Closing summary
With Boris Johnson’s future as prime minister in the balance, following a flurry of resignations including the chancellor and the health secretary, the pound – already battered by recession fears – has come under more selling pressure. It fell to a fresh low of $1.877 today, the lowest since the early days of the pandemic, and is currently down 0.4% on the day at $1.1911, still below the $1.20 mark.
Jordan Rochester, strategist at the Japanse investment bank Nomura, now expects sterling to slide in the coming months to its lowest level since 1985 against the dollar. He is targeting $1.15 by the end of July and $1.10 by the end of September, compared with a previous target of $1.18.
With the US becoming a key energy export partner for Europe, this is leading a significant ... trade shock to the benefit of the dollar.
You can follow the latest developments on our politics live blog here.
The latest Institute for Supply Management report on the US services sector showed it expanded for the 25th month in a row, albeit at a slightly slower pace. The headline index fell to 55.3 in June, from 55.9 in May. Wall Street stocks are broadly flat.
The euro is also being hammered by worries over recession and an energy supply crunch and is approaching parity versus the dollar, falling 0.9% to $1.0177.
European stock markets are rallying after yesterday’s slump. The FTSE 100 index is 103 points ahead, or 1.4%, at 7,124 while the German Dax has gained 1.8%, France’s CAC 1.9% and Italy’s FTSE MiB is up 1.2%.
Crude oil bounced back earlier in the day after yesterday’s near-10% plunge but has reversed those gains and is trading lower. Brent crude is at $102.07 a barrel, ,down 0.7%, while US light crude has lost 1.1% to $98.36 a barrel.
Our main stories today:
Thank you for reading. We’ll be back tomorrow. Take care! - JK
Updated
Wall Street has opened broadly flat, as investors awaited minutes from the US Federal Reserve’s last meeting, released at 7pm BST. The Dow Jones fell 10 points at the open to 30,957 while the S&P 500 rose less than a point and the Nasdaq gained 15 points.
Even Michael Gove, one of the most senior ministers in the government, has told Johnson that he must quit, the deputy political editor of the Daily Mail reported.
Boris Johnson could face another confidence vote within days as members of the Conservative backbench committee will consider changing its rules as soon as Wednesday night, the Guardian understands, reports our chief political correspondent Jessica Elgot.
Two executive members said it was possible that the 1922 Committee could decide at a meeting of the executive on Wednesday afternoon to change the rules to allow for another vote. Johnson is protected under the current rules by a year’s immunity after he won a vote a month ago.
What could 1922 Committee elections mean for Boris Johnson?Read more
Boris Johnson’s press secretary insisted he would fight another confidence vote if it were called. Asked if the prime minister believed he would win it, she said: “Yes.”
In the latest news on the cost of living crisis: Demand for debt services among Lloyds Bank customers has jumped by 30% in the first six months of the year, as the cost of living crisis takes its toll, reports my colleague Joanna Partridge.
Amid a squeeze on living standards, research from the bank indicates three-quarters of its 26 million UK customers were worrying about rising prices and the impact it is having on their savings.
The chief executive of Lloyds, Charlie Nunn, said that customers were working to get a grip on their finances by consolidating their debts.
Nunn added that eight in 10 of its customers have less than £500 of savings in their current and savings accounts.
Lloyds Banking Group is the country’s largest mortgage lender and is often considered a bellwether for the UK economy.
The European parliament has backed plans to label gas and nuclear energy as “green”, rejecting appeals from Ukraine and climate activists that the proposals are “a gift to Putin,” reports Jennifer Rankin in Brussels.
The vote was a “dark day for the climate”, said one senior MEP, while experts warned the EU had set a dangerous precedent for other countries to follow.
Nadhim Zahawi, the new chancellor of the exchequer, has called for a review of the UK’s corporate tax policy in a clear hint that a rise from 19p to 25p due next year could be reduced or scrapped, reports our economics writer Phillip Inman.
Zahawi, who took up the post on Tuesday evening after Rishi Sunak’s resignation, said he wanted to examine the planned increases in corporation tax to make sure British companies remain competitive.
And here is our profile of the second-richest MP in parliament.
