Closing post
Time to recap.
Economists are hopeful that the US economy is on track for a soft landing, after US employers added 187,000 jobs in July, less than expected.
July’s jobs report is a sign that the labor market is cooling after a series of interest rate hikes by the Federal Reserve have driven rates to their highest level in 22 years.
July’s gains were just 2,000 more than the jobs added in June. The BLS revised June’s job gain down to 185,000, a cut of 24,000 jobs. It also cut May’s jobs number. Together, June and July represent the two weakest monthly gains in two and a half years.
Here’s the full story:
In the UK, there are fears the economy is caught in a ‘low growth trap’, after the Bank of England cut its GDP forecasts yesterday and hiked interest rates to a 15-year high.
UK car sales have risen for 12 months in a row….but rising interest rates have been blamed for another fall in housebuilding.
Shipping giant AP Møller-Maersk has warned of a longer and deeper contraction of global trade than previously expected.
Inflationary pressures in the food sector are on the rise, with the UN reporting that global food commodity prices rose in July.
Revolut is shutting down its crypto trading operations in the US amid a regulatory crackdown.
Britain’s stock market has closed higher tonight, with the FTSE 100 index gaining 35 points or 0.5% to 7564 points.
Here’s Tiffany Wilding, Pimco’s managing director and economist, on today’s US jobs report:
1. What Happened?
June’s U.S. Jobs report showed that 187,000 jobs were added to the economy, but downward revisions (-49k) from prior months and contracting aggregate hours (-0.1% month-over-month) confirmed the labor market is continuing to decelerate. The labor market still looks very resilient, with the unemployment rate ticking back to record lows at 3.5%, strong household employment gains, and the 3 month moving average (3mma) pace of payrolls at 218k.
2. What Does It Mean?
The last two reports have highlighted growing layoffs in several of the weaker sectors we’ve been monitoring. This, plus notable slowing in leisure and professional services payroll gains, has kept the headline number on top of a trend towards 0 payroll growth by year end. Meanwhile resilience in average hourly earnings was boosted by calendar effects, but the 4.9% 3-month annualized pace underscores the Fed’s complicated job as wage inflation lags price inflation.
3 What Is Next?
Overall this report doesn’t really change our thinking – the labor market is slowly decelerating, but we think a sharper slowdown is still ultimately necessary to keep inflation from reaccelerating next year. For the Fed, this report has to be a relief, but likely doesn’t tilt the scales one way or the other. At the last press conference, Chair Powell, suggested that the committee might hike or it might not at its September meeting. Next week’s inflation report, which we expect will continue to show more moderate inflationary trends, may be more convincing, and push the Fed to be patient and watch how the economy evolves for another meeting
Revolut to stop crypto services for US customers
Revolut is shutting down its crypto trading operations in the US amid a regulatory crackdown.
The fintech firm said it had taken the “difficult decision” as a result of the “evolving regulatory environment and the uncertainties around the crypto market in the US.”
It follows a crackdown on crypto exchanges, by the Securities and Exchange Commission (SEC), which has accused industry giant Binance of a range of securities violations, including mishandling customer funds and misleading investors and regulators, and alleged Coinbase of skirting SEC rules by letting users trade crypto tokens that were actually unregistered securities.
Revolut said users will be blocked from buying cryptocurrencies from 2 September, and that access would be fully disabled by 3 October, meaning customers will no longer be able to buy, sell, or hold any cryptocurrencies after that date.
Revolut said in a statement:
“This decision has not been taken lightly, and we understand the disappointment this may cause. This suspension does not affect Revolut users outside of the US in any way, and impacts less than 1% of Revolut’s crypto customers globally.”
A spokesperson stressed that the decision would not affect customers in any other markets, including the UK, where Revolut has been registered as a crypto asset provider since September 2022.
The company - which has been waiting more than two years for a decision on its UK banking licence - said it would not disclose how much of its revenues rely on crypto services, but said in 2021 that they made up around 15-20% of its revenues.
The head of the Federal Reserve Bank of Atlanta has said US employment gains are slowing in an orderly manner.
President Raphael Bostic told Bloomberg Television’s Wall Street Week with David Westin that there is no need to hike rates further to ease inflation.
Bostic said:
“I expected the economy to slow down in a fairly orderly way, and this number — 187,000 — comes in continuing that pace,”
“I’m comfortable. I’m not expecting this to be over in a short period of time.”
Bostic also predicted that US interest rates could remain at their current restrictive levels well into next year.
He argued:
“We are today in a restrictive stance, and as inflation continues to fall, the degree to which it’s restrictive actually grows as that gap between the inflation rate and our interest rate widens.
So I think that will put enough constraint on the economy that it will continue to slow. But again, I’m not expecting this to be a two-month or a three-month period.”
