:
At Wise, we take the responsibility of complying with all sanctions laws very seriously. We took immediate steps to suspend our services to Russia as soon as sanctions were enacted in response to its invasion of Ukraine.
On June 29, 2022, an individual was added to the list of sanction-designated persons under UK regulations. We promptly followed sanctions screening procedures and suspended an account suspected to belong to a business owned by that individual. This meant that the account-holder could no longer send or receive any funds via this account. During our review of this account, however, we learned that a business debit card associated with the account was used to make a £250 ATM withdrawal on the same day.
We voluntarily reported this ATM withdrawal to OFSI, undertook an immediate review of our processes and implemented the necessary internal system changes to prevent this type of transaction going forward.
We take this matter very seriously. We remain committed to ensuring that our day-to-day operations are in compliance with all relevant regulatory requirements, and to working openly and collaboratively with our regulators.
*This post has been updated to add Wise’s comment.
Updated
Bank of England chief economist Huw Pill used some intriguing topographical metaphors in his speech on the UK economy and the path of interest rates.
Bloomberg’s Lucy White reports that Pill said he wanted a “Table Mountain” approach to interest rates – rather than a Matterhorn.
BOE's Huw Pill says he's backing a "Table Mountain" approach for UK interest rates, in one of his clearest hints yet on future path of hikes. Implies further rises limited, but the base rate likely to stay at or near its current 5.25% for some time. https://t.co/29bJx19ZbG pic.twitter.com/akSm1eDOjB
— Lucy White (@LucyGJWhite) August 31, 2023
The speech was in Cape Town, which is overlooked by Table Mountain. A flat top would suggest interest rates will remain at current levels for a long while, rather than dropping steeply like the famous spike of the Matterhorn on the Swiss-Italian border.
(And a thumbs up from the business live blog for visually interesting metaphors in central bank speeches.)
The euro has edged further against the US dollar today after eurozone inflation data beat expectations.
The single currency is trading at $1.087, down 0.5% against the dollar. It peaked above $1.093 earlier this morning.
Eurozone unemployment stayed stable at 6.4%, so it is the inflation data that will be the focus for economists.
Food, alcohol and tobacco was the main driver of inflationary pressure, Eurostat said.
Energy prices have fallen markedly – although that follows a lot of increases caused by Russia’s war in Ukraine. Eurostat said:
Looking at the main components of euro area inflation, food, alcohol & tobacco is expected to have the highest annual rate in August (9.8%, compared with 10.8% in July), followed by services (5.5%, compared with 5.6% in July), non-energy industrial goods (4.8%, compared with 5.0% in July) and energy (-3.3%, compared with -6.1% in
July).
Euro area #inflation at 5.3% in August 2023, stable compared to July. Components: food, alcohol & tobacco +9.8%, services +5.5%, other goods +4.8%, energy -3.3% - flash estimate https://t.co/vM7t1vOWg8 pic.twitter.com/21rXJa1Ili
— EU_Eurostat (@EU_Eurostat) August 31, 2023
Eurozone inflation higher than expected as price pressures remain
Eurozone inflation has come in higher than expected, adding to pressure on the European Central Bank to push ahead with another rate hike at its September meeting.
Inflation across the euro area is expected to come in at 5.3% in August, the same as July, statistics office Eurostat said.
Economists had expected inflation to fall to 5.1%, according to a poll by Reuters.
UK energy regulator bans 'excessive profits' made via market loophole
The UK’s energy regulator is to ban a controversial practice by electricity generators in which they made tens of millions of pounds a day for helping to balance the grid.
Energy companies were accused of manipulating the market, by saying they were going to switch off their generators just at the moment they were most needed. Under the UK’s grid balancing system, they were then offered inflated prices to turn them back on.
Regulator Ofgem said it would ban the practice from 26 October, in time for this winter’s heating season. Generators could face “stiff penalties for breach of licence conditions, including being subject to provisional and final orders and fines of up to 10% of their regulated turnover”, Ofgem said.
Eleanor Warburton, Ofgem’s acting director for energy systems management and security, said:
This new licence conditions shows Ofgem will not tolerate electricity generators attempting to take advantage of the balancing mechanism system to make excessive profits through inflexible generation.
We believe the new licence condition strikes the right balance between protecting consumers and ensuring they pay a fair price for their energy while also enabling a competitive electricity market that provides fair returns for generators.
We’ll be monitoring the effectiveness of it to ensure it’s doing what it was designed to do.
Ofgem had said it was considering changes to the regime in March.
The scale of the profits made from the balancing regime was enormous. Balancing costs – paid ultimately by the taxpayer – tripled in the winter of 2021/22, to over £1.5bn between November 2021 and February 2022, compared to average annual winter balancing costs of just under £500m for between 2017 and 2020, Ofgem said.
The Bank of England’s Huw Pill also cautioned that there was a risk that the central bank raises borrowing costs too high. He said:
Now that policy is in restrictive territory, there is the possibility of doing too much and inflicting unnecessary damage on employment and growth.
But he also said there was no room for complacency, Reuters reported. Some indicators of underlying inflation pressures have developed less benignly recently than the headline rate of inflation.
Headline UK inflation has fallen from 11.1% in October – a 40-year high – to 6.8% in July.
Bank of England must 'see the job through' on inflation says chief economist
The Bank of England needs to keep interest rates high enough for long enough to “see the job through” on cutting inflation, its chief economist has said.
Huw Pill said he was focused on a “lasting return to target” for UK inflation, which was at 6.8% in July, well above the Bank’s 2% target.
The Bank’s monetary policy committee (MPC) has raised interest rates for 14 times in a row, and has another meeting on 21 September. It is expected to raise rates further.
