US stock markets fell on Wednesday after credit rating Fitch downgraded US debt, blaming an “erosion of governance.”
It was only the second time in history that a leading credit agency downgraded US debt. The first was in 2011, when Fitch rival Standard & Poor’s cut the US’s triple-A rating after a nerve-racking fight between the Republicans and the Obama administration over the federal budget.
All the major US stock markets opened in the red on Wednesday, with the tech-heavy Nasdaq recording the largest fall, down 1.86%, followed by smaller drops at the S&P, down 1.19%, and the Dow, down 0.72%.
We’re now ending our live coverage. You can read the latest full story here:
Updated
Fitch made its decision to downgrade the US credit rating due to fiscal concerns and a deterioration in US governance as well as polarization – which was reflected in part by the January 6 insurrection, Richard Francis, a senior director at Fitch Ratings, told Reuters.
Fitch downgraded the US to AA+ from AAA on Tuesday, citing fiscal deterioration over the next three years and repeated down-to-the-wire debt ceiling negotiations that threaten the government’s ability to pay its bills.
“It was something that we highlighted because it just is a reflection of the deterioration in governance, it’s one of many,” he said. “You have the debt ceiling, you have January 6. Clearly, if you look at polarization with both parties ... the Democrats have gone further left and Republicans further right, so the middle is kind of falling apart basically.”
Summary
A surprise downgrade of the US government’s credit rating by the rating agency Fitch has sent stock markets around the world tumbling, even though the US Treasury Secretary Janet Yellen dismissed the cut as “arbitrary” and “outdated”.
The UK’s FTSE 100 index has lost 102 points, or 1.3%, to 7,563. The German and Italian markets have also fallen more than 1% while the French bourse is trading 0.8% lower at the moment. On Wall Street, the tech-heavy Nasdaq tumbled 184 points, or 1.3%, to 14,101.
The dollar sold off briefly overnight but has been little affected by the rating cut. The pound weakened, though, sinking 0.7% against the dollar to $1.2690, and by 0.2% against the euro to €1.1602.
Our other main stories:
One of Britain’s biggest housebuilders, Taylor Wimpey, has warned that the Bank of England’s rate rises to tame high inflation have weakened the housing market and made homes less affordable, forcing some homebuyers to take on longer mortgages to cope with higher borrowing costs.
The bosses behind Britain’s multibillion-pound clean energy rollout will gather in Downing Street to discuss the government’s plan for green economic growth later on Wednesday.
Grant Shapps, the energy secretary, was expected to meet the leaders of energy companies including EDF, SSE, Shell and BP, which are poised to invest billions in low- and zero-carbon projects.
Rishi Sunak has signalled he will struggle to achieve two of his five priorities: to halve inflation by the end of the year and to reduce NHS waiting lists in England, which he blamed on striking workers.
The pound has weakened today, sinking 0.6% against the dollar to $1.2699, and by 0.3% against to the euro to €1.1597.
Economists at Bank of America have abandoned their forecast for a US recession, the first major Wall Street bank to officially reverse its call.
(This was even before the stronger-than-expected ADP jobs report.)
The move comes a week after Federal Reserve Chair Jerome Powell told reporters that the central bank’s own economists are no longer forecasting a recession, Bloomberg News reports.
BofA economists, led by Michael Gapen, wrote in a note to clients today:
Recent incoming data has made us reassess our prior view that a mild recession in 2024 is the most likely outcome for the US economy.
Growth in economic activity over the past three quarters has averaged 2.3%, the unemployment rate has remained near all-time lows, and wage and price pressures are moving in the right direction, albeit gradually.
The resilience of the US economy this year, despite the most aggressive Fed rate hikes in decades, has forced many on Wall Street to repeatedly revise their forecasts for when the country will fall into recession. Now, with recent data showing persistent strength in hiring alongside slowing inflation, forecasters are beginning to rethink their recession calls altogether.