Our economics correspondent Richard Partington has looked at the tightrope the new chancellor has to walk.
Should he remain in the job longer than some political commentators expect, Nadhim Zahawi faces a balancing act as chancellor. He must walk the line between doing what it takes to prevent the political implosion of Boris Johnson’s government, and dealing with the worst succession of economic shocks to hit Britain since at least the 1970s.
As the fourth Conservative chancellor in as many years, parachuted in after Rishi Sunak resigned with a stinging critique of Johnson’s devil-may-care attitude to tax and spend, Zahawi is expected to face heavy pressure from the prime minister to slash taxes to revive the economy.
Zahawi is the second richest MP in parliament after his predecessor, with an even more complicated business hinterland than Sunak. In the midst of the cost of living crisis, opponents are likely to jump on his past as an oil industry executive who earned millions from fossil fuels while an MP, as well as past links to the former Tory MP Jeffrey Archer, and billing taxpayers for the electricity for his stables.
The new chancellor has an unenviable task to steer the economy clear of recession and a persistent cost of living shock. Inflation is the highest since 1982 and forecast to reach 11% in October, while the economy is expected to plunge to the bottom of global growth league tables next year.
GSK shareholders vote on Haleon spinoff
Meanwhile, shareholders in the drugmaker GlaxoSmithKline will be asked to rubber-stamp its plan to spin off its consumer healthcare business, called Haleon, at a meeting that begins in an hour’s time.
Haleon makes a host of well-known brands, such as Sensodyne and Aquafresh toothpaste, as well as Panadol, Voltaren and Advil to treat pain and inflammation, along with heartburn pills Nexium, and Chapstick.
If the radical revamp is approved as expected, GSK will demerge and list Haleon on the London stock exchange later this month, with a value of around £45bn. The Haleon shares are due to list and start trading on Monday 18 July.
GSK will then focus one its remaining pharmaceuticals and vaccines business under its chief executive Dame Emma Walmsley. She has come under pressure to improve the performance of the business from activist shareholder Elliott Advisors, a New York hedge fund, which has questioned her leadership.
Updated
Pound sinks amid political turmoil
With the political turmoil deepening, it’s no wonder the pound is sinking further. It is now down 0.6% at $1.1883. still the lowest level since the beginning of the pandemic, 19 March 2020.
But the euro is also being hammered by recession fears. It is approaching parity against the dollar, trading 0.8% lower at $1.0181.
Updated
Boris Johnson said during prime minister’s questions:
Hang on in there - that’s what I’m going to do.
Boris Johnson believes he still has support of majority of Tory MPs, No10 says
— John Stevens (@johnestevens) July 6, 2022
PM will contest a confidence vote if one is called
Updated
Yet another resignation.... Stuart Andrew has stood down as housing minister.
It is with sadness that I am resigning as Housing Minister.
— Stuart Andrew (@StuartAndrew) July 6, 2022
I pay tribute to all my ministerial colleagues, officials, and civil servants in the Department and the wider sector.
I look forward to continuing to serve my constituents in Pudsey, Horsforth, and Aireborough. pic.twitter.com/wTnrr9rcSu
Sterling has touched a fresh two-year low, losing 0.5% of its value to $1.1894, the lowest since March 2020.
Separately, JustEat has struck a deal with Amazon under which Amazon Prime members get free access to Grubhub deliveries in the US. The deal also gives Amazon a stake of up to 15% in Just Eat’s struggling US meal delivery business Grubhub, amid speculation that Just Eat wants to sell it.
Amazon has agreed to take a 2% stake in Grubhub and will offer its Prime members access to the service for one year. Amazon will also receive warrants over up to a further 13% of Grubhub’s equity, which will vest if certain performance conditions are met. This means it could end up owning 15% of the US meal delivery business.
The deal is a major relief for Just Eat Takeaway, Europe’s largest meals company, whose stock has fallen 70% this year. Shareholders have urged the company to sell or find a partner for Grubhub, which it acquired last year for $5.8bn in shares.
Updated
European Commission raids online food delivery firms
The European Commission has raided several online food and grocery delivery firms in two EU countries over concerns they may be in a cartel, which could mean hefty fines for the businesses if they are found guilty of breaking competition law.