Atlanta Fed President Raphael Bostic says US employment gains are slowing in an orderly manner and there is no need to hike rates further to ease inflation https://t.co/87Kh5YO8U4
— Bloomberg Economics (@economics) August 4, 2023
Economics professor Justin Wolfers sees a soft landing in today’s jobs report:
If you were to write the script of what a soft landing looks like, this is it.
— Justin Wolfers (@JustinWolfers) August 4, 2023
Payrolls grew a strong +187k, signaling a slower yet still strong—and more sustainable—pace. Downward revisions of -49k for the prior two months mean job growth has averaged +217k over the past 3 mths
The unemployment rate fell a tick to 3.5% and remains near the lowest rates recorded in half a century. We haven't had unemployment this persistently low for this long in decades. Layoffs are incredibly low and workers report feeling confident they can find work.
— Justin Wolfers (@JustinWolfers) August 4, 2023
With the slower jobs growth this month and recent downward revisions, it seems clearer that jobs growth has slowed meaningfully.
— Justin Wolfers (@JustinWolfers) August 4, 2023
But there's no cause for pessimism here. Put recent growth of around +200k into context, you'll discover that this is still remarkably robust growth.
Key takeaways from July job report:
— Heather Long (@byHeatherLong) August 4, 2023
1) The economy is humming
2) Job growth is slowing, but solid (+187k jobs now vs. +399k avg. last yr)
3) Service sector is hiring (health, social)
4) Women have done so well they make up 49.9% of workers (!)
5) Wage growth +4.4% y/y is well… pic.twitter.com/jeG0GfdQPW
July jobs report has a lot to like for the Fed - and some things not to like. Hiring in the past 2 months was the slowest since the pandemic in 2020. But wages still running high and unemployment falls to 3.5%. Wall Street thinks the Fed likely on hold. https://t.co/uMFAo4MqKp pic.twitter.com/gRkuMC2xLU
— Jeffry Bartash (@jbartash) August 4, 2023
Paul Ashworth, chief North America economist at Capital Economics, suggests the Fed shouldn’t be worried that US wage growth was steady last month, rather than slowing as expected:
The news that average hourly earnings growth increased by 0.4% m/m in July, and 4.4% over the past 12 months, might seem like a problem for the Fed. With productivity growth accelerating, however, it may not be.
Benjamin Trevis, economist at the CEBR thinktank, predicts we’ll see one more rise in US interest rates, even though job creation has slowed in the last two months.
Trevis explains:
“The number of US non-farm payrolls increased by 187,000 in July, marking a significant slowdown compared to the 312,000 average monthly job additions in the prior 12 months.
The latest data shows that the Federal Reserve’s tightening campaign is beginning to have the desired impact of slowing labour market activity. However, with unemployment still very low and wage growth above historical norms, there is still a way to go before the central bank can confirm an end to its tightening campaign.
Cebr expects one more 25 basis point rate hike by the central bank before the end of the year, which would bring the main interest rate to the target range of 5.50% - 5.75%.”
In essence there was something for everyone in this jobs report, says Michael Hewson of CMC Markets:
Weaker jobs growth, however an unemployment rate inching lower and wage growth robust.
Ultimately it speaks to a resilient US economy and a Fed likely Fed pause in September, ahead of next week’s CPI report.
Janet Mui, head of market analysis at RBC Brewin Dolphin, sees nothing indicaing a recession in today’s US jobs data.
US jobs report in July is still consistent with a strong labour market, despite lower-than-expected and the smallest monthly job gains since December 2020.
Job gains cooled with the Fed’s tightening campaign and a slower economy, but still decent at 187K in July. Weakness is contained in the manufacturing sector where payrolls dropped by 2K, reflective of the sector’s downturn and more cyclical nature.
Higher-than-expected wage growth of 4.4% YoY means compensation is outpacing inflation and a boost for workers.
The job market is not getting softer, yet, but it’s growing at a slower pace. Nonfarm payrolls rose 187K in July, slightly below consensus expectations and the second consecutive month below 200K, the first time that’s happened since the onset of COVID. In addition, payroll…
— Robert Stein (@BobStein_FT) August 4, 2023
Sonu Varghese, VP & global macro strategist at advisory firm Carson, has fired over some ineresting thoughts on today’s US jobs report:
The jobs numbers this morning were just slightly below the expectations for a 200,000 increase, coming in an 187,000. At some point, job growth had to slow down and though many people will read this as the start of a recession, this is more likely just normalization of the economy as opposed to “softening.”
Job growth recently has been driven by non-cyclical sectors, like health care, education, and government. These sectors had lagged in the original recovery but have accounted for more than 50% of job creation in 2023 as opposed to 25% in 2022. The cyclical sectors have been on the softer side this year, and this report points to more of the same.