Bank of America economists pull their forecast for a US recession, the first large Wall Street bank to officially reverse its call https://t.co/UtvP0vjEGW
— Bloomberg Markets (@markets) August 2, 2023
Wall Street opens in the red
Stocks in New York have opened lower, as investors on Wall Street digest last night’s credit ratings downgrade by Fitch.
The Dow Jones industrial average, which tracks 30 large US companies, has dropped by 144 points, or 0.4%, to 35,486.
The broader S&P 500 is nearly 32 points, or 0.7%, lower at 4,5844, and the tech-focused Nasdaq has slid 152 points, or 1%, to 14,131.
UK and European stock markets are trading between 0.8% and 1% lower, paring some of their earlier heavy losses.
Updated
Benchmark indexes fell more than 1%, dragged down by poor global cues triggered by weakness in US economic data. Dow and Nasdaq futures indicate a bad start for US markets.
— TradingQnA (@tradingqna) August 2, 2023
🛢️Brent Crude: 85.36 0.53%
💲USD INR Spot: 82.5347 0.306%.
📜India 10Y Bond yield: 7.156 -0.01% pic.twitter.com/PGL8R4awMs
Prominent economists Larry Summers and Mohamed El-Erian are among those criticising Fitch Ratings for downgrading the US, given signs of resilience in the world’s largest economy.
Former Treasury Secretary Summers said while there are reasons for concern about the long-run trajectory of the US deficit, the country’s ability to service its debts wasn’t in doubt.
Summers told Bloomberg in a telephone interview that:
“The idea that this is creating the risk of a default on US Treasury securities is absurd, and I don’t think that Fitch has any new and useful insights into the situation.”
El-Erian, chief economic adviser to Allianz SE, said the downgrade was “a strange move” that was unlikely to impact markets,
Updated
European stock markets are still a sea of red, although they have come back a bit.
UK’s FTSE 100 index down 77 points, or 1, at 7,588
Germany’s Dax down 132 points, or 0.8%, at 16,108
France’s CAC down 38 points, or 0.5%, at 7,367
Italy’s FTSE MiB down 251 points, or 0.5%, at 29,108
Futures are pointing to a lower open on Wall Street in an hour’s time, with the Nasdaq down 0.8% while the S&P 500 futures are 0.55% lower and the Dow Jones has slipped 0.37%.
Updated
The number was below June’s 455,00 increase in jobs, though (which was revised lower).
ADP chief economist Nela Richardson said:
The economy is doing better than expected and a healthy labour market continues to support household spending. We continue to see a slowdown in pay growth without broad-based job loss.
US private sector adds 324,000 jobs, more than forecast
The ADP jobs report from the US is out, and is much stronger than expected.
It shows the private sector added 324,000 new jobs last month, versus economists’ expectations of 189,000. It was driven by a 201,000 jump in jobs at hotels, restaurants, and bars, the payroll processing firm ADP reported.
It bodes well for the US non-farm payrolls jobs report on Friday…
⚠️BREAKING:
— Investing.com (@Investingcom) August 2, 2023
*U.S. JULY ADP NONFARM PAYROLLS RISE BY 324,000; EST. 189,000; PREV. 497,000https://t.co/IsLUSoNAMW
🇺🇸🇺🇸 pic.twitter.com/Cs37o8tlXo
Private sector added 324,000 jobs in July, well above expectations, ADP says https://t.co/9tkiOhKVsx
— CNBC (@CNBC) August 2, 2023
Morningstar keeps AAA rating on US
While the rating agency Fitch downgraded the US government’s triple-A credit rating, sending global stocks tumbling, DBRS Morningstar decided to keep its AAA rating on the US today, with a “stable trend”.
The confirmation reflects 1) the signing of the Fiscal Responsibility Act of 2023 into law on June 3rd, thereby enabling Treasury to pay the federal government’s obligations on time, and 2) our assessment that credit risk stemming from future debt ceiling negotiations remains very low.