The EC, which acts as the competition enforcer in the 27-country bloc, did not name the companies. It said:
The investigation concerns an alleged agreement or concerted practice to share national markets for the online ordering and delivery of food groceries and other consumer goods in the European Union.
Just Eat Takeaway, the biggest online meal delivery company operating in the EU, said it was not aware of an EU investigation into its activities. A spokesperson for Uber, which owns Uber Eats, told Reuters it had not been targeted.
Meanwhile, the resignations just keep coming. Jo Churchill, a junior minister at the Department for Environment, Food and Rural Affairs, has just quit. She said in her resignation letter:
Recent events have shown integrity, competence and judgement are all essential to the role of prime minister, while a jocular self-serving approach is bound to have its limitations.
Our beloved country is facing an uncertain future and strong headwinds, a clear self-less vision is needed.
It is with a heavy heart that I have this morning tendered my resignation to the Prime Minister. I will not be doing media interviews on this matter. pic.twitter.com/gjFCVCrXEy
— Jo Churchill MP (@Jochurchill_MP) July 6, 2022
Boris Johnson is facing MPs at prime minister’s questions right now. He said the government should not walk away in a crisis, and that they had a plan and were getting on with it.
He said the economy was facing tough times and Russia’s invasion of Ukraine was the worst war in Europe in 80 years.
That is exactly the moment that you’d expect a government to continue with its work, not to walk away, and to get on with its job.
Updated
Pound at two-year low, euro hits fresh two-decade low
The battered pound remains under selling pressure, amid recession fears and as Boris Johnson is clinging to power despite a flurry of resignations, including the chancellor, the health secretary and others in more junior roles.
Britain’s financial services minister John Glen also quit today in protest against Boris Johnson. News just in that Victoria Atkins, a junior home office minister, has resigned from the government. The conservative MP Tom Hunt said he had submitted a letter of no confidence in the prime minister, saying: “Events of the past week have been the last straw that has broken the camel’s back”.
Sterling has slipped 0.3% against the dollar to $1.1918, remaining near Tuesday’s low of $1.1899, its lowest level since March 2020. Experts said the crisis at 10 Downing Street meant further turmoil in the days and weeks ahead.
Adam Cole, head of currency strategy at RBC Capital Markets, told Reuters:
Markets have now all but written off Boris Johnson as PM.
There is no real frontrunner to replace him and the potential PMs run to a dozen different people, without a view on that it’s difficult to say what Boris’s replacement would mean for policy.
The Bank of England warned on Tuesday that the outlook for the UK and global economy had “deteriorated materially”.
The euro has hit a fresh two-decade low as fears over rising energy prices and potential shortages outweighed relief over the end of a Norwegian oil and gas worker strike. The single currency fell 0.7% to $1.0194.
Updated
News round-up
Here’s a round-up of today’s main stories.
The Norwegian government has stepped in to end the oil and gas worker strike, and this has brought relief to European markets.
The Bank of England will “deliver inflation back to its 2% target”, its chief economist has pledged, despite the challenges it faces from rising food and energy costs and a fall in the value of the pound making both more expensive.
More than 2m UK households have missed a bill payment every month this year as people struggle to keep their heads above water in a “relentless cost of living crisis”, according to new research from consumer group Which?.
The new chancellor, Nadhim Zahawi, is continuing his rapid recent ascent which saw him only become a junior minister in 2018, and first enter the cabinet, as education secretary, less than a year ago – a profile by our political correspondent Peter Walker.
The British government has delayed the decision on whether the UK’s largest producer of semiconductors can be bought by a Chinese-owned manufacturer by another month and a half.
The business secretary, Kwasi Kwarteng, had been expected to make a decision by Tuesday on the purchase of Newport Wafer Fab by Nexperia, a Dutch firm wholly owned by China’s Wingtech.
Kwarteng has sought an extra 45 working days to scrutinise the controversial £63m deal, in a move first reported by the Financial Times.
Canada is to throw out about 13.6m doses of the Oxford-AstraZeneca Covid-19 vaccine because it couldn’t find any takers for it either at home or abroad.