The unemployment rate fell a tick to 3.5% indicating that the labor market remains strong.
Strong employment and strong wage growth means income growth is still strong, which is positive for consumption and the economy, as long as inflationary pressure remains muted.
Wall Street has opened a little higher, as traders assess whether today’s US jobs report could mean last week’s increase in US interest rates will be the last.
The Dow Jones industrial average, of 30 large US companies, has gained 0.4% or 136 points to 35,352.
The broader S&P 500 index is 0.5% higher, while the tech-focused Nasdaq Composite is 0.8% higher.
Ronald Temple, chief market strategist at Lazard, says:
“The case for ending the rate hike cycle got stronger with today’s job report.
Strong, but slowing, job growth suggests the Fed is navigating the tightening cycle well. With inflation down from over 9% to 3% and unemployment near a 54-year low, this is undoubtedly a positive report for the economy overall.”
Shares in Amazon have jumped 9%, after the ecommerce giant beat Wall Street forecasts last night with sales up 11% to $134.4bn in the last quarter.
The company reported a quarterly profit of $6.7bn, nearly double what analysts expected.
Updated
Today’s jobs report will not clear up the Fed’s dilemma about whether to stop raising interest rates, or not, says Seema Shah, chief global strategist at Principal Asset Management:
While the doves will be encouraged by the fall in job gains to below 200,000 for the first time since December 2020, the hawks will be focused on the fact that average hourly earnings are hotter than expected and that the unemployment rate seems steadfastly stuck around the 3.5-3.6% mark.
This jobs report is definitely not a gamechanger, Shah adds:
The Fed still has another report to come before their next meeting but, if no clear direction emerges, the Fed is likely to stay put.
Powell seems to need a very compelling reason to hike again so, with the hurdle so high, it would likely take a meaningful upside surprise to both job gains and wage growth to prompt Fed action in September.”
The dollar has weakened following today’s US jobs report, pushing the pound up by half a cent to $1.277.
$DXY The Dollar heading lower after NFP pic.twitter.com/XazkDNbevl
— Andrew Moss, CMT (@Andy__Moss) August 4, 2023
US may achieve 'soft landing' as jobs growth cools
Some experts are hopeful that today’s jobs report suggests the US could achieve a “soft landing”, rather than tumbling into recession.
Michelle Cluver, portfolio strategist at Global X ETFs, says:
While significantly below the 312K average from the last 12 months, this reading still reflects a robust labor market that is adding almost double the number of jobs required to keep pace with population growth.
From a market perspective, this is encouraging for the Fed’s fight against inflation. This is the second consecutive month that NFP has come in below expectations, and the June reading was even revised downward to 185K.
This reduces the probability of the Fed needing further rate hikes this year. However, wage growth in the NFP report came in at 4.4%, above expectations.
David Henry, investment manager at Quilter Cheviot, is hopeful a recession can be avoided:
“While the labour market is slowly cooling as rate rises have some impact, at the moment there still seems to be enough momentum in the economy to avoid recession.
Whisper it, but the fabled ‘soft landing’ may just be achieved, although a lot can still happen before the Fed declares “job done”.
The economy’s robustness may mean that the Fed feels comfortable continuing to raise rates, but it has repeatedly stated that these decisions will remain dependant on the data and there are a number of data points due before the next meeting - not least next week’s inflation number.
Updated
A solid-enough jobs report to see us into summer...headline NFP just a rounding error away from consensus, though the -49k net revision does take off some of the shine...unemployment marginally lower, earnings growth stays strong...goldilocks-ish...
— Michael Brown (@MrMBrown) August 4, 2023
Today’s jobs report indicates the Fed’s aggressive actions to combat inflation are beginning to soften what has been a strong jobs market, says Stephen J. Rich, Chairman & CEO of Mutual of America Capital Management.
Rich explains:
Today’s softer jobs report could be viewed as a harbinger of slower economic growth and the equity markets typically do not like such negative numbers. Until now, the strong labor market has been a key area of strength, unaffected by the Fed’s interest rate policy. However, if weak job growth continues and unemployment escalates, talk of a recession is likely to grow louder again and the equity markets will likely give back some of their gains.”
“Despite wider signs of a possible economic slowdown, we expect the unemployment rate to remain low in the coming months and serve as reassurance for the Fed as they continue with their efforts to bring inflation down to their 2.0% target rate.”
Today’s US jobs report is “slightly weaker than expected”, says Richard Flynn, managing director at Charles Schwab UK:
Last month’s results offered evidence that employment growth had begun to slow, and today’s numbers indicate that a downward trend may be in motion.
While this should be encouraging for policymakers as they continue to battle sticky inflation, the Fed would likely prefer to see wage gains closer to 3%.
Growth in the 4% region may not be enough to convince bankers that monetary policy is working, so further interest rate hikes may be around the corner.”
