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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Eurozone inflation jumps to 2.6%; UK house prices rebound; US PCE index lifts rate cut hopes – as it happened

Nationwide United States Virgin Money United Kingdom CMA Inflation Nationwide Building Society
The Bastille Food Market in Paris, France
The Bastille Food Market in Paris, France Photograph: Jon Lovette/Getty

Closing post

Time to recap…..

Euro zone inflation rose in May, in a sign that the goal of fully controlling price rises remains in the distances.

Consumer prices jumped by 2.6% this month, on an annual basis; despite this, the European Central Bank is still forecast to cut interest rates next week.

Inflationary pressure in the US remained unchanged in April, according to the latest PCE index, which also showed a small slowdown in monthly core inflation.

UK house prices returned to growth in May, with average prices rising 0.4% in May despite the drag from high mortgage rates, Nationwide reported.

But, the number of mortgages being approved has dropped, Bank of England data for April showed.

And in other news…

European market close

In the City, the blue-chip FTSE 100 index has ended the day 46points higher, or 0.55%, at 8277 points. That still means it lost ground this week, for the third week in a row.

Europe’s markets also rose today, despite this morning’s pick-up in inflation, with the Stoxx 600 index finishing 0.3% higher.

Spain fines budget airlines €150m over ‘abusive’ cabin bag and seat charges

Budget airlines including easyJet and Ryanair have been hit with fines totalling €150m (£128m) by the Spanish government for policies that include charging passengers extra for cabin luggage.

In the biggest sanction issued by the Spanish government’s ministry of social rights and consumer affairs, the carriers easyJet, Ryanair, Vueling and Volotea have been penalised after an investigation launched last summer.

Under the judgment, the four airlines face being banned from charging passengers for cabin luggage in the future.

The Spanish news outlet Cadena SER reported that the fines would total €150m, with the airlines also being censured for charging passengers extra fees to reserve adjacent seats for children and other dependents. More here.

The US dollar has taken a knock from today’s PCE inflation report.

Against a basket of currencies, the US dollar is down 0.3%- which has lifted the pound to $1.2753.

The fact the PCE readings were largely unchanged appears to be giving some confidence that the US is on track for interest rate cuts in coming months, although prices are rising faster than the Fed’s 2% target …..

Wall Street has opened slightly higher, after the PCE index showed US inflation rising in line with forecasts.

After some choppy recent sessions, the Dow Jones industrial average is up 55 points or 0.15% at 38,167 points.

The broader S&P 500 index is also 0.15% higher, while the tech-focused Nasdaq Composite has gained a more modest 0.05%.

James Knightley, chief international economist at ING, says the small rise in core PCE inflation will be welcomed by the Fed:

The Federal Reserve’s favoured inflation measure rose 0.2% MoM. That’s what we need to see to soothe the Fed’s inflation worries, but one is not enough.

We need a series of 0.2% readings between now and September, with further slack in the jobs market and more evidence of a cooling consumer spending story. All certainly possible, but by no means guaranteed.

Google News suffers outage

Google’s news service is suffering a technicla glitch today, which has left users unable to see updates.

Down Detector, which tracks tech outages across the globe, showed a surge in the number of reports that Google News was not working at around 1pm on May 31.

While the main search engine seemed to be unaffected, users who clicked on the “news” tab found no stories.

Instead, a message appeared on-screen, which said: “Uh-oh! Something went wrong. Please try again.”

PCE inflation is "a step in the right direction"

Sonu Varghese, global macro strategist at Carson Group, has fired over thoughts on the slowdown in PCE inflation in April:

  • The Fed’s preferred core PCE metric rose at the slowest pace this year, up just 0.2% month-over-month

  • This is a step in the right direction as it suggests that Q1 inflation heat was due to idiosyncratic factors that may now be in the process of reversing

  • We’re continuing to see disinflation for durable goods like vehicles and household equipment, as well as groceries

  • On the services side, a lot of the strength is from housing and portfolio management services (which is due to higher stock prices), but we should see disinflation going forward for both these categories

  • So the overall inflation outlook looks good, with disinflation in the pipeline, and that likely keeps the Fed on track to cut twice this year starting in September

The drop in core PCE inflation last month was pretty marginal, points out Capital Economics:

Excluding food and energy, the core PCE deflator increased by a slightly more modest 0.2% m/m last month, although it was a close run thing, with prices rising by 0.249% to be exact.

