Full story:
Finally, here’s my colleague Edward Helmore on today’s drama at the Fed:
Under pressure from Wall Street and the White House, the Federal Reserve lowered interest rates on Wednesday for a second straight meeting, but declined to signal if it would continue to drop rates in the future.
Citing the global economic outlook and “muted” inflationary pressures at home, the central bank decided to lower interest rates a quarter of a point to meet a target borrowing rate of 1.75% to 2%.
The cut was in line with the expectations of investors and economists, but the board showed it was not willing to schedule further cuts.
The decision showed Fed officials are split over where to set interest rates. Seven of 10 officials voted in favor of the cut, two opposed it and one argued for a larger half-point cut.
The board said: “This action supports the committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the committee’s symmetric 2% objective are the most likely outcomes, but uncertainties about this outlook remain.”
The analytical firm Capital Economics noted the Fed was split over rates and said its economic projections unchanged since July.
The breakdown of the split “suggests most Fed officials still see a rebound in economic growth as their base case scenario, which means any further rate cuts would be limited,” it wrote in a note to investors.
Financial markets largely welcomed the news as a buffer against risks from a global slowdown and uncertainty over Donald Trump’s trade policies.
But some analysts warned the cut could do more harm than good.
Kerstin Braun of the Stenn Group said: “Real capital growth and real economic activity are driven by long-term interest rates, which are functions of expected future inflation and investor confidence.”
With rates head toward zero, Braun added, “banks have no incentive to loan money, making credit actually tighter for companies that want to grow”.
The cut was immediately criticized by Trump, who last week said the Fed’s “boneheads’’ should reduce rates to zero or lower. Trump is counting on a strong economy fueled by cheap money to boost his reelection chances next year.
“Jay Powell and the Federal Reserve Fail Again. No “guts,” no sense, no vision! A terrible communicator!” Trump said in a tweet following the announcement...
Here’s the full story:
Goodnight! GW
Wall Street staged a late recovery, after Jerome Powell hinted that the Fed could act aggressively if the US economy turned sour.
The Dow Jones industrial average has closed in the green, up 36 points or 0.13% at 27,147.
Reaction is pouring in.
Ronald Temple, Head of US Equities, Lazard Asset Management says:
“Today the FOMC gave investors what they expected. Looking forward to October 30th, ignore the dot plot. What matters most to monetary policy is what happens in terms of US/China trade, Brexit, and US consumer resilience against the backdrop of slowing global growth.”
Here’s Seema Shah, Chief Strategist at Principal Global Investors:
“Today Powell delivered a very hawkish policy rate cut. Although it met market expectations for a 25 basis point cut, the committee was split with officials divided on future rate moves. In fairness, with recent economic data - such as industrial production growth and housing stats- tentatively suggesting that a trough in activity is approaching, a stabilisation in growth is a more plausible scenario than an outright recession, so perhaps there is less need for further easing. The US/China trade war had a starring role in Powell’s press conference, but by contrast he was reluctant to refer to the mid-cycle adjustment.
Tim Foster, Fixed Income Portfolio Manager, Fidelity International, writes:
“Today’s move was widely expected, and markets should be relatively unmoved, although more disappointingly for investors the Fed’s ‘dot plot’ of their projections for rates doesn’t show any consensus for further cuts this year. The Fed’s rate cuts also look rather old-fashioned compared to the European Central Bank’s (ECB) comprehensive package of easing measures last week. This simplicity could change soon, though, as the Fed’s toolkit for monetary policy proves increasingly ineffective against upward pressure on money market rates.
And here’s Aaron Anderson, Senior Vice President of Research, Fisher Investments:
“Recent economic data hasn’t been spotless, but it certainly doesn’t suggest a looming recession or the need for the Fed to cut rates. Industrial production, capacity utilization, housing sentiment, consumer sentiment, and retail sales all beat expectations in the past week. Headline inflation has been steady, while core inflation has accelerated. The Fed can’t legitimately claim it’s “data dependent” if it cuts rates against this backdrop. Reigniting QE would be an even bigger mistake.”
Rajan Naik, Director of Financial Markets Online, has sympathy with the Fed chair:
“Jerome Powell can barely get a break. Attacked by President Trump for not cutting rates far enough, and lambasted by the markets for giving scant future guidance, he knows better than anyone that the central banker’s task is often a thankless one.
The irony is the Fed has played this one by the book. With global growth sputtering and no inflationary pressure to worry about, a gentle nudge on the monetary policy tiller was firmly baked into market expectations.
Yet despite following that script to the letter, two things undermined Mr Powell’s calm and measured arguments. His insistence that future decisions will be “data dependent” smacks more of fudge than prudent bet hedging.