US hourly earnings higher than expected
Pay growth in July was faster than expected, in a boost for US workers.
The jobs report shows that average hourly earnings for all employees on private nonfarm payrolls rose by 14 cents, or 0.4%, month-on-month in July to $33.74. Economists had expected a rise of 0.3%.
On an annual basis, average hourly earnings have increased by 4.4%, beating forecasts of a slowdown to 4.2%.
That might cause the Fed some concerns, as its policymakers ponder whether they have raised US interest rates high enough to drive out inflation.
Non-Farm Payrolls - Improvement in jobless rate = underlying strength.
— Kathy Lien (@kathylienfx) August 4, 2023
Good for Stocks, should be +USD but traders dont see this as enough for Sept hike
👎 NFP +187K vs 200K Forecast
👍 Unemployment Rate 3.5% vs. 3.6% Forecast
👍 Average Hourly Earnings 0.4% vs. 0.3% Forecast
United States Non Farm Payrollshttps://t.co/AL0r1gqseN pic.twitter.com/eQaz013w9j
— TRADING ECONOMICS (@tEconomics) August 4, 2023
At 187,000, July’s jobs gains are rather less than the average monthly gain of 312,000 over the prior 12 months.
That indicates that the Federal Reserve’s policy of raising US interest rates to cool the economy is having an effect.
US added 187,000 new jobs in July
Newsflash: The US economy added fewer new jobs than expected last month.
The US non-farm payroll rose by 187,000 in July, data just released shows, below forecasts of an increase of 200,000.
June’s NFP has been revised down too, from +209,000 to +185,000, while May’s has been cut by 25,000, from +306,000 to +281,000, meaning fewer jobs were created in the spring than we thought.
The U.S. Bureau of Labor Statistics has also reported that the unemployment rate fell to 3.5%, down from 3.6% in June.
They add:
Job gains occurred in health care, social assistance, financial activities, and wholesale trade.
Forecasting the monthly non-farm payroll changes is a tricky task, and economists have a range of views.
Estimates range from a 140,000 increase, which would be quite disappointing, to a cheerier 300,000 new jobs, according to estimates on Refinitiv.
#NFP | PREVIEW: July US Nonfarm Payrolls Expected To Fall To 200,000; Unemployment Rate To Hold Steady At 3.6%
— TradeSignals24 (@TradeSignals_24) August 4, 2023
Take A Look At What The Top Economists Are Forecasting In Today's US Jobs Report: pic.twitter.com/70QQ8m6aG9
We’re about to find out who’s right….
US July jobs report coming up....
The financial markets are eagerly awaiting the latest US jobs report, due on the half-hour.
July’s Non-Farm Payroll is expected to show that the US economy added around 200,00 new jobs last month, slightly down on the 209,000 new hires recorded in June.
June’s jobs gain was the weakest since December 2020.
Economists will also be watching the latest pay figures, for signs that higher interest rates are cooling the labor market.
Hourly earnings are expected to slow to 4.2% year-on-year from 4.4% previously but continue to rise month-on-month. The unemployment rate is also expected to remain at a long-term low of 3.6%.
Analysts at FxPro point out that eleven out of the last twelve labour market reports have exceeded expectations – with last month’s being a rare miss.
They add:
A second worse-than-expected report in a row could crystallise the market pressure and become the first signal of a trend reversal.
The wage rate is also important for the dollar’s momentum: a better-than-expected reading is a reason for the Fed to tighten policy, which is positive for the dollar. Weak wage growth and strong employment can revive the appeal of risky assets to the detriment of the US dollar.
Happy Jobs Day!
— Pepperstone (@PepperstoneFX) August 4, 2023
The July US labour market report is due this lunchtime, with consensus expecting NFP to rise +200k on the month, a marginal slowdown from the +209k seen in June pic.twitter.com/ZnCuIde97p
Updated
Bank of England chief economist, Huw Pill, is briefing the Bank’s agents about yesterday’s interest rate decision and monetary policy report:
BOE'S PILL: THERE ARE INCREASING SIGNS THAT OUR POLICY IS WORKING TO BRING DOWN INFLATION.
— Breaking Market News (@financialjuice) August 4, 2023
BOE'S PILL: RESTRICTIVE RATES WILL WEIGH ON ACTIVITY AND PRICES.
— Breaking Market News (@financialjuice) August 4, 2023
BOE'S PILL: IF THE MPC MAINTAINS RATES IN RESTRICTIVE TERRITORY, IT WILL CONTINUE TO WEIGH ON INFLATION.
— Breaking Market News (@financialjuice) August 4, 2023
BOE'S PILL: WE ARE TRYING TO BALANCE RISKS OF DOING TOO LITTLE BUT IT IS POSSIBLE THAT WE DO TOO MUCH.