The AAA ratings reflect the United States’ considerable credit strengths, including the scale, diversification, and resilience of the US economy, the strength of the country’s governing institutions, and the reserve currency status of the U.S. dollar. Nevertheless, we continue to monitor how political polarization could adversely impact US credit fundamentals over time.
The US dollar has been largely unaffected by US credit rating downgrade.
It’s trading flat against sterling today (one pound is worth $1.278) and also the euro (€1 = $1.0975), despite Fitch downgrading the US from AAA to AA+ last night.
Fawad Razaqzada, market analyst at City Index and FOREX.com, says:
The big news from last night was the unexpected announcement from Fitch downgrading US credit rating which caused US index futures and global equity markets to drop.
But the reaction in FX has been muted with the dollar retaining its recent bullish bias against most currencies, except the likes of the yen which many consider to be more of a haven currency than the US dollar.
The day is still young though, and once US investors join the fray later, we might see a more significant response
Key event
After a choppy morning, European stock markets remain solidly in the red as it reaches noon in London.
The FTSE 100 index has recovered a little from its earlier lows, but is still down 74 points at 7592, down 1% today.
Across Europe, Germany’s DAX is down around 0.85% while France’s CAC is about 0.75% lower.
Fitch’s unexpected decision to downgrade the US AAA credit rating last night seems to have hit the mood in global markets.
As Laith Khalaf, head of investment analysis at AJ Bell, pointed out earlier:
“There is a saying that when the US sneezes, the rest of the world catches a cold. That is certainly true with how the US government’s credit rating downgrade has troubled markets globally.”
Wall Street is on track to open in the red in two and a half hours.
⚠️BREAKING:
— Investing.com (@Investingcom) August 2, 2023
*U.S. STOCK FUTURES DROP AFTER FITCH DOWNGRADE; NASDAQ FUTURES DOWN 1.1%, VIX SPIKES 8%$DIA $SPY $QQQ $IWM $VIX 🇺🇸🇺🇸 pic.twitter.com/GErfMQHx3O
Bill Blain, strategist at Shard Capital, says there is “absolutely no doubt” that political risks in the US are elevated and rising fast.
Blain writes:
Fitch threw a spanner into the works last night downgrading the US – but they were right to do so.
Credit and equity risks are up. Political risks in the US and UK – both are approaching peak electoral cycle crises points – are rising and the disinformation wars will ensure it gets… fruity.
Updated
Rishi Sunak says UK inflation not falling as fast as he would like
Rishi Sunak has admitted that inflation is not falling as fast as he would like, but claimed that people can “see light at the end of the tunnel”.
Taking part in a radio call-in hosted by LBC on Wednesday, Sunak (who has promised to halve inflation by the end of the year), said:
“I know families are struggling with the cost of living and that’s why I set it out as my first priority to halve inflation, and we’re making progress.
“Is that as fast as I’d like? No. Is it as fast as anyone would like? No. But the numbers most recently that we had show that we’re heading in the right direction, inflation is coming down, and I think people can see light at the end of the tunnel.
Sunak added that he was “determined to stick to the course and bring down inflation for everyone.”
CPI inflation fell to 7.9% in June, a bigger fall than expected, but that’s still almost four times over the Bank of England’s 2% target.
The UK government has launched a consultation on plans to ban cold calls offering any financial products, as part of a push against fake investments.
The proposals would prohibit cold calls pitching products such as sham cryptocurrency schemes, mortgages and insurance.
Once in force, people receiving a cold call offering these types of products will know that it is a scam, and fewer people will become victims, the government says.
City of London Police estimate that victims of fake investment scams lost £750m between 2022-23.
Security Minister Tom Tugendhat says today:
Fighting fraud is at the heart of our campaign to fight crime. The National Economic Crime Victim Care Unit and the cold calling consultation are delivering on our pioneering Fraud Strategy.