Canada signed a contract with AstraZeneca in 2020 to get 20m doses of its vaccine, and 2.3 million Canadians received at least one dose of it, mostly between March and June 2021.
Ben & Jerry’s has sued its parent Unilever plc to block the sale of its Israeli business to a local licensee, saying it was inconsistent with its values to sell its ice-cream in the occupied West Bank.
UK antitrust watchdog investigating Amazon
The UK’s antitrust watchdog is investigating Amazon on whether the US tech giant is hurting competition by giving its own sellers an unfair advantage over third-party sellers on the marketplace.
Britain’s Competition and Markets Authority said it opened an investigation on Tuesday on concerns Amazon’s practices relating to sellers on its domestic marketplace may be anti-competitive and could result in a worse deal for customers.
The investigation comes after the European Commission decided to investigate over similar concerns.
Some of the products on Amazon’s marketplace are supplied through its own retail business. However, a large proportion are supplied by third-party sellers. Amazon provides services to these sellers, including those that are essential to make sales, such as matching sellers with consumers, the CMA said.
The British regulator said its investigation would focus on three main areas, including how the Seattle-based company collects and uses third-party seller data and how it sets the eligibility criteria for selling under the Prime label.
Sarah Cardell, general counsel at the CMA, said:
Millions of people across the UK rely on Amazon’s services for fast delivery of all types of products at the click of a button. This is an important area so it’s right that we carefully investigate whether Amazon is using third-party data to give an unfair boost to its own retail business and whether it favours sellers who use its logistics and delivery services – both of which could weaken competition.
Thousands of UK businesses use Amazon to sell their products and it is important they are able to operate in a competitive market. Any loss of competition is a loss to consumers and could lead to them paying more for products, being offered lower quality items or having less choice.
A formal investigation will allow us to consider this matter properly.
Updated
Global markets calmer but recession fears remain
Some calm has returned to global markets: stock markets are rallying after Tuesday’s slump as an end to a Norwegian oil and gas worker strike has eased worries of an energy supply crunch, although European recession fears remain, and oil has rebounded.
However, the euro is still trading at a two-decade low against the dollar, at $1.0232, and the pound also remains under pressure following two key cabinet resignations and a flurry of other departures, after a slew of self-inflicted scandals raised serious questions about Boris Johnson’s future as prime minister. Sterling briefly ventured above the $1.20 mark this morning, but is now down again, slipping 0.2% to $1.1934.
In London, the FTSE 100 index is 91 points ahead at 7,116, a 1.3% gain. The German and French stock markets have gained more than 1% and Italy is up 0.4%.
Oil is trading back above $100 a barrel after a near-10% plunge on Tuesday. Brent crude is trading $1.26 higher at $104.04 a barrel while US light crude is at $100.25 a barrel.
The Norwegian government has stepped in to end a strike that had threatened supplies of gas to Britain. The labour dispute had shut down oilfields and gasfields and was expected to cut Norway’s gas supplies by almost 60% by the weekend.
At the same time, Goldman Sachs raised its forecasts for European natural gas prices, saying that a complete restoration of flows via the Nordstream 1 pipeline following upcoming maintenance work is no longer the most likely scenario.
It said a prolonged reduced flow rate is more likely going forward, as the required turbine repairs could take longer than expected. The US investment bank is now forecasting Dutch gas prices to average €153 per megawatt hour in the third quarter, €121 in the fourth quarter and €138 next summer, Reuters reported.
Today, the Dutch wholesale gas contract for September delivery has dropped 7.5% to €161 per megawatt hour.
Updated
Retail sales rose 0.2% in the eurozone in May from April, following April’s 1.4% drop, and were flat across the European Union, according to Eurostat, the EU’s statistical office.
Consumers cut spending on food, drinks and tobacco for the second month in a row, with those essential purchases down 0.3% after a 2.3% slump in April, which was the first decline since June 2020 amid soaring inflation.
Among member states for which data are available, the highest monthly increases in overall retail sales volumes were registered in Cyprus (+9.0%), Croatia (+1.7%) and Portugal (+1.5%). The largest declines were observed in Ireland (-6.5%), Finland (-2.8%) and Austria (-2.2%).