The annual core inflation rate was unchanged at 2.8% although, at 2.754% in April, there was still some marginal progress.

The Federal Reserve’s interest rate-setting committee will be cheered by today’s PCE inflation data, says Michael Brown, senior research strategist at Pepperstone.

This afternoon’s core PCE figures will come as further welcome relief to the FOMC, with the slowest monthly rise this year helping to further cement the bumpy disinflationary path on which the US economy continues to tread.

However, as one swallow doesn’t make a summer, one promising PCE print shan’t provide policymakers with the requisite ‘confidence’ that they continue to seek in order to deliver the first rate cut, which remains likely in early-autumn, providing that data continues to show price pressures cooling over coming quarters.

PCE inflation report lifts rate cut hopes

Just in: The US Federal Reserve’s preferred inflation measure remained unchanged last month, new data shows, which may calm fears that price pressures are accelerating again.

The personal consumption expenditures (PCE) price index rose by 0.3% month-on-month in April, and was 2.7% higher than a year ago, the US Commerce Department reports.

Core PCE, closely watched by the Fed, slowed during April – rising by 0.2%, lower than the 0.3% increase recorded in March.

On an annual basis, core PCE stuck at 2.8%.

Reuters reports that traders are now pricing in about a 51% chance of a rate cut by September, versus about 49% before the report.

Canadian growth misses forecasts

Just in: Canada’s economy grew less quickly than expected at the start of this year, confirming that the UK had the fastest growth among the G7.

The Canadian economy expanded at an annualized rate of 1.7% in the first quarter, new data shows, missing forecasts.

That is equal to a quarter-on-quarter rate of just over 0.4%. Economists had expected 2.2% growth while the Bank of Canada had pencilled in 2.8%.

Fourth-quarter GDP growth was revised to an annualized rate of 0.1% from 1.0% reported initially, Statistics Canada data showed.

This puts Canada towards the top of the growth table for the first three months of the year.

  • UK: +0.6%

  • Canada: +0.425%

  • US: 0.325%

  • Italy: 0.3%

  • Germany: +0.2%

  • France: +0.2%

  • Japan: -0.5%

Regulators urged to launch probe into greenwashing by UK’s major banks

That was quick.

Financial and advertising regulators are facing calls to launch an investigation into greenwashing by the UK’s five biggest high street banks, PA Media report.

Campaigners wrote to the Financial Conduct Authority (FCA), Competition and Markets Authority (CMA) and the Advertising Standards Authority (ASA) on Friday as a new anti-greenwashing rule came into force (see last post for details).

The Make My Money Matter campaign – which advocates for sustainable pension investments – said the regulators should review sustainability claims and communications at Barclays, HSBC, Santander, Natwest and Lloyds.

The letter coincides with the FCA’s new requirement for financial institutions to ensure retail investors are given “fair, clean and not misleading” information on the green goals of investment products and services.

Make My Money Matter said regulators should investigate the “mismatch” between banks’ promotion of climate statements and their real-world activities.

Back in the UK, new rules to prevent finance firms making false or misleading claims about the environmental impact of their products have come into effect.

The Financial Conduct Authority’s anti-greenwashing rules came into force this morning, and experts predict they could have a substantial impact on the industry.

The FCA is hoping the new rules will protect consumers from misleading sustainability claims.

The rules could have a far-reaching impact on banks. Clare Wiles, a managing associate in Linklaters’ financial regulation team, predicts they will “capture a huge range of communications” within the finance industry. More here.

May’s jump in inflation is a “headache” for the European Central Bank, says Matthew Ryan, head of market strategy at global financial services firm Ebury:

While we still expect the bank to follow through with a 25-basis-point rate cut at its June meeting next week, we are now likely to see a relatively less dovish set of communications that both flag disquiet over inflation, while hinting no immediate rush to ease policy again.

Swap markets continue to heavily price in a June rate reduction, but are now not fully pricing in a second cut in the ECB’s deposit rate until December.

Updated

Eurozone inflation is proving stickier than expected, comments Richard Flax, chief investment officer at wealth manager Moneyfarm.

Eurozone inflation rose to 2.6% in May, coming in above the predicted 2.5% and higher than April’s 2.4% growth. This development poses a challenge for the ECB, which is on the brink of reducing rates next week. Additionally, core annual inflation rose in May, raising concerns that it may stabilise around 3% rather than 2% in the coming months. Although this situation might not alter the ECB’s plans for June, future data trends could prompt a reassessment.