Fraud doesn’t just lead to financial loss, it can destroy confidence and lead to severe stress. That’s why it’s so important that victims get the best possible care and support.
The government announced its new anti-fraud strategy back in May:
More details of the consultation are online here.
The Information Commissioner’s Office is today reminding people to report nuisance calls, texts and emails they receive, using its online reporting tool.
Updated
UK mortgage rates are remaining stubbornly high today.
Moneyfacts reports that average two-year and five-year fixed mortgage rates are flat today, compared with yesterday.
They report:
The average 2-year fixed residential mortgage rate today is 6.85%. This is unchanged from the previous working day.
The average 5-year fixed residential mortgage rate today is 6.37%. This is unchanged from the previous working day.
That leaves the average two-year fixed rate at its highest level since 26 July, and the five-year rate at the highest since 25 October 2022.
There’s no good news for savers, either.
Moneyfacts says:
The average 1-year fixed savings rate today is 5.21%. This is unchanged from the previous working day.
The average easy access savings rate today is 2.80%. This is down from an average rate of 2.81% on the previous working day.
Haleon posts higher sales; takes £30m restructuring charge
Haleon, which makes a host of well-known consumer brands including Sensodyne toothpaste, Centrum vitamins and Panadol painkillers, has reported higher sales and profits - a year after it was spun off from drugmaker GSK.
Revenues climbed 10.6% to £5.7bn while pre-tax profits rose 11% to £960m in the six months to the end of June. It now expects organic revenue growth of 7% to 8% this year, and adjusted operating profit growth of 9% to 11% at constant currencies.
The company incurred restructuring costs of £30m, as it implements a three-year programme to save £300m in costs, with the benefits largely expected next year and in 2025.
We reported last month that Haleon, which has 24,000 staff across 170 countries, intends to cut hundreds of roles in the UK and potentially thousands worldwide. It declined to provide further details today.
Brian McNamara, the chief executive, said:
One year from listing, we are very pleased with Haleon’s first half results. We delivered double digit organic revenue growth, with both price and positive volume mix. Encouragingly this trend was consistent across the first and second quarters. Our growth was also broad based across regions and categories. Performance in the first half also remained competitive with around 55% of our business gaining or maintaining share.
Looking ahead, whilst we continue to expect a challenging environment given further pressure on consumer spending and global geopolitical and macroeconomic uncertainties, we remain confident in the resilience of Haleon’s incredible portfolio of category leading brands.
Adam Vettese, analyst at trading and investing platform eToro, said:
Haleon has posted a squeaky-clean set of numbers this morning, one year on from being spun out of GSK. The firm… has seen a positive uptick in revenues while increasing operating profits by 8.9%. It has now increased profit guidance four times in a row.
This has been a familiar story in the past year for major name-brand consumer staples firms. The one thing that unites these companies is pricing power. Inflation has been passed on with no real dent to demand for firms like Haleon as the strong revenue growth suggests.
In the past consumer staple brands have tended to be good value-oriented defensive moves for investors in times of economic stress. Haleon fits this mould well but since it is a spin-off, we don’t have a good past measure from the firm to guide what will happen to its demand during a recession.
Here is our full story on Taylor Wimpey:
Updated
US downgrade sends European shares to two-week lows
It’s turned into a market rout. The FTSE 100 has tumbled 130 points, or 1.7%, to 7,533 while the German, Italian and French markets have lost 1.5%.
The pan-European Stoxx 600 index fell 1.7%, touching its lowest level since 18 July.
Laith Khalaf, head of investment analysis at the stockbroker AJ Bell, said:
There is a saying that when the US sneezes, the rest of the world catches a cold. That is certainly true with how the US government’s credit rating downgrade has troubled markets globally.
Ratings agency Fitch lowered the rating from the top level of AAA to AA+ amid concerns about the country’s finances and its debt burden. In effect, this is saying the US is now higher risk than previously thought. The news took markets by surprise, sending Asian and European indices down.