— Breaking Market News (@financialjuice) August 4, 2023
BOE'S PILL: THE GREATER RISK IS THAT INFLATION WILL PERSIST IN THE UK.
— Breaking Market News (@financialjuice) August 4, 2023
We have had some encouraging economic data from Germany earlier today.
German factory orders unexpectedly jumped by 7% in June, the most in three years, which may show that Europe’s largest economy is stabilizing.
The surprise increase was down to a pick-up in major orders, such as machinery and aircraft.
Airbus, which has a major factory in Hamburg and smaller plants in other parts of Germany, reported a jump in aircraft orders in June.
Some encouraging Macro data coming from #Germany.
— jeroen blokland (@jsblokland) August 4, 2023
The volume, hence real factory #orders, rose by a whopping 7.0% in June.
As a result, order volume rose 3.0% from a year ago, marking the first year-on-year increase since February 2022.
These numbers do not match a #recession! pic.twitter.com/vcxLWlHbrG
World stock markets are set for their worst week since March, unless the upcoming US jobs report in 45 minutes can provide a lift.
The MSCI All-World index is headed for its biggest weekly drop in five months, Reuters reports, thanks in part to a surge in government bond yields this week after more data pointed to slowing inflation and the prospect of a deluge of U.S. Treasury supply.
WPP also said that brands are taking a “wait and see” approach to advertising on social media platform X (the rebranded Twitter), until they can understand where owner Elon Musk is taking the company.
WPP CEO Mark Read said the re-branding “took people a little bit by surprise”.
He told Reuters:
“Clients cannot understand where the platform is heading and what its character will be in the future.
“Some clients are dipping their toe back in, but overall I’d describe it as wait and see.”
Advertising giant WPP has added to fears of an economic slowdown, by reporting today that major tech firms had cut their marketing spending.
WPP lowered its forecast for revenue growth this morning, with chief executive Mark Read explaining:
“Our performance in the first half has been resilient with Q2 growth accelerating in all regions except the USA, which was impacted in the second quarter by lower spending from technology clients and some delays in technology-related projects.
WPP now expects like-for-like revenue, less pass-through costs, growth of 1.5-3.0% for FY 2023, down from 3-5% previously.
After hitting a five-week low of $1.2620 yesterday, then rebounding, the pound is trading just below $1.27 this morning, broadly flat on the day.
Raffi Boyadjian, lead investment analyst at XM, says sterling is struggling to find its feet, as investors are disappointed that the Bank of England didn’t strike a more hawkish tone when it raised interest rates by a quarter-point yesterday.
Boyadjian says:
The pound tumbled yesterday after Governor Andrew Bailey told reporters he didn’t think there was a case for a 50-bps hike.
The downgrade in growth forecasts could also be weighing on sterling even though inflation is seen falling to 2% or below by 2025. But with upside risks to wage growth, investors remain sceptical about how quickly the BoE will be able to get inflation under control.
Over in the eurozone, policymakers are growing more confident that inflation has peaked.
The European Central Bank said today that underlying inflation in the euro zone has probably peaked, which could encourage the ECB to pause its cycle of interest rate rises.
In a new article published this morning, ECB economists say:
Median and mean underlying inflation measures suggest that underlying inflation likely peaked in the first half of 2023, particularly when looking through the upward base effect caused by the introduction of the €9 ticket in Germany in June 2022.
The article also warns there has been an “ongoing shift in inflationary forces from external to domestic sources”.
Measures of underlying inflation are historically high, but are showing signs of easing, our #EconomicBulletin finds. Underlying inflation developments are a key input for our monetary policy assessment, especially in today’s highly uncertain environment https://t.co/DhJrS1qJDI pic.twitter.com/uE07jCrkZy
— European Central Bank (@ecb) August 4, 2023
In the City, shares in outsourcing group Capita have tumbled by over 14% after it reported a loss this morning, partly due to the costs of a cyber attack.
Capita reported a pre-tax loss of £67.9m for the first half of this year, down from a £100,000 profit in H1 2022. It said the loss was due to “business exits, non-core Portfolio goodwill impairment and costs associated with the Group’s cyber incident”.
That attack, Capita revealed this morning, will cost up to £25m.
The group is still recovering from the attack by the Black Basta ransomware group, which hacked its Microsoft Office 365 software and accessed the personal data of staff working for the company and dozens of clients.
Capita confirmed on Friday that “some data was exfiltrated” from its IT systems but added that this was less than 0.1% of its server estate. More here.
Maersk predicts prolonged container trade slowdown
In a blow to growth hopes, shipping giant AP Møller-Maersk has warned of a longer and deeper contraction of global trade than previously expected.