The challenge here for the ECB is that reaching the last mile target inflation rate of 2% may prove more arduous than anticipated.

Updated

Vodafone has completed the disposal of its Spanish operations to Zegona Communications for €4.1bn in cash and €900m in the form of redeemable preference shares.

The telecoms giant has been undergoing a transformation programme under new chief executive Margherita Della Valle, who has sought to simplify the group and taken action in three underperforming markets where Vodafone’s returns were below the cost of capital.

The disposal of the Spanish division, which was announced last October but needed to go through regulatory approvals, is part of Vodafone’s turnaround which also includes a sale of its operations in Italy and a proposed merger with CK Hutchison’s Three in the UK which is currently being considered by the Competition and Markets Authority(CMA), the anti-trust regulator.

ING: they won't like these eurozone inflation figures at the ECB...

With the European Central Bank on the eve of deciding on a historic interest rate cut, today’s rise in eurozone inflation adds to doubts about the future path of inflation.

So says Bert Colijn, senior economist for the eurozone at ING, who explains that May’s inflation report shows that “the final throws” of getting inflation back to target are not necessarily easy.

This means that next week’s ECB meeting may not mark the start of a traditional cutting cycle, even if borrowing costs are cut, as expected.

Colijn writes:

While many forward-looking indicators remain benign, a hot labour market, continued supply chain disturbances, and a recovery of purchasing power will make for an interesting debate at the ECB governing council as they decide on the path of monetary policy from here on in.

Core inflation seems set to decelerate again, but the question is at what pace? Services inflation remains elevated for now but forward-looking indicators do gradually move in the right direction. Still, we expect services inflation to trend around 3.5% towards the end of the year, well above target. If goods demand returns on the back of higher real wage growth, goods inflation could accelerate somewhat again towards the end of the year as supply chain problems still modestly curb supply.

Updated

Key event

This rise in eurozone inflation will make for a “more interesting” European Central Bank policy meeting next week, says Mohamed El-Erian, chief economic adviser at Allianz.

He still expects a rate cut on Thursday, though.

Core eurozone inflation up to 2.9%

Core inflation across the eurozone has also risen, which may cause some frowns at the European Central Bank.

Inflation, stripping out energy, food, alcohol & tobacco, is estimated to have risen to 2.9% this month, reversing the drop to 2.7% seen in April.

This is the first rise in eurozone inflation this year.

Having ended 2023 at 2.9%, inflation eased in January (2.8%), February (2.6%) and March (2.4%), before holding steady in April.

Eurozone inflation rises to 2.6%

Newsflash: inflation across the eurozone has picked up this month, showing that the squeeze on households is not over.

The annual inflation rate across the eurozone is expected to be 2.6% in May, statistics body Eurostat reports, up from 2.4% in April, driven by rising prices in the services sector.

Economists had expected a smaller rise in inflation, to 2.5%.

That takes CPI inflation away from the European Central Bank’s 2% target, just as investors anticipate an interest rate cut by the ECB next week.

According to Eurostat, services inflation rose to 4.1% in May, up from 3.7% in April, while food, alcohol & tobacco inflation slowed to 2.6% (from 2.8% in April).

Non-energy industrial goods prises rose by 0.8% per year (down from 0.9%), and there was a small increase in energy prices (up 0.3% year-on-year, compared with -0.6% in April).

This follows a pick-up in inflation in Germany yesterday (to 2.8%), and in France this morning (to 2.7%), both on an EU-harmonised basis.

UK mortgage approvals dip but lending jumps

Just in: UK lenders approved fewer new mortgages than expected last month, but there’s been a pick-up in the amount borrowed to fund a house move.

New Bank of England data shows there were 61,100 mortgage approvals for house purchases in April, down on March’s 61,300, and below forecasts for a rise to 61,500.

However, mortgage borrowing rose last month; people borrowed £2.4bn of mortgage debt in April, compared to £0.5bn in March.

(mortgage approvals are an indicator of future borrowing).

The remortgaging market also cooled: Net approvals for remortgaging (with a different lender) decreased to 29,900, from 33,500, which suggests higher mortgage rates deterred people from shifting to new deals.

The ‘effective’ interest rate – the actual interest paid – on newly drawn mortgages increased slightly by 1 basis point, to 4.74% in April. The rate on the outstanding stock of mortgages increased by 7 basis points, to 3.57% in April.