When the debt of the world’s largest economy is seen as lower quality, it will naturally trouble investors and make them rethink their portfolios. It also might surprise some people given how the US economy is proving to be more resilient than expected.
There are only three stocks in positive territory on the FTSE 100. BAE Systems jumped nearly 6% after upgrading forecasts on rising military spend. Taylor Wimpey’s results contained nuggets of good news, helping to lift its shares. Convatec moved higher after it lifted full-year guidance.
Khalaf noted:
Brent Crude advanced 0.6% to $85.45 a barrel, meaning the commodity price has now risen by 18% since the end of June amid signs of tightening supply.
Justin Wolfers, professor of public policy and economics at the University of Michigan, tweeted:
Fitch has downgraded the U.S. long-term credit rating from AAA to AA+.
— Justin Wolfers (@JustinWolfers) August 1, 2023
And I’m mad as hell, because it’s the direct result of a multi-decade campaign of fiscal vandalism and political sabotage by Republicans, and the rest of us are left footing the bill.https://t.co/7Bfm0nvbXE
Updated
Market sell-off gathers pace
The sell-off in stock markets has gathered pace, with the FTSE 100 index now down 1.5% at 7,48, a fall of 117 points. There are only three risers on Britain’s blue-chip index: BAE Systems, Taylor Wimpey and Convatec.
Germany’s Dax has tumbled 203 points, or 1.3%, to 16,035 while France’s CAC has lost 81 points, or 1.1%, to 7,324 and Italy’s FTSE MiB is down 455 points, or 1.5%, to 28,901.
Wall Street futures are also trading lower, pointing to a lower open later, down 1.2% for the Nasdaq, 0.86% for the S&P 500 and 0.67% for the Dow Jones.
BAE upgrades outlook, boosted by higher defence spending
Britain’s biggest defence company BAE Systems is the biggest riser on the FTSE 100 this morning, after it upgraded its outlook for 2023, boosted by increased government spending on military equipment “in an increasingly uncertain world”.
The company’s shares rose 5.6%, after it forecast growth of 10% to 12% in annual earnings per share, up from 5% to 7% forecast in February, and also lifted its sales outlook. It had an order intake of £21.1bn in the first half of the year, resulting in a record order backlog of £66.2bn.
It said demand from customers, including the US, UK, Saudi Arabia and Australia, meant its full-year results would be better than expected across the board. Since Russia’s invasion of Ukraine in February last year, demand for weapons, ammunition and military equipment has jumped as western countries support Ukraine and shore up their own positions.
BAE makes submarines, fighter jets, ships, combat vehicles and other kit, and chief executive Charles Woodburn said the company was well-positioned to deliver “sustained growth in the coming years”. He said:
Our global footprint, deep customer relationships and leading technologies enable us to effectively support the national security requirements and multi-domain ambitions of our government customers in an increasingly uncertain world.
Taylor Wimpey: UK homebuyers take on longer mortgages
UK homebuyers are taking on longer mortgages to cope with higher borrowing costs, said Taylor Wimpey, one of the country’s biggest housebuilders.
It explained:
More of our customers are adapting to the challenging backdrop by extending their mortgage terms. For example, according to data provided by an independent financial advisor relating to H1 2023, 27% of our first time buyers are taking mortgage terms of over 36 years compared to 7% in 2021. For second time buyers, those taking out mortgages with durations of over 30 years has increased to 42%, compared to 28% in 2021.
The company reported lower first-half profits and sales as it warned that the Bank of England’s rate hikes, in response to stubbornly high inflation, had weakened the housing market and made homes less affordable to buy (for those needing a mortgage).
But its shares rose 3.5% as the results were better than expected, and it stuck to its full-year outlook. Rivals Barratt and Persimmon also saw share gains.