Maersk predicted this morning that global container volume growth will contract by between 1% and 4% this year. It had previously forecast volumes of between +0.5% and -2.5%.
It blames:
…muted global macro-economic growth given continued pressure from higher interest rates and potential recessionary risk in Europe and the US.
Maersk ships goods around the world, so is a handy barometer of global economic developments.
Chief executive Vincent Clerc said he saw no sign that the destocking which has curbed global trade activity would end this year.
Clerc told a media briefing:
“We had expected customers to draw down inventories around the middle of the year, but so far we see no signs of that happening. It may happen at the beginning of next year.”
“Consequently, the uptick in volumes we had expected in the second half of the year has not occurred.
Updated
World food prices rise in July
The price of essential ingredients is rising again around the world as the ongoing conflict in Ukraine, political events, and unpredictable weather are impacting crops and the transport of foodstuffs such as cereals.
The rice price index hit its highest level in almost 12 years in July, after rising 2.8% last month alone, according to the UN’s international food price index. The increase came after India banned exports of non-basmati white rice on 20 July, in a bid to curb domestic food inflation after heavy rains hit crops in the world’s largest exporting nation.
The UN’s Food and Agriculture Organization (FAO) said the move had amplified “upward pressure already exerted on prices by seasonally tighter supplies and Asian purchases.”
Rice prices have continued to climb on global commodity markets in recent days, with exporters reporting that Indian parboiled prices hitting a record high this week, as demand shifted to this grade, which is not subject to export restrictions.
Traders in Thailand and Vietnam, the world’s second and third largest rice exporting countries, have also been looking to re-negotiate prices of August rice shipments, Reuters reported earlier this week, to take advantage of rising prices.
The cost of wheat also made their first monthly climb in nine months in July, the UN FAO found, because of uncertainty about Ukrainian grain exports since Russia decided to terminate the Black Sea grain deal last month, which had guaranteed safe shipment from Ukraine’s sea ports. Russia’s subsequent attacks on Ukrainian port infrastructure on the Black Sea and Danube river pushed international wheat prices up by 1.6% last month according to the UN food price index.
The price of vegetable oils soared by 12% last month compared with June, marking the first increase after seven months of falls, as international prices of sunflower, palm, soy and rapeseed oils all rose. Sunflower oil prices surged by 15% month-on-month over worries about exporting the product out of Ukraine.
Lengthy spells of dry weather in large producers Canada and the US have also added pressure to wheat prices.
Overall, international food prices rose slightly - by just 1.3% - in July, and remain some 12% lower than the FAO’s food price index a year earlier, as the cost of sugar slid, and there were small falls in the prices of dairy and meat, all of which should ease some pressures on consumers amid stubbornly high food price inflation in many countries.
Two-year fixed mortgage rates unchanged
The latest daily mortgage rates are out….
Moneyfacts reports that the average 2-year fixed residential mortgage rate today is 6.85%.
This is unchanged from the previous working day – and indeed unchanged since Tuesday, when it rose from Monday’s 6.81%.
There is a little relief for those seeking longer-term fixed rates, though.
The average 5-year fixed residential mortgage rate today has dropped to 6.35%, down from 6.36% on Thursday.
We’ll find out on Monday if there has been more reaction to yesterday’s interest rate rise.
Updated
UK house-building falls again as rate hikes hit demand
UK housebuilding continued to fall last month as high interest rates hit demand, a new survey of the sector shows.
Data firm S&P Global has reported that there was another sharp fall in house building last month, as new orders were constrained by rising borrowing costs.
Its construction Purchasing Managers’ Index (PMI) has recovered to 51.7, its highest level since February, and up from June’s five-month low of 48.9.
July data signalled a renewed expansion of overall construction output in the UK according to the S&P Global / CIPS UK Construction #PMI which posted 51.7 (Jun: 48.9).
— S&P Global PMI™ (@SPGlobalPMI) August 4, 2023
Read more: https://t.co/NZ0n62rKb6 pic.twitter.com/uql3gciTN7
But a sub-index measuring the house-building sector picked up to 43.0 from June’s 39.6, still well below the 50-point mark showing stagnation.
The report shows that residential construction work have now fallen for eight consecutive months.
Construction companies noted that rising borrowing costs had led to fewer sales enquiries and slower decision-making among clients in July.
Tim Moore, economics director at S&P Global Market Intelligence, explains:
July data indicated that some parts of the UK construction sector gained momentum, notably commercial building and civil engineering activity. This led to a renewed rise in total construction output which, although modest, was the fastest for five months. Survey respondents commented on increased infrastructure work, office refurbishments, and resilient demand for a range of commercial projects.
Meanwhile, another steep reduction in house building acted as a severe constraint on construction growth. Around 35% of the survey panel reported a decline in residential work during July, while only 18% signalled a rise. Lower volumes of housing activity have been recorded in each month since December 2022, with construction companies widely reporting subdued sales due to rising interest rates and worries about the economic outlook.