In Germany, Europe’s economic powerhouse, retail sales rose 0.6% in May following April’s 5.4% slump. In France and Spain, sales were flat on the month.
Updated
Some reaction to the construction surveys:
Weak construction PMI -> Keep in mind the lead role of housing in the economic cycle. Another datapoint indicating a steep recession ahead for #eurozone https://t.co/w3sKoDuyua
— Florian Kronawitter (@fkronawitter1) July 6, 2022
A further rise in the latest UK construction materials prices as expected as the spikes in energy costs & commodity prices continue to feed through. Construction materials prices in May 2022 were 27.2% higher than a year ago according to the ONS...#ukconstruction #construction pic.twitter.com/YQyjJPYCAE
— Noble Francis (@NobleFrancis) July 6, 2022
... 13% of UK construction steel imports are from Russia & Ukraine (so supply is affected & there's a rise in demand & price from other sources), recent commodity price spikes lead to iron ore & steel price rises plus... #ukconstruction #construction https://t.co/cUKfZdAifn pic.twitter.com/9YGCcO7RMQ
— Noble Francis (@NobleFrancis) July 6, 2022
The picture was similarly gloomy in the eurozone, where an equivalent survey suggests that construction activity is declining, led by Germany. Both output and new orders fell at the fastest rates for 16 months. This will feed into growing recession fears.
The headline index from S&P Global fell to 47 in June from 49.2 in May.
Firms talked about weaker demand amid acute price pressures and economic uncertainty. House building fell at the sharpest pace since May 2020, when the sector was shuttered by the initial wave of the Covid-19 pandemic
Usamah Bhatti, economist at S&P Global Market Intelligence, said:
Eurozone construction companies reported a sustained downturn in activity halfway through 2022. Construction activity fell at a solid pace that was the quickest for 16 months amid a steep deterioration in new orders. Firms commonly attributed the weakness to higher prices and economic uncertainty, which held back new project tenders.
There were tentative signs that price and supply pressures were continued to ease from earlier in the year, as delivery times lengthened to the least extent since January, albeit one that was still severe. This somewhat curbed input price inflation for the second month running, with the rate of increase the slowest for five months. Yet, inflation remained elevated overall. Price and supply concerns continued to dampen the outlook for the year ahead, with firms signalling pessimism for the fourth consecutive month.
By country, Germany saw the sharpest fall in overall activity, though the rate of decline softened from that seen in May, while French firms saw a renewed contraction that was the steepest since last August. Growth at Italian firms meanwhile softened to the weakest in the current 17-month sequence, heading closer to stagnation.
#Eurozone construction activity fell at a solid pace in June, as the #PMI dipped to 47.0 (May: 49.2), its lowest since February 2021, amid contractions in housing, commercial and civil engineering work. Read more: https://t.co/mSp3H048dQ pic.twitter.com/gha9ks95N6
— S&P Global PMI™ (@SPGlobalPMI) July 6, 2022
Further risk of #eurozone recession as #construction output and orders fall at increased rates in June #PMI #EUR #ECB.
— Chris Williamson (@WilliamsonChris) July 6, 2022
Full release at https://t.co/Gvdn8uaXYe pic.twitter.com/rF7tzseEEg
Updated
UK, eurozone construction sectors weaken
The construction sectors in the UK and eurozone have weakened further.
The latest purchasing manager index from S&P Global and CIPS, a closely-watched monthly survey, showed that UK construction expanded at the weakest pace in nine months and new orders increased at the lowest rate since October. Worries about the economic outlook led to a sharp decline in business expectations for the year ahead, taking optimism to the lowest levels since July 2020. Housebuilding fell for the first time since May 2020.
The headline index fell to 52.6 in June from 56.4 in May, still indicating expansion, but the weakest since last September. Housebuilding was the weakest area of construction activity for the fourth month in a row. The sub-index fell to 49.3, below the 50 mark that divides expansion from contraction.
Tim Moore, economics director at S&P Global Market Intelligence, which compiles the survey said: “
The gloomy UK business outlook and worsening consumer demand due to the cost of living crisis combined to put the brakes on construction growth in June. Commercial construction saw a considerable loss of momentum as clients exercised greater caution on new spending, while long-term infrastructure projects ensured a relatively resilient trend for civil engineering activity.