And the divisions within the Fed’s rate-setting committee have burst into the open. With several members holding polar opposite views, the Fed’s avowed plan to keep cutting rates hangs in the balance.
With the Fed’s next move fired up into the air, the Dollar is moving with it.”
Q: Does America suffer from having much higher bond rates than other advanced economies [as president Trump has claimed recently?
Global capital markets are highly integrated, and our rates are being pulled down by very low rates abroad, says Powell.
He then also warns that record low bond yields (as in the eurozone) aren’t really a good thing.
Those very low rates abroad are caused by expectations of very low inflation, and low growth, he states.
That’s the end of the press conference.
Q: Donald Trump has called the Fed ‘boneheads’ recently, and he just called you a ‘terrible communicator’. Any plans to change?
I’m not going to change my practice of not responding to comments from elected officials, says Powell -- rising above the tirade of tweets from the White House.
But he then makes an important point -- an independent Federal Reserve, free from political interference, has served the American people well.
Powell: Morale at the Fed is high
Q: Have you taken any steps to bolster morale at the Fed, because of the criticism from Donald Trump?
Morale is very high, we’re very unified, Powell says firmly.
We feel we’re doing the best job we can to serve the American people.
Jay Powell on #Fed: "we're very unified" in response to Trump criticism.
— Caroline Hyde (@CarolineHydeTV) September 18, 2019
Though clearly they're NOT "very unified" on future policy needs...
Updated
Powell: We don't expect a recession
Q: You say the economy is strong, but there are signs it is slowing. How do you see it evolving over the next year?
Jerome Powell says that he, and the FOMC, expect moderate growth, a strong labour market, and inflation back up to 2%.
But there are risks - namely the slower global economy and trade tensions.
We don’t see a recession, we’re not expecting a recession, but are are making monetary policy more accommodative, he adds.
Jerome Powell is channelling Milton Friedman!
Asked about how the rate cut will affect the economy, the Fed chair cites Friedman’s maxim that monetary policy works with an lag.
Powell quotes Friedman. Econ 101. 🤦♂️ pic.twitter.com/stmxcondVe
— Viraj Patel (@VPatelFX) September 18, 2019
Q: Does the Fed have enough firepower to handle a downturn?
Powell says it is a mistake to hold onto your firepower until a downturn has gathered moment.
If the economy weakens more, we’re prepared to be aggressive, he declares.
But he doesn’t think negative interest rates would be appropriate.
“It’s a challenging time, I admit it” says Powell rather frankly, when asked about the Fed’s policy stance.
“What’s the Fed’s reaction function now?” asks @mckonomy. “It’s an unusual situation,” says Powell, citing the strong economy, before mentioning geopolitical risks to trade risks and financial conditions. “It’s a challenging time.”
— Vonnie Quinn (@VonnieQuinn) September 18, 2019
Q: What concerns do the Fed have about the trade war?
Trade policy isn’t our responsibility, Powell says. But it does affect the stance of monetary policy.
Trade policy is weighing on the outlook, he says, adding that the Fed “can’t give businesses a settled road map for global trade”, but does have tools to help companies through.
Those tools allow the Fed to support job creation, and give consumers the confidence to buy items such as durable goods, Powell adds.
The Fed’s dot plot, showing where policymakers expect interest rates to be in future, is meant to provide clarity.
But when the FOMC is split, it doesn’t. And Powell is playing down its importance, by explaining that Fed governors have a range of views...
Can we please just get rid of the dot plot? It's taking up so much space in the room and clearly Powell doesn't think it helps us understand what will happen next.
— Frances Donald (@francesdonald) September 18, 2019
#Powell "people have different perspectives" - pls pls pls stop asking me about all these different dots in the dot plot
— BlondeMoney (@MarketBlondes) September 18, 2019
Powell has hinted that the Fed could stop unwinding its stimulus measures, and potentially expand its balance sheet again.
Powell: “There's real uncertainty and it's possible we need to resume the organic growth of the balance sheet." #Fed
— Akiko Fujita (@AkikoFujita) September 18, 2019
Powell hinted at the end of “soft QT”. To be looked at carefully in the coming days and discussed at the next meeting. Excess reserves will then be kept constant and the balance-sheet increasing roughly with nominal GDP, as opposed to currently constant balance sheet
— Anders Svendsen (@SvendsenAnders) September 18, 2019
Q: What’s caused the sudden jump in the repo rate this week, and are you worried? (the cost of overnight borrowing between banks, as explained here)
Powell says that the spike was caused by tax bills, and the cost of settling bond purchases- which