Pound falls below $1.24 to 2024 low
A late PS: The pound has dropped below $1.24 for the first time since last November.
Sterling is down almost half a cent tonight at $1.2391, after BoE deputy governor Sir Dave Ramsden said he thought inflation could be lower over the next few years than the Bank had previously forecast.
Closing post
Time to wrap up; here’s today’s main stories so far:
https://www.theguardian.com/business/2024/apr/19/finnish-startup-food-air-solar-power-solein
Oil is ending the day flat, another sign that investors are more relaxed about Middle East events.
This leaves Brent crude unchanged at $87.10 per barrel.
FTSE 100 closes higher
I mentioned this morning that European stock markets weren’t really plunging on the back of Israel’s attack on Iran.
And to underline that, stocks in London have just closed higher.
The FTSE 100 index has ended the day 18 points higher at 7895, up 0.25%. Packaging company Mondi led the risers, up 9%, after abandoning its hopes of taking over DS Smith.
The picture across Europe is mixed, though, with Germany’s DAX down around 0.5% today, Spain’s IBEX off 0.3%, and France’s CAC flat.
Sir Dave Ramsden concluded his speech in Washington (online here) by saying he would take a “watchful and responsive” approach to setting interest rates:
He says:
The MPC will have to consider collectively the degree of restrictiveness of policy at each upcoming meeting to ensure inflation returns sustainably to the 2% target. I will continue to take a watchful and responsive approach to my policy decisions as I have tried to do throughout this period of unprecedented structural shocks.
Watchful, in terms of assessing the evidence as it accumulates and responsive in terms of the stance of monetary policy warranted by the evidence.
Some Bank critics have said it is being too slow to respond to the economic slowdown by leaving interest rates on hold since last summer, having been too slow to raise them as inflation began to rise in 2021.
In his speech, Sir Dave Ramsden shows how recent falls in headline inflation have dampened inflation expectations.
That leads to a drop in pay growth, which leads to a slowdown in services inflation (as firms have smaller wage increases to pass on), he explains.
BoE's Ramsden: inflation will fall sharply in April, near to the 2% target
A Bank of England deputy governor has predicted that UK inflation will fall back close to the official target in April, for the first time since the summer of 2021.
Sir Dave Ramsden has told an event in the US that he is confident that price pressures will ease further, after CPI inflation fell to 3.2% earlier this week.
And significantly, he also suggested he was less confident that inflation would rise towards the end of this year, as the Bank has previously predicted.
Speaking at the Peterson Institute of International Economics, in Washington DC, Ramsden argues that the UK looks like less of an outlier in terms of recent inflation performance and more of a laggard.
March’s fall in the CPI index means inflation is falling more slowly in the UK than in the US, and Ramsden predicts that April’s data – due in mid-May – will show a fall close to eurozone levels (where inflation was just 2.4% in March).
Ramsden cautions that the risks from events in the Middle East “remain to the upside”, but predicts that the cut to the UK’s energy price cap this month will help push inflation down.
He says:
Given we know the level of the Ofgem price cap for April and also taking account of the freezing of fuel duties in the March Budget, then other things equal we can be confident headline CPI inflation will fall sharply in April, to close to the 2% target.
Ramsden was one of eight policymakers who voted to leave interest rates on hold in March, with one voting for a cut.
The MPC will meet again in early May, and Ramsden says today that he believes there’s more chance that inflation stays near the 2% target over the next three years – rather than back towards 3% by the end of this year, as the Bank had predicted.
Ramsden says:
Over the last few months I have become more confident in the evidence that risks to persistence in domestic inflation pressures are receding, helped by improved inflation dynamics.
As we set out in our March 2024 minutes there is a range of views among the MPC on these risks. For me the balance of domestic risks to the outlook for UK inflation, relative to the February MPR forecasts, is now tilted to the downside, with a scenario where inflation stays close to the 2% target over the whole forecast period at least as likely.
Updated
Professor Costas Milas of the University of Liverpool is concerned by the rather relaxed response of financial markets to the Iran-Israel conflict.