House building has expanded more quickly than the rest of the construction sector over the course of the pandemic, but now finds itself as the worst-performing broad category so far in 2022.
Construction companies appear braced for a difficult second half of the year as new order growth and business activity expectations fell again in June, reflecting inflation concerns, higher interest rates and less favourable domestic economic conditions.
Latest #PMI data pointed to a slowdown in UK construction activity with the #PMI at 52.6 (May: 56.4), it's lowest since September 2021. Housing activity fell for the first time in over 2 years. Read more: https://t.co/HOKem9CWYG pic.twitter.com/JBpmuACv9d
— S&P Global PMI™ (@SPGlobalPMI) July 6, 2022
Updated
Here is our full story on Bank of England deputy governor Jon Cunliffe’s comments this morning.
Bank of England chief economist: high inflation 'very unsatisfactory'
The Bank of England’s chief economist Huw Pill has described soaring inflation as a “very unsatisfactory situation” and hinted at bigger rate rises.
Inflation has hit a 40-year high of 9.1% and the Bank forecasts a further rise to 11% by October.
An immediate issue for monetary policy makers is whether the pace of policy tightening now needs to change.
For an MPC [monetary policy committee] member charged with achieving the inflation target of 2% – someone in ‘the price stability business’, if you like – this is obviously a very unsatisfactory situation. But any discomfort I feel in that regard of course pales in comparison with the challenges facing those most directly exposed to the current cost of living crisis.
We recognise the hardship associated with elevated inflation rates. For those who spend a higher proportion of their income on energy and food – unfortunately, a group particularly numerous among the less well off – recent price rises have imposed a significant squeeze on their real incomes. These are difficult times for many people.
Our current experience is therefore a salutary reminder of the importance of price stability – what makes the MPC remaining ‘in the price stability business’ so crucial. It is essential we bring inflation back down to target, so as to reduce the uncertainties facing households and allow firms to plan for the future. Achieving price stability serves as an anchor for wider macroeconomic stability and prosperity.
The Bank has raised interest rates five times since December, by a quarter of a percentage point each time, to 1.25%.
Pill said the monetary policy committee is divided, but he is prepared to vote for a bigger rate hike, depending on the data.
As the patterns of individual votes on Bank Rate in recent months reveals, unanimity about the short-term interest rate outlook no longer exists.
Updated
New UK finance minister: need to grow economy
Britain’s new finance minister Nadhim Zahawi has done more media interviews. He said the government needed to rebuild and grow the struggling economy and that he would look at all options, including tax cuts.
When asked whether he would cut taxes, he told Sky News:
I will look at everything, there is nothing off the table.
He said 2023 was shaping up to be tough and he would focus on the cost of living squeeze on households. He also hinted at a rethink of his predecessor Rishi Sunak’s plan to increase taxes on businesses next year. He told the BBC:
Of course I will be looking at where else can I make sure the economy remains competitive and dynamic with our European neighbours and the rest of the world as well. Nothing is off the table.
But he stressed the need for “fiscal discipline” and said the government would have to be careful about increasing public sector pay, which could drive inflation even higher. He told Sky News:
The important thing is to get inflation under control, be fiscally responsible.
He said it was important to remember that higher inflation pushes up debt servicing costs for the government.
Updated
Gabriele Foà, co-portfolio manager at Algebris Investments says sterling faces more turmoil in the days ahead.
The pound has strengthened a bit, but remains below $1.20, and is currently trading at $1.1977, up 0.17% on the day.
In the short term, key cabinet member resignations will lead to more pound volatility. After last month’s confidence vote, Johnson’s position is clearly more unstable and increased uncertainty around the next government will weigh on the currency.
In addition to the political instability, the UK is facing one of the sharpest slowdowns in economic activity in Europe and inflation will likely peak close to 10% in the third quarter. A shift of government focus away from economic policy to politics is likely to exacerbate the impact on asset prices.
Beyond the initial impact, markets may see a change in government as a positive catalyst for sterling. Brexit uncertainty, oscillating economic policies and more politicised Bank of England communication have been important factors behind Sterling’s weakness over the last 12 months. Improvement in any of these areas could provide relief for the currency and UK assets in general.