Updated

Last night, Saudi Arabia announced plans to raise £9bn more capital by selling shares in its national oil company Saudi Aramco.

Saudi Arabia will hold a secondary public offering of 1.545 billion Aramco shares, or 0.64% of shares in issue.

It is aiming for a price between 26.70 riyal (£5.60) and 29.00 riyal (£6) per share, with most of the shares going to institutional investors. It will launch on Sunday, and should be concluded by next Friday.

Bill Blain, strategist at Wind Shift Capital, says the capital is being raised “at a fascinating time”, given recent illness suffered by Saudi Arabia‘s King, Salman bin Abdulaziz.

Blain writes:

In the next few weeks its inevitable that Crown Prince Mohammed Bin Salman (MBS) will become King of Saudi Arabia. His ambition is to firmly establish Saudi as the undisputed leading power in the Middle East, levering that into global power.

Saudis’ economic strength is oil. It’s using its wealth to innovate a diversified tech led economy. Although some of the projects at the core of the reinvention of Saudi have already been scaled back due to escalating costs, and its purchase of global sports franchises is generally misunderstood, the plan is to fuel the economy with plentiful investment by the state SWF, The Public Investment Fund. As such, that’s a pretty effective use of the state’s wealth.

Flutter shifts to New York, leaves CFO behind

It’s all change at betting group Flutter this morning.

Flutter, which owns FanDuel, Sky Betting & Gaming, Sportsbet, PokerStars, Paddy Power, and Betfair, has completed the migration of its primary stock market listing to New York, from London.

Peter Jackson, CEO of Flutter Entertainment, says:

Today marks an important milestone in the evolution of Flutter with the commencement of our primary listing on the New York Stock Exchange.

This closely follows the recent move of our operational headquarters to New York, with both reflecting the increasing importance of the US sports betting and iGaming market to our business. We have a fantastic position in the US, with FanDuel the clear number one operator, and we look forward to this next step on our journey.”

But CFO Paul Edgecliffe-Johnson won’t be sharing this journey. Flutter’s board have decided it’s “in the company’s best interests” him to step down from his role as group CFO and executive eirector.

Edgecliffe-Johnson was concerned about his ability to spend the “extensive executive management time” in the United States that is now needed, due to family commitments in the UK. So he’s being replaced by Rob Coldrake, currently CFO of Flutter International, with immediate effect.

Updated

In the City, shares in sport and fashion retailer JD Sports have dropped almost 8% in early trading, after it reported a drop in UK sales in the last quarter.

JD has told shareholders that like-for-like sales in the UK are down 6.4% in the 13 weeks to 4 May, which it says is due to “continued promotional discipline” (ie, not cutting prices much) and “tough” comparable sales a year ago.

It says:

The UK therefore held back the JD fascia overall, although LFL sales growth was achieved in our complementary fascias in North America and in our Sporting Goods fascias.

JD’s results (delayed by a couple of days) also show a 66% jump in pre-tax profits for the last financial year (to 3 February), and revenues up 4.1%, which it calls “strategic progress in a challenging market”.

CEO Régis Schultz says:

We have started the new financial year with Q1 in line with our expectations in a volatile market and we are on track to deliver our profit guidance for the full year.

UK house prices: what the experts say

Karen Noye, mortgage expert at wealth manager Quilter, says the UK housing market is showing “considerable resilience” in the face of tough economic conditions, and the affordability squeeze.

This is likely in part due to the annual spring bounce as more buyers come to market making it more competitive. However, on an annual basis, prices have increased by 1.3%. The slight uptick suggests some stability, albeit under challenging conditions.

“Nationwide’s data reflects a modestly positive trend, but the housing market remains very unpredictable and the growth in house prices is modest. Monthly property transactions have been lower than expected, indicating a cautious market but this is no surprise given the stress the nation’s finances have been under.

“Affordability remains a significant challenge, particularly for first-time buyers who face rising mortgage rates and the ongoing pressures of living costs.

Tom Bill, head of UK residential research at Knight Frank, says house prices do not feel poised to rally:

High supply is keeping a lid on prices and stubborn services inflation means swap rates are rising and mortgages starting with a ‘3’ feel some way off.

Asking prices still need to reflect the fact that buyers currently have tighter budgets and more choice. The general election is unlikely to impact mainstream property markets and if buyers want to know what prices will do next, the next inflation reading rather than the political manifestoes is the best place to start.”