He tells us:
It looks like financial markets are buying into the argument that either Iran or Israel can ...“put into a computer program” their military operations and that these operations will run “smoothly”.
Both Iran and Israel are playing with fire.
Past experience, as I note in a recent LSE Business blog, shows that oil prices and inflation do increase in response to rising geopolitical risk and, at the same time, UK growth will take a “hit”. I am rather sceptical that “this time is different”.
A senior lawyer for the Post Office fought a high court case brought by post office operators “tooth and claw” because the state-owned body knew criminal appeals would follow if it lost the lawsuit, a public inquiry heard today.
Rodric Williams, a senior lawyer with the Post Office, was giving evidence for the second day to a public inquiry which is looking into how hundreds of post office operators were pursued and prosecuted for more than a decade over alleged financial shortfalls in their branch accounts, which it has since emerged were caused by bugs in the Post Office’s Horizon IT system.
Williams who is the head of legal (dispute resolution and brand) at the Post Office was asked about the aggressive litigation strategy which Post Office took in fighting a high court lawsuit brought by post office operators including Alan Bates, whose fight for justice was dramatised by ITV earlier this year. The high court case paved the way for the convicted victims to be exonerated.
Edward Henry KC, a barrister acting for post office victims, put to Williams that Post Office had fought the high court lawsuit “tooth and claw” because they knew if they lost the case “ a cascade of criminal appeals would follow.”
Williams replied:
“I don’t recall turning my mind to that at the time.”
Henry also accused Williams of being in possession of all the information that was eventually deployed to overturn the conviction of post office operator Seema Misra, one of the best known victims of the scandal.
In 2010 Misra was sentenced to 15 months in prison for theft and locked up on her son’s 10th birthday while eight weeks pregnant. She was placed on suicide watch after collapsing in court. Her conviction was amongst those overturned by the court of appeal in 2021.
The inquiry heard that Williams knew by 2013 and certainly by 2016 that expert evidence used in her trial was flawed and her criminal conviction was unsafe.
Henry said:
“Mrs Misra’s conviction was eventually quashed in April 2021, ten and half years after she’d been wrongly convicted. You personally were aware of information sufficient to quash her conviction by July 2013 weren’t you?”
Williams replied:
“I had information - whether it was sufficient to quash.. That I do not know.”
The inquiry continues.
The US stock markeet hs opened flattish, as anxiety over the Middle East eases.
The S&P 500 share index has dipped just 2 points, or 0.05%, to 5,008, while the Dow Jones industrial average has gained 0.2%.
The tech-focused Nasdaq has lost 0.3%, as shares in streaming service Netflix slide 7% after it issued a mixed trading outlook last night.
Interesting developments in the UK supermarket scene today.
Bloomberg are reporting that US private equity firm TDR Capital is closing in on a deal to buy billionaire Zuber Issa’s 22.5% stake in Asda.
The deal, if completed, would increase TDR’s stake in Asda and tighten its grip on the indebted supermarket chain.
Bloomberg reports:
The agreement for Issa’s 22.5% stake would give TDR majority control and could be announced in coming weeks, the people said, asking not to be named with negotiations in flux. They declined to specify the terms being discussed.
TDR’s holding in Asda would rise to about two-thirds, while the transaction would further the dismantling of the relationship between brothers Zuber and Mohsin Issa.
Zuber Issa, his brother Mohsin, and TDR bough a majority stake in Asda in 2021. The Blackburn-based Issa brothers had previously become billionaires by building up a petrol station empire.
It emerged in February that Zuber was looking to sell his stake, after the breakdown of Mohsin’s marriage was said to have “sent shockwaves” through the family.
Rising real wages could help the UK retail sector recover in 2024, argues Barbara Teixeira Araujo, an economist at Moody’s Analytics.
Following this morning’s weaker-than-expected retail sales report, Teixeira Araujo says:
“While U.K. retail sales were flat in March, it is not all doom and gloom. Sales rose in the first quarter at the strongest pace since the post-pandemic rebound in mid-2021, and will contribute around 0.1 percentage points to first-quarter GDP growth.