Updated
UK car sales hit full year of non-stop growth.
Despite rising interest rates, and the cost of living crisis, UK car sales have now risen for 12 months in a row.
Trade body the Society of Motor Manufacturers and Traders has just reported that the new car market grew 28.3% in July with 143,921 new vehicles registered.
This means the market has posted non-stop growth for a full year despite “challenging economic conditions”, SMMT says.
New car market up 28.3% in July to record full year of non-stop growthhttps://t.co/8tNa70Rr4F pic.twitter.com/YtWKKGVoeF
— SMMT (@SMMT) August 4, 2023
Sales of battery-powered electric vehicles are up almost 88% year-on-year, with just over 23,000 new BEVs registered in July.
Mike Hawes, SMMT chief executive, said:
Choice and innovation in the market are growing, so it’s encouraging to see more people switching on to the benefits of driving electric.
With inflation, rising costs of living and a zero emission vehicle mandate that will dictate the market coming next year, however, consumers must be given every possible incentive to buy.
Government must pull every lever, therefore, to make buying, running and, especially, charging an EV affordable and practical for every driver in every part of the country.
The SMMT has raised its forecst for overall new car registrations this year by 0.9%, to 1.847m.
But, the outlook for 2024 has been downgraded by 0.7% to 1.951m, “reflecting wider concerns about the cost of living.”
Generali Investments fears that the UK economy will stagnate this year.
Christoph Siepmann, senior economist at Generali Investments, explains:
While acknowledging that GDP growth held up better that previously expected, it nevertheless revised growth down 0.5% in 2024 (from +0.75%) and to 0.25% in 2025 (from 0.75%).
We are still more pessimistic for this year and expect a stagnation.
Generali also predict UK interest rates will peak at 5.75%, and think they could be kept there at least until mid-2024.
Updated
As we covered yesterday, the Bank of England’s decision to raise interest rates by a quarter of one percent was not unanimous.
One of its nine policymakers, Swati Dhingra, opposed increasing borrowing costs as the risks of overtightening had continued to build.
Two policymakers, Catherine Mann and Jonathan Haskel, pushed for a larger increase to 5.5%, arguing that private sector wage growth was trending higher, adding to inflationary pressures.
Paul Donovan, chief economist of UBS Global Wealth Management, says the decision offers “a valuable international lesson”.
Yesterday’s decision had votes for unchanged rates, a 0.25pps hike, and a 0.50pps hike.
One of the unfortunate realities of modern life is that structural change and the aftershocks of the pandemic means we have less understanding of how any economy is performing in real time, widening the spectrum of opinion about what has to happen next.
Interest rates: What the papers say
The 14th increase in UK interest rates in a row, yesterday, makes the front page of many newspapers this morning.
The Guardian highlights the calls from Conservative MPs for tax cuts to help the economy:
GUARDIAN: Latest rate rise sparks Tory calls for tax cuts #TomorrowsPapersToday pic.twitter.com/tA0jIISpMY
— Neil Henderson (@hendopolis) August 3, 2023
Jeremy Hunt’s warning that the UK is stuck in a low-growth trap is on the front of The Times, which also says some analysts think UK interest rates could rise as high as 6%.
TIMES: Economy is caught in a trap, says chancellor #TomorrowsPapersToday pic.twitter.com/eTYafvYY5Z
— Neil Henderson (@hendopolis) August 3, 2023
The Financial Times flags the Bank’s warning that borrowing costs are likely to remain elevated despite slowing inflation.
FINANCIAL TIMES: Interest rates hit 15 year high #TomorrowsPapersToday pic.twitter.com/AQJqkCz9iZ
— Neil Henderson (@hendopolis) August 3, 2023
The i points out that millions of households face huge rises in their mortgage payments if interest rates remain high over the next few years:
i: Three years of mortgage pain ##TomorrowsPapersToday pic.twitter.com/sNJ2CPREx8
— Neil Henderson (@hendopolis) August 3, 2023
Predictions that Britain’s era of cheap food has come to an end make the front of the Daily Telegraph:
TELEGRAPH: NHS goes private to end record backlog #TomorrowsPapersToday pic.twitter.com/gV6fWgkq1N
— Neil Henderson (@hendopolis) August 3, 2023
Here’s a grim example of Britain’s low-growth trap, from economics professor Jonathan Portes:
Astonishing stat of the day:
— Jonathan Portes (@jdportes) August 4, 2023
UK GDP per capita growth 1993Q1-2008Q1: over 40%
UK GDP per capita growth 2008Q1-2023Q1: under 4%https://t.co/F7RSdms3bt pic.twitter.com/cFjBokLvK4
[usual caveats. This isn't a proper analysis: 2008 was a peak, 1993 was early in a recovery. And most other advanced economies esp in Western Europe will also have slowed sharply. Still, even though I knew it was bad, didn't think it was this bad.]