Speaking at a research conference in Cape Town organised by the South African Reserve Bank, Pill said (via Reuters):
The key element is that we on the MPC need to see the job through and ensure a lasting and sustainable return of inflation to the 2% target.
At present, the emphasis is still on ensuring that we are - in the words of the MPC’s last statement - sufficiently restrictive for sufficiently long to ensure that we have that lasting return to target.
Germany’s unemployment rate has risen slightly, as expected, to 5.7%.
That’s up from 5.6% in July, according Germany’s federal statistics office.
UBS to make $10bn of cost cuts after taking over rival Credit Suisse
Shares in Swiss bank UBS have jumped by 7% after it said it was hoping to make $10bn (£7.9bn) in cost cuts after absorbing rival Credit Suisse’s domestic bank operations.
Taking over those operations – rather than selling them off or floating it separately – could be politically difficult because of likely job losses in Switzerland.
Nevertheless, investors appear to like what they see in UBS’s first results since the takeover. Its share price is now higher than at any time since the financial crisis in October 2008.
Credit Suisse was sunk not by its domestic operations, but rather by a series of huge errors by its corporate and investment bank. UBS stepped in to rescue it at the behest of the Swiss government after it became clear Credit Suisse would not make its way out of a crisis.
Sergio Ermotti, UBS’s chief executive, said:
Our analysis clearly shows that full integration is the best outcome for UBS, our stakeholders and the Swiss economy. Clients will continue to receive the premium level of service they expect, benefiting from enhanced offerings, expert capabilities and global reach.
And Credit Suisse will continue to sponsor “civic, sporting and cultural activities in Switzerland at least until the end of 2025”.
Updated
Are we heading for a Eurozone inflation surprise in a few hours? French inflation has come in higher than analysts’ expectations.
French consumer prices rose by 5.7% in August compared to a year earlier, up from 5.1% in July, according to data harmonised with the rest of the EU published by Insee, France’s statistics office.
That was higher than the 5.4% expected by economists polled by Reuters.
Insee said:
This increase in inflation is due to a rebound in energy prices. The prices of food slowed down (for the fifth consecutive month), as did, to a lesser extent, those of manufactured goods and services.
The FTSE 100 has dipped at the opening bell.
The UK’s blue-chip index is down 0.1%, with mining company Glencore the biggest faller, down 5%.
Glencore is the subject of a story by the Financial Times saying that 200 funds, including some managed by Fidelity, Vanguard, Legal & General, HSBC, Abrdn and Invesco, are taking action on allegations they “suffered loss” as a result of “untrue statements” by commodities company.
The FT reported:
Dozens of the world’s biggest asset managers have accused the trading house Glencore of lying in past share prospectuses to cover up corrupt activities, escalating a far-reaching action in London’s High Court that could have significant ramifications for the natural resources industry.
Glencore has not yet filed its defence in the case, and declined to comment to the FT.
Updated
UK car output up 32% on last year in July
Good morning, and welcome to our live coverage of business, economics and financial markets.
UK car production rose year-on-year for the sixth consecutive month in July, as the global chip shortage eased and the numbers of electric cars and hybrids rose.
Production from UK factories rose by 31.6% in July compared to last year, according to new data from the Society of Motor Manufacturers and Traders (SMMT). Output remains 29% below 2019, before the coronavirus pandemic (although that includes the effect of Honda’s closure of a plant in Swindon).
More than eight-in-10 cars made in the UK were shipped overseas. The top destination market, as ever, was the EU, followed by the US, China, Japan and Australia.
Almost two in every five cars were electric, or were hybrids combining batteries with petrol or diesel engines. Electrified volumes rose 73.9% to 30,180. So far this year 200,000 of the UK’s 527,000 cars have been electrified in some way (although the SMMT does not break down how many are pure electric in its announcement).
Mike Hawes, SMMT chief executive, said:
Six months of growth shows that British car production is recovering and, with electrified models increasingly driving volumes, the future is more positive. Recent investment announcements have undoubtedly bolstered the sector but global competition remains tough.
If we are to attract further investment and produce the next generation of zero emission models and technologies, we need a coherent strategy that builds on our strengths and supports all aspects of advanced automotive manufacturing.
Today’s big focus in financial markets will be on inflation data, with key measures ahead from the eurozone and the US today.
Both the European Central Bank and the US Federal Reserve will be watching the data closely for signs that inflationary pressures are easing. They must decide whether to raise interest rates further to make sure inflation stays lower, or whether they have now done enough.
Jim Reid and other analysts at Deutsche Bank, an investment bank, said:
Resilient inflation numbers from Germany and Spain [yesterday] added to speculation that the ECB might deliver a 10th consecutive rate hike next month.
Not everyone is convinced that would be a good idea:
Hello Thursday! #Inflation in the #Netherlands fell to 3.4% (EU Harmonized) in August, the lowest level since September 2021.
— jeroen blokland (@jsblokland) August 31, 2023
Yet, with the Eurozone #CPI estimate expected to come in at 5.1%, the #ECB is leaning toward another rate hike. With hindsight, this could end up in a… pic.twitter.com/emNCQNDKvC
The agenda
8:55am BST: Germany unemployment (August; previous: 5.6%; consensus: 5.7%)
10am BST: Eurozone inflation (August; prev.: 5.3%; cons.: 5.1%)
10am BST: Eurozone unemployment (July; prev.: 6.4%; cons.: 6.4%)
1pm BST: India GDP year-on-year growth rate (first quarter; prev.: 6.1%; cons.: 7.7%)
1:30pm BST: US personal consumption expenditure price index (July; prev.: 3%; cons.: 3.3%)