Updated
Johnson is set to face MPs at PMQs at lunchtime, after a snap YouGov poll suggested that two-thirds of Brits now want Boris Johnson to resign.
After yesterday’s flurry of cabinet and other resignations, the minister for children and families, Will Quince, quit this morning, saying he was going after being given an “inaccurate” briefing over the prime minister’s appointment of a politician who was the subject of complaints.
Economists at Daiwa say:
Politics to continue to dominate in the UK, with a majority of Brits wanting Johnson to quit; construction PMIs to offer little distraction on the economic front After yesterday’s resignation of two senior cabinet ministers – including chancellor Sunak, whose departure raises the possibility of a looser fiscal policy over the near term – over issues related to the PM’s basic integrity and competence, and a couple of further junior resignations this morning, politics will continue to dominate in the UK.
While the PM might just about make it through the summer, he seems highly unlikely to see out the year in Downing Street, with changes to Conservative leadership rules likely to be instigated if he doesn’t resign. And those increased expectations of Johnson’s departure should give support to sterling.
European stock markets are rallying after yesterday’s slump, caused by recession fears.
The FTSE 100 index in London is now trading 161 points higher at 7,189, a 2.3% gain. The German and French indices are more than 1.6% ahead while the Italian borsa has risen 1.5%.
Bank of England's Cunliffe: 'will act' to curb inflation
Here are more comments from the Bank of England’s deputy governor Jon Cunliffe, who said this morning that the central bank “will act” to ensure high inflation doesn’t become embedded.
UK inflation rose to a 40-year high of 9.1% in May, and the Bank expects it to reach 11% in the autumn. The central bank is targeting a rate of inflation of 2%, and in response to soaring prices it has hiked interest rates five times since December. He told BBC radio 4’s Today programme:
It’s our job to make sure that as this inflationary shock passes through the economy we don’t find that leaves us with inflation being the new normal, the sort of embedded psychology. People can have confidence that we will act to make sure that that doesn’t happen.
Cunliffe also acknowledged the impact of the cost of living crisis, and that the economy is slowing.
What we expect is that the cost of living squeeze will actually hit people’s spending and that will start to cool the economy, and we can see signs that the economy is already slowing.
He said most of the forces driving up inflation were from abroad, as Russia’s invasion of Ukraine in late February has sent energy and food prices spiralling – and that the Bank would act to avoid a wage-price spiral.
Those prices will not continue to rise forever and as that shock passes, the economic conditions in the country have to be ones that do not allow the wage-price spiral to develop... and that’s where we’ll do what’s necessary.
The Bank has been criticised for being slow to act to curb soaring inflation, but Cunliffe said:
We’ve increased rates at every meeting for the last five meetings. I don’t think that has ever happened actually before in the history of the monetary policy committee.
Updated
The UK’s new chancellor, Nadhim Zahawi, said this morning that he would look at ways in which the country can remain “competitive and dynamic” with its European neighbours and the rest of the world.
Asked about taxes, he said the prime minister wanted to ensure that the government had fiscal discipline, and that he he shared that view. He told the BBC:
Of course I will be looking at where else can I make sure the economy remains competitive and dynamic with our European neighbours and the rest of the world as well. Nothing is off the table.
Stock markets open higher after Tuesday's slump
Stock markets in London and the rest of Europe have opened higher after yesterday’s losses.
The FTSE 100 index in London is trading 92 points higher at 7,118, a 1.3% gain, following yesterday’s near-3% slump. Germany’s Dax is up 1.6%, France’s CAC opened 1.3% higher, and Spain’s Ibex and Italy’s FTSE MiB both advanced 1.1%.
Updated
JPMorgan economist Allan Monks says events could move quickly:
Both chancellor Sunak and health secretary Javid have stepped down, placing significant additional pressure on the Prime Minister whose position was already weakened after only narrowly winning a confidence vote last month.
Current party rules stipulate that Johnson cannot face another no-confidence vote until next summer. But the main risk now is either that those rules will be changed to force another vote, or Johnson is pressured to voluntarily step down. Events could move very quickly, with a Conservative leadership contest potentially putting in place a new prime minister in the next couple of months or so – ahead of the party’s annual conference in early October.