— Jonathan Portes (@jdportes) August 4, 2023
The Bank of England’s warning yesterday that interest rates will stay high for longer than many had hoped is a blow to Rishi Sunak, as he weighs up when to call an election.
As things stand, Sunak faces heading to the polls with the economy barely growing, and borrowing costs painfully high.
Sir John Redwood, a Conservative MP and former cabinet minister, argued that “targeted tax cuts would be extremely helpful” from the Treasury but said his main criticisms were directed at the Bank for lurching from low interest rates creating inflation to rates that “cause a housebuilding collapse and manufacturing recession”.
Reeves: Rate rise is 'hammer blow' for workers
Shadow chancellor Rachel Reeves has labelled yesterday’s rise in interest rates a “hammer blow for working people” which, she argues, did not need to happen.
Writing in the Daily Mirror, the shadow chancellor said the Government is “managing decline rather than getting us moving”.
She wrote:
“This rise – a hammer blow for working people – did not have to happen.
“The Tories crashed the economy with last September’s disastrous mini-Budget and left you paying the price.”
Reeves says Labour has a plan to improve the economy:
First, we’d make sure the banks provide support to mortgage holders who are struggling with repayments.
Second, we would introduce a proper windfall tax on the huge profits the oil and gas giants are making because of Russia ’s invasion of Ukraine and use that money to help families with the cost of living.
And third, we would put in place a long-term plan to secure and grow our economy.
Interest rates rising again will come as a hammer blow for working people.
— Rachel Reeves (@RachelReevesMP) August 4, 2023
After so much Tory economic damage, delivering change will not come easily.
But I know that only Labour's plans can deliver it.
My @DailyMirror piece today.https://t.co/jSOyN0aONn
Introduction: Economy is caught in a trap, says Jeremy Hunt
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Britain is stuck in a ‘low-growth trap’, chancellor Jeremy Hunt has warned, after the Bank of England lifted interest rates to a 15-year high of 5.25% on Thursday.
The BoE also cut its growth forecasts yesterday, and warned that interest rates will remain “sufficiently restrictive for sufficiently long” to squeeze inflation out of the economy.
Hunt told Sky News that other advanced economies were also wedged in this trap saying:
It’s not just the UK, but Europe, the US, Canada, Japan…We’re all in a low-growth trap that we need to get out of.
The chancellor cited IMF forecasts that the UK’s long-term growth rates will be higher than France, Germany or Japan, but conceded “they’re not high enough.
Hunt points to the huge global shocks which have rocked the UK, including a 1970s-style energy crisis and a once in a century pandemic.
He pledges:
What you’ll see from me in the autumn statement, coming up, is a plan that shows how we break out of that low-growth trap and make ourselves into one of the most entrepreneurial economies in the world. That’s what we want.’
The Bank of England’s new growth forecasts are undoubedly poor.
It downgraded the outlook for GDP compared to its previous estimates released in May, particularly during 2024 and at the beginning of 2025.
Dr Linda Yueh, economics fellow at Oxford University, says the BoE’s forecasts are so dire she thought there was a typo in them.
She told Radio 4’s Today programme:
I thought there was a one missing. Growth is normally at least 1%. But the bank has said in 2024-2025, the growth rate is going to average only 0.25%.
It’s a quarter of a percent increase in national output, or national income. I thought it would be at least 1.25%
This is why the chancellor Jeremy Hunt says we’re at risk of being stuck in a low growth equilibrium.
High interest rates will not help the UK economy to grow, of course, as the Bank tries to bring inflation down. It expects consumer inflation to “fall markedly further this year”, but CPI isn’t expected to hit its 2% target until early 2025.
Governor Andrew Bailey cautioned it was too early to say when UK interest rates may start to be cut, saying:
“Inflation is falling and that’s good news. We know that inflation hits the least well-off hardest and we need to make sure that it falls all the way back to the 2% target.,
“That’s why we’ve raised rates to 5.25% today.”
Also coming up today
The US economy will be in focus this afternoon, when July’s jobs figures are released.
Economists predict around 200,000 new jobs were created in America last month, slightly down on June’s 209,000, with the unemployment rate is seen steady at 3.6%.
A strong jobs report could prompt further increases in US interest rates, while a poor report could encourage the Federal Reserve to stop its tightening cycle.
The agenda
8.30am BST: Eurozone construction sector PMI index
9am BST: UN monthly food price inflation report
9am BST: UK new car sales for July
9.30am BST: UK construction sector PMI index
1.30pm BST: US Non-Farm Payroll jobs report for July
Updated