Our view is that the retail sector bottomed out in the second half of 2023, and we expect rising real wages to support sales in the high street this year. April’s cut to National Insurance contributions, combined with the increases in the state pension, welfare benefits and with the rise in the National Living Wage will further support take-home pay, making 2024 the year when retailer’s fortunes will likely turn.”
Global stock markets are inching higher after hitting a two-month low earlier today.
The MSCI All Country index dropped to its lowest since February as reports of an attack on Iran came in, but has since recovered a little as Tehran played down the incident.
Amazon could be forced to recognise a trade union for the first time in the UK after members of the GMB at the internet retailer’s Coventry warehouse were granted permission to hold a legally binding ballot.
The Central Arbitration Committee (CAC), the independent statutory body that adjudicates on collective bargaining rights, has ruled that a vote should be held at the site to test support for union recognition.
A win would give the GMB the right to discuss terms and conditions such as pay, hours and holidays with Amazon.
Elsewhere in the City, the battle to own packaging firm DS Smith seems to have wrapped up.
British paper and packaging group Mondi has announced it has decided it will not make an offer to buy rival DS Smith.
Mondi folded after DS Smith agreed to be taken over by International Paper of the US in a £5.8bn all-share deal, earlier this week.
Back in March, Mondi had pounced on DS Smith and agreed an all-share deal worth £5.14bn; that agreement, though, has been gatecrashed by International Paper.
Mondi says today:
Following a period of due diligence, and after carefully considering the value the combination with DS Smith would deliver to Mondi’s shareholders, the Mondi Board has decided that the transaction would not be in the best interests of its shareholders. Accordingly, Mondi does not intend to make an offer for DS Smith.
Shares in DS Smith have tumbled by 10%, as traders abandon hopes of a bidding war. Mondi’s shares have jumped 9%.
Oil price drops back to pre-strike levels
Oil has now lost all its earlier gains, as Iran indicates it is not planning an immediate response against Israel.
A senior Iranian official has told Reuters that Iran has no plan for immediate retaliation against Israel, explaining:
“The foreign source of the incident has not been confirmed. We have not received any external attack, and the discussion leans more towards infiltration than attack.”
Brent crude has now sunk back to $86.57 per barrel, around 0.5% lower than its closing price yesterday, as traders try to assess how these latest developments will impact the Middle East political landscape.
“The situation remains fluid”, explains Stephen Innes, managing partner at SPI Asset Management:
Iranian state-controlled media appears to be downplaying the attacks, offering reassurances that nuclear facilities remain unaffected., making it potentially challenging for Iran’s government to justify any retaliation if the narrative in Isfahan continues to be reported as a tempest in a teapot.
Airline stocks are off their earlier lows, too, but still down for the current session….
After approaching a record high early ths morning, gold has now slipped back as Tehran plays down today’s attack.
Bullion is just 0.1% higher at $2,381 per ounce, having traded as high at $2,417/ounce at one stage.
The Bizarre Bazaar#commodities pare all of early session gains#gold #silver #Brent #WTI pic.twitter.com/vNs0gqmyUJ
— Neha Anand (@Neha_1007) April 19, 2024
In the building sector, construction group Geoffrey Osborne is calling in the administrators.
A notice announcing the company’s intention to appoint adminstrators was filed with the High Court shortly before 4pm yesterday, Construction News reports.
This follows “an extensive effort” to secure new investment, Geoffrey Osborne explains, following difficult years in which the construction sector was hit by the pandemic, rising costs, and the surge in mortgage rates.
The company says:
Osborne has faced significant headwinds common to the entire construction [industry] over the past two years, fuelled by high inflation, the lingering impacts of Covid-19 and Brexit, and a slowdown in public sector procurement.
Despite these challenges, Osborne has maintained strong relationships with suppliers, contractors and staff, while delivering for customers.
UK mortgage rates have crept a little higher, after we learned on Wednesday that inflation fell by less than expected last month.