Monks has also looked at the recession fears.
While there are several factors behind the resignations, one highlighted by Sunak was differences in opinion on the direction of fiscal policy ahead of a joint speech on the economy that had been planned by the chancellor and Johnson next week.
As recession fears mount in the face of sharply rising gas prices and reduced supply, pressure will remain for the next chancellor to deliver at least further targeted support. But the odds of a more politically motivated income tax cut appear to have receded. Our forecast shows a small contraction in GDP on average from the second to the fourth quarter, which future fiscal announcements this year could yet lean against. But the main risk now is that the weight of drags on the economy undermine business confidence and hiring intentions, which have so far remained robust and underpinned the recovery to date.
It is worth pointing out that talk of recession is based on expectations rather than any discernable evidence in the latest business survey. Vacancies remain elevated despite a recent fall, and an upward revision to the June PMI today from 53.1 to 53.7 leaves the survey some way from recession levels and consistent with a 1.5-2.0% pace of growth based on historical comparisons.
The combination of recent events are weighing further on the currency and equity markets, highlighting the still two-sided nature of the risks faced by the monetary policy committee. The question is whether growth headwinds will do some of the MPC’s work for them - potentially causing that Bank to step back from prior hints of a more forceful response from monetary policy and instead opting to continue along a more gradual path. But unless the labor market weakens materially in the face of current headwinds, pressure will remain on the Bank of England to continue tightening.
Introduction: Pound hit as Johnson's future in doubt
Good morning, and welcome to our rolling coverage of business, the world economy, the financial markets, and the cost of living crisis.
UK stock markets are expected to stage a cautious recovery today after their worst single-day performance in three weeks yesterday amid recession fears, as investors brace for months of political uncertainty.
Boris Johnson’s premiership is hanging by a thread, after the chancellor, the health secretary and a string of Conservative aides dramatically quit last night, dealing a crushing blow to his authority following a slew of self-inflicted scandals.
After Sajid Javid, the health secretary, and Rishi Sunak, the chancellor, both resigned, they were replaced by Steve Barclay and Nadhim Zahawi (previously education secretary) respectively. And Michelle Donelan has become the new education secretary.
Stock futures suggest the FTSE 100 index could rise more than 1% when London opens, a partial recovery from yesterday’s 2.9% tumble.
The political drama added to the selling pressure on the pound. Sterling already struggled yesterday amid recession fears, and is currently trading at a two-year low of $1.19, down 0.3% on the day. The dollar, seen as a safer currency, as benefited.
Ipek Ozkardeskaya, senior analyst at Swissquote Bank, says:
The political turmoil in the UK certainly added to the selling pressure on the sterling, however the reason why cable slipped below the 1.20 mark was a booming US dollar, across the board.
Stock markets in London and across Europe were hit by rising worries about a European recession yesterday, and the euro slumped to a two-decade low, as a jump in natural gas prices intensified the strain on the European economy. European futures point at a positive start this morning, but gains remain fragile.
We have taken a look at the favourites to succeed Johnson as prime minister.
And here is what other papers say:
Meanwhile, Bank of England deputy governor Jon Cunliffe has said that the central bank “will act” to ensure that the recent surge in inflation does not become embedded in the economy. He told BBC radio this morning:
It’s our job to make sure that as this inflationary shock passes through the economy we don’t find that leaves us with inflation being the new normal, the sort of embedded psychology.
People can have confidence that we will act to make sure that that doesn’t happen.
The Agenda
- 8.30am BST: Eurozone S&P Global construction PMI for June
- 9.10am BST: Bank of England’s chief economist Huw Pill speaks
- 9.30am BST: UK S&P Global/CIPS Construction PMI for June (forecast: 55)
- 10am BST: Eurozone retail sales for May
- 1.30pm BST: Bank of England deputy governor Jon Cunliffe speaks
- 2.45pm BST: US S&P Global composite and services PMIs final for June
- 3pm BST: US ISM Non-Manufacturing PMI for June (forecast: 54.3)
Updated