Andy Murphy, director at the investment research firm Edison Group, said:
This update from Taylor Wimpey constitutes a clear case of “it could have been worse”, as a weakening property market and high operational costs having combined to put huge pressure on the construction sector during H1 2023. With the impact of the building hiatus, induced by Covid-19, still being felt by the industry, current market conditions are naturally taking their toll.
That being said, tight cost management, strong brand awareness, and savvy operational maneuvers have helped to mitigate the effect of these external factors on Taylor Wimpey’s profits. Moreover, while not currently translating to strong market demand, the fact remains that Britain needs new homes and will continue to need new homes when mortgage rates stabilise. Current conditions are unfavourable, yes, but the question now is what position Taylor Wimpey will be in when the situation turns.
Updated
More people miss bill payments amid cost of living crisis
Higher numbers of people are missing payments for essential bills including for energy, water or council tax, according to a consumer group, as the cost of living crisis continues to hurt household finances.
Which?’s consumer insight tracker found that 2.4m UK households missed or defaulted on essential payments including for housing, loans or credit cards in the month to 13 July, returning to the high levels seen last winter.
The number of people missing out on payments last month was significantly higher that the levels seen in May, suggesting that consumers remain under pressure even in the warmer months of the year when energy costs are lower.
The figures come as the Bank of England is expected to further raise interest rates on Thursday, in a bid to tackle stubbornly high inflation, increasing the squeeze on borrowers including consumers and businesses.
Of the missed payments, 1.5m households missed or defaulted on settling up a household bill such as for energy water or council tax in the month to mid-July, Which? found.
European stocks fall after Fitch surprise downgrade
European stock markets have fallen following Fitch’s surprise downgrade of the US government’s triple-A credit rating.
The UK’s FTSE 100 fell 66 points, or 0.86%, to 7,600 in early trading while the French and German markets slid 1.3% and the Spanish and Italian indices both lost 1.1%.
The downgrade triggered a brief sell-off for the US dollar last night. The dollar index briefly dipped to an intra-day of 101.96 but the decline was quickly reversed. It is now down 0.1% at 102.19.
US Treasury Secretary Yellen was quick to downplay the announcement, saying it was “arbitrary” and “outdated” and ”does not change what Americans, investors, and people all around the world already know: that Treasury securities remain the world’s preeminent safe and liquid asset, and that the American economy is fundamentally strong”.
Lee Hardman, senior currency analyst at MUFG Bank, said:
When S&P downgraded the US credit rating in August 2011 it triggered a sharp selloff in risk assets and boosted safe haven demand for US Treasuries. The US dollar reaction was more muted. On this occasion we are expecting the immediate market reaction to be relatively more modest. The timing of the downgrade was somewhat surprising although Fitch did warn back in May that they were weighing up lowering the credit rating.
The announcement sheds more light on the health of the US public finances which we have already highlighted as a negative structural factor for US dollar performance over the medium to long-term. The US Treasury just announced on Monday that it has increased the net borrowing estimate for Q3 to $1 trillion which is well above the $733 billion it had predicted back in May. The Treasury is due to preview its quarterly financing plans later today.
Energy bosses meet Grant Shapps amid debate over net zero
The bosses of big energy companies are set to meet Grant Shapps, the energy security secretary, today to discuss the future of net zero as a debate rages over the UK government’s green policies.
The meeting comes just days after the government announced it would grant more than 100 new oil and gas drilling licences off the coast of Scotland. The move was immediately condemned by climate campaigners as sending a “wrecking ball” through the government’s climate pledges.
Executives from the utility companies EDF and SSE and the oil and gas giants Shell and BP are meeting Shapps, who has faced criticism from his own ranks, including former energy minister Chris Skidmore, who said it was “the wrong decision at precisely the wrong time, when the rest of the world is experiencing record heatwaves”.
Shapps told GB News:
I’m meeting today with a bunch of energy companies at No 10 who are going to invest £100bn in renewables, and that’s great.