Iain McKenzie, CEO of The Guild of Property Professionals, says house prices across the country are in “a state of flux”:

This is undoubtedly still a good time to market your property, but it is always worth speaking to an estate agent with a good understanding of prices in your area. While house price figures are useful for giving a top-level overview, they do not give you the granular detail that you might need to get the most out of your sale.

Inflation came in higher than expected this month, which makes it increasingly unlikely that the Bank of England will lower interest rates in June.

For the time being, people on tracker mortgages will face higher repayments and crucially for buyers it also means that some of the most attractive mortgage offers will be slower to return to the market.

Updated

Nationwide: General elections don't disrupt house prices

Nationwide have also dug into their data, and found that past general elections do not appear to have generated volatility in house prices or resulted in a significant change in house price trends.

Their chief economist Robert Gardner says:

On the whole, prevailing trends have been maintained just before, during and after UK general elections. Broader economic trends appear to dominate any immediate election-related impacts.

Updated

CMA starts investigation into Nationwide/Virgin takeover

It’s a busy morning for Nationwide Building Society.

As well as their latest house price data, we’ve also just learned that the UK’s competition authorities have launched a merger inquiry into its £2.9bn takeover of rival Virgin Money.

The Competition and Markets Authority (CMA) says it is considering whether the deal – the biggest since the financial crisis – would lead to a substantial lessening of competition within the UK banking sector.

The CMA is seeking views from interested parties, by 14 June (details here).

Last week, Virgin Money shareholders have voted in favour of Nationwide’s offer, despite one investor claiming the takeover was “likely to sell shareholders very short”.

As well as the shareholder vote, the deal still needs formal approval from City regulators the Financial Conduct Authority and Prudential Regulation Authority, as well as signoff from the CMA.

Updated

Introduction: UK house prices growing, but living standards languish

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Whether people feel wealthier can be a key factor in where they place their tick at the ballot box.

And those lucky enough to own a house became slightly wealthier this month, new data shows, while a separate report shows living standards have languished for more than a decade.

Lender Nationwide has just reported that UK house prices rose by 0.4% month on month in May, ending a two-month run of falling prices.

This has lifted the annual rate of house price inflation up to 1.3%, from 0.6% in April, with the average house price now £246,249.

Prices rose even though some lenders raised mortgages rates this spring - although costs are below the spike in the months after the 2022 mini-budget fiasco which did such damage to the Conservative party’s popularity.

Nationwide reports that the market is showing some resilience. Its chief economist, Robert Gardner, says:

The market appears to be showing signs of resilience in the face of ongoing affordability pressures following the rise in longer term interest rates in recent months. Consumer confidence has improved noticeably over the last few months (see chart below), supported by solid wage gains and lower inflation.

The general election campaign is unlikely to disrupt the housing market much; Rightmove reported this week that 95% of people planning to move home say the election will not affect their plans.

The wider economic picture, though, is that the UK has been suffering weak income growth since the Great Recession.

The Institute for Fiscal Studies reports this morning that median incomes grew by just 6% between 2009–10 and 2022–23; before the 2008 crisis, economists would have expected growth of 30% over that 13-year period.

The IFS warns that there’s no “silver bullet”, but reforms to taxes, planning, education and more can make a material difference to the UK’s long-term prospects.

Mubin Haq, chief executive of abrdn Financial Fairness Trust, says:

Unfortunately, living standards have languished for more than a decade.

On a range of measures UK performance has been weak, especially in comparison to other wealthy countries. The danger is that stagnation becomes the new normal. This is in no one’s interests and stunts too many futures and too many lives.

Key to any future government will be a renewed drive to tackling hardship and improving living standards.

Also coming up today

New Bank of England data will show how many mortgages were approved last month, another gauge of the housing market’s health.

Global investors are bracing for the latest US PCE inflation data, which measures price changes across a wide range of consumer expenses. A strong PCE report could throw more cold water on hopes of early US interest rate cuts, while a weak reading could put them back into play….

The agenda

  • 7am BST: Nationwide house price index for May

  • 7am BST: German retail sales

  • 7.45am BST: French inflation report

  • 9.30am BST: UK mortgage approvals and consumer credit stats

  • 10am BST: Eurozone inflation report

  • 1.30pm BST: Canadian Q1 GDP report

  • 1.30pm BST: US PCE inflation index

Updated

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