The financial markets are now pricing in slightly less than two interest rate cuts this year, meaning investors aren’t fully convinced that the Bank of England will have cut Bank rate to 4.75% by December from 5.25% today.
Data firm Moneyfacts reports that average mortgages rates are a little higher this morning:
The average 2-year fixed residential mortgage rate today is 5.83%. This is up from an average rate of 5.81% on the previous working day.
The average 5-year fixed residential mortgage rate today is 5.40%. This is up from an average rate of 5.39% on the previous working day.
Britain’s FTSE 100 index is also being pushed lower by retail stocks.
JD Sports (-2.3%) and Marks & Spencer (-2.1%) are in the top Footsie fallers, amid disappointment that sales volumes were lower than expected in March.
UK retailers’ failure to grow sales volumes last month (see earlier post) shows price rises are deterring consumption, says Paul Donovan, chief economist at UBS Global Wealth Management:
UK March retail sales were weaker than consensus expectations. Consumers still seem intent on punishing attempts at profit-led inflation— price increases are deterring consumption.
UK retail sales data does not directly capture the pivot to spending on having fun as services are not included, but stronger clothing sales hint at this trend.
Airline shares fall as geopolitics takes centre stage
Falling airline shares are dragging European stock markets to their lowest level in a month this morning.
The main airlines are mainly lower this morning, hit by the higher oil price (which pushes up fuel costs) and fears of travel disruption if the Middle East conflict escalates.
Here’s the situation presently:
IAG (owner of British Airways): -2.8%
Ryanair: -1.6%
EasyJet: -2.1%
Wizz Air: -2.1%
Deutsche Lufthansa: -0.6%
Air France: -2.4%
Kathleen Brooks, research director at XTB, says geopolitics are taking centre stage in the markets again:
Nearly a week to the day when Iran sent drones and missiles into Israel, Israel has retaliated and sent a missile into Iran. The initial reports caused a large uptick in the oil price. Brent crude jumped nearly $4 per barrel on the news above $90 per barrel, but it has since retreated as the details about the extent of the attack emerge.
The missiles struck targets in Western Iran, and no nuclear sites have been damaged. Air space around Iran had been closed, but reports say it is now back open. Thus, we can assume this will not be a barrage of attacks and instead a one punch retaliation for Iran’s move last Saturday. As Jeremey Bowen of the BBC put it, the clandestine war between the two foes is now out in the open. So far, the attacks have been restrained, which is causing some relief to markets. However, the risk premium across asset prices is likely to rise as the future remains unclear. Will Iran and Israel leave each other alone now that they have had their tit-for-tat reprisals? Or does this continue, with well-planned ‘attacks’ that are designed to cause the least amount of civilian damage and are more a show of what could be possible?
While this is obviously preferable to an all-out war, it is a risky strategy. One mistake that causes casualties or hits an unexpected target could trigger an escalation in reprisals and a deeper, more dangerous situation in the Middle East. This is why volatility is likely to stick around, especially as it comes at a delicate time for financial markets as they recalibrate expectations for interest rate cuts.
Although European stock markets certainly aren’t in a full-blooded plunge, yet anyway, the main indices are all in the red – following losses across Asia overnight (see 7.21am).
The European Stoxx 600 is at a one-month low, as investors fret about events in the Middle East.
Here’s the situation in early trading:
FTSE 100: -36 points or -0.46% at 7842 points
Germany’s DAX: -152 points or -0.9% at 17,681 points
France’s CAC: -45 points or -0.6% at 7,976 points
Italy’s FTSE MIB: -345 points or -1% at 33,533 points
Wall Street is heading for losses when it opens in four hours, too, with the S&P 500 down 0.5% in pre-market trading.
Richard Hunter, head of markets at interactive investor, says:
“Asian markets bore the brunt of the breaking news of a retaliatory attack on Iran by Israel, also sending Dow futures sharply lower and resulting in further spikes in gold and oil prices.
US markets will not have the opportunity to react directly to the developments until later, but the escalation will put pressure on the main indices, which were already lining up for a weekly drop. The Dow Jones managed a wafer-thin gain on Thursday, whereas the Nasdaq and S&P500 continued on a downward trend which is eroding the heady gains made over recent months.
In the year to date, the Dow has now added just 0.2%, the Nasdaq 3.9% and the S&P500 5% as interest rate concerns continue to weigh on investor sentiment.
Updated
Gas prices have jumped this morning, with the UK month-ahead contract up 1.9% to 82.7p per therm.
Airline shares drag FTSE 100 down
Shares are dipping in Europe as traders digest events in the Middle East overnight.
In London, the FTSE 100 blue-chip share index is down 38 points or 0.5% at 7838 points.
IAG, the parent company of British Airways, is the top faller, down almost 4%, followed by easyJet (-2.5%).
Engineering firm Rolls-Royce, which makes and services jet engines, are down 1.7%.
European markets are also lower, with the pan-European Stoxx 600 down 0.6%.
Retail recession is over, says Capital Economics
Although sales volumes (the amount of stuff people bought) were flat in March, the first quarter of 2024 has been a brighter time for retailers than the last quarter of 2023.
Sales volumes increased by 1.9% in the three months to March 2024 when compared with the previous three months, the ONS reports.
That brings the retail recession to an end, declares Capital Economics this morning.
Alex Kerr, their assistant economist, explains:
Despite the softer-than-expected data, retail sales still added almost 0.1 percentage points to real GDP growth in Q1. Moreover, the prospect of interest rate cuts and the boost to real household incomes, from falling inflation and the 2p cut to national insurance in April, suggest the recovery in consumer spending will continue throughout this year.
Automotive fuel sales volumes rose to their highest level since May 2022 in March, today’s retail sales report shows.
Retailers told the ONS this rise was linked to increased footfall on their forecourts.
March’s retail sales stagnation is “disappointing”, says Nicholas Hyett, Investment Manager at Wealth Club, commented:
“Retailers had a gloomier March than many expected, and overall sales remain 1.2% below their pre-covid peak.
Department stores remain an area of particular weakness, not good news for John Lewis which announced it would not be paying its regular staff bonus for the second year in a row during the month. However, high street shops more broadly have actually performed better, it’s food retail and online shopping that have held back growth.
The disappointing numbers will fuel speculation that the Bank of England will consider interest rate cuts this summer, though are not poor enough to necessitate a move.
British retail sales stagnate
Retail sales across Britain stalled in March, as the cost of living squeeze continues to hit spending, new data shows.
The Office for National Statistics has just reported that British retail sales volumes stagnated in March, following modest growth of just 0.1% in February (revised up from stagnation).
That’s weaker than expected; economists polled by Reuters had expected sales growth of 0.3% in March.
While spending on motor fuel and non-food goods rose, there was a drop in spending at department stores, on food, and online.
On an annual basis, sales volumes rose 0.8% over the year to March 2024, weaker than the 1% expected.
That leaves them 1.2% below their pre-Covid-19 level in February 2020.
ONS senior statistician Heather Bovill says:
“Retail sales registered no growth in March. Hardware stores, furniture shops, petrol stations and clothing stores all reported a rise in sales. However, these gains were offset by falling food sales and in department stores where retailers say higher prices hit trading.
“Looking at the longer-term picture, across the latest three months retail sales increased after a poor Christmas.”
Retail sales showed no growth in March 2024, following a revised increase of 0.1% in February 2024.
— Office for National Statistics (ONS) (@ONS) April 19, 2024
➡️ https://t.co/65yQJqIxlh pic.twitter.com/xIwzMNwnVm
Updated
S&P cuts Israel's credit rating on heightened geopolitical risk
Last night, ratings agency S&P Global lowered Israel’s credit rating, before the reports of explosions in Iran.
S&P cut Israel’s long-term ratings to A-plus from AA-minus, citing Heightened Geopolitical Risk, and left its outlook on negative.
S&P says:
“We forecast that Israel’s general government deficit will widen to 8% of GDP in 2024, mostly as a result of increased defense spending”
S&P Global predicts that a wider regional conflict will be avoided, but that the Israel-Hamas war and the confrontation with Hezbollah appear set to continue throughout 2024.
Asia-Pacific stock markets are a sea of red today, after Israel carried out military operations against Iran.
Japan’s Nikkei share index has shed 2.3%, or 883 points, to 37,196, away from the record high set last month.
China’s CSI 300 is off 0.8%, and South Korea’s KOSPI is down 1.9%.
Introduction: Oil jumps after Iran explosions
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Reports of powerful explosions in Iran overnight have pushed up the oil price, as investors fear escalation in the Middle East crisis.
Brent crude surged back over $90 amid reports of explosions near the Iranian city of Isfahan, with US officials confirming that Israel has carried out military operations against Iran.
Oil jumped on fears that the conflict had entered a new phase, while stocks fell.
Brent oil rises above $90 amid reports of Israeli missiles hitting Iran pic.twitter.com/MmeuOsvPmM
— Stephen Stapczynski (@SStapczynski) April 19, 2024
Stephen Innes, managing partner at SPI Asset Management, says:
Reports of an Israeli aerial bombardment targeting a key nuclear facility in central Isfahan have sparked a significant shift out of risk assets and into safe-haven investments.
Metal and soft commodity prices – such as wheat, soybeans and corn - also rose, on fears of shipping disruption and higher energy input costs.
Higher oil and food prices, and shipping costs, would add to inflation, undermining efforts to bring the cost of living crisis under control.
But… markets are calming down somewhat, with Brent crude now easing back to $89/barrel (up 2% today) as Iran appears to play down the incident.
Oil and gold prices coming down
— Stephen Stapczynski (@SStapczynski) April 19, 2024
👉 “Contrary to the rumors and claims made by the Israeli media on Friday morning, there are no reports of an attack from abroad on Iran’s central city of Isfahan or any other part of the country,” Iran’s semi-official Tasnim reports
A senior commander of Iran’s Army Siavosh Mihandoust has said that no damage was caused in the overnight attack, according to state TV, adding that the noise heard overnight in Isfahan was due to air defence systems targeting a “suspicious object”.
Diplomat Carl Bildt, co-chair of the European Council on Foreign Relations, says this is important, and that the key is to break the dangerous cycle of escalation.
Whether there was a large 🇮🇱 attack or not isn’t particularly relevant - important is that 🇮🇷 is playing down the reports. Key now is to break the dangerous cycle of escalation. https://t.co/h8TqFmKn8O
— Carl Bildt (@carlbildt) April 19, 2024
Our brilliant Middle East Crisis liveblog has all the details:
Also coming up today
Some lenders to Thames Water are facing the prospect of losing up to 40% of their money if the troubled supplier is nationalised, with much of its £15.6bn debt ending up on the public books.
EXC: The secret Whitehall blueprint for Thames Water’s renationalisation:
— John Collingridge (@jmcollingridge) April 18, 2024
- bulk of £15.6bn debts go on state balance sheet
- some lenders to lose 35-40% of £
- new public corporation takes ownership, based on Crossrail
- equity wiped out
By @Annaisaac https://t.co/3oRjheFnQf
The Guardian revealed last night that a government blueprint, codenamed Project Timber, is being drawn up; it would turn Britain’s biggest water company into a publicly owned arm’s-length body.
Some lenders to its core operating company could lose up to 40% of their money under the plans, which which is at an advanced stage. More here:
There’s also excitement in the crypto currency world, where bitcoin is about to undergo a halving. This will cut the rewards for bitcoin miners in half, to reduces the pace at which new bitcoins enter the market.
The agenda
7am BST: UK retail sales for March
2pm BST: IMF/World Bank Spring Meeting continues in Washington DC
3.15pm BST: Bank of England deputy governor Dave Ramsden on panel about lessons to learn from post-pandemic inflation
Updated