Here’s more reaction to the US credit downgrade.
Tony Sycamore, analyst at IG, said this would spark a flight to safety among investors.
Risk aversion flows means lower equities and safe haven buying of currencies such as the Japanese Yen and Swiss franc… It will also likely see buying of treasuries.
Stephen Innes, managing partner at SPI Asset Management, said:
Global Funds buy US debt because it’s the safest and most liquid investment option. However, after the rating downgrade on Tuesday, the US bond appeal could tarnish slightly. Still, the significant issue is that the downgrade could negatively affect various funding pipelines, such as mortgage rates and global swaps contracts.
While debt downgrades seldom, if ever, have long legs, investors may pause and let the dust settle before re-entering risk markets. However, within this super market-friendly environment of stable growth and a Fed close to the end of its hiking cycle creating fertile ground for stock gains, its unlikely risk sentiment will wander too far off the soft landing path.
Introduction: Markets fall after US downgrade; Taylor Wimpey warns rising interest rates weakened housing market
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Stock markets have fallen after the rating agency Fitch unexpectedly downgraded the US government’s top credit rating, which sparked an angry response from the White House.
Fitch cut the United States to AA+ from AAA, citing the expected fiscal deterioration over the next three years and “a high and growing general government debt burden,” and an “erosion of governance” due to repeated debt ceiling negotiations that threaten the government’s ability to pay its bills. It is the second major rating agency after Standard & Poor’s to strip the country of its triple-A rating.
In Asia, Japan’s Nikkei tumbled 2.2% while Hong Kong’s Hang Seng lost 2.1% and the South Korean Kospi slid 1.7%. Yields, or interest rates, on US 10-year government bonds known as Treasuries fell 2 basis points to 4.021% in Tokyo.
US Treasury Secretary Janet Yellen said the move was “arbitrary” and “outdated,” while the market reaction was relatively muted. On Wall Street, S&P 500 and Nasdaq futures are down around 0.5%.
Economists at Capital Economics said:
The announcement is not a complete surprise given that Fitch hinted at such a move during the recent debt ceiling standoff and had a long-standing negative outlook on its AAA rating. It echoes the decision by Standard and Poor’s to cut its own US rating from AAA to AA+ in the aftermath of the 2011 debt ceiling standoff, which was justified at the time with similar arguments. Moody’s still has the US at Aaa, but has maintained a negative outlook on that rating for more than a decade.
It’s a little strange to be downgrading the US at a time when the economy now appears poised to pull off the seemingly impossible trick of bringing inflation back to target without triggering a recession. Admittedly, even though the economy is operating above potential and the unemployment rate is below 4%, the Federal deficit remains on track to be close to 6% of GDP in the current fiscal year. And interest costs are set to double from 1.4% of GDP in 2021 to 2.8% in 2025.
Here in the UK, the housebuilder Taylor Wimpey has flagged affordability concerns due to higher mortgage rates, as it reported slower sales and rising cancellations. It warned that the Bank of England’s rate hikes had weakened the housing market.
Revenue fell 21% to £1.6bn, dragging profit before tax down 29% to £237.7m in the six months to 2 July.
Jennie Daly, the chief executive, said:
Whilst increased mortgage costs are impacting affordability for our customers, we continue to see strong underlying interest. However, reservations are below the levels we have experienced in recent years.
We saw an encouraging start to the year with demand in the traditionally strong spring selling season recovering from the low levels of Q4 2022 and with mortgage rates reducing from the highs of late 2022.
However, market conditions weakened in the second quarter as the Bank of England responded to higher than expected inflation by increasing the base rate from 4.5% to 5% in June, which drove an increase in the cost of mortgages towards the end of the half.
The average two-year fixed mortgage deal was 6.85% on Tuesday, while the average five-year fixed deal was 6.37%, according to Moneyfacts.
The Agenda
1.15pm BST: US ADP Jobs report for July (forecast: 189,000)
Updated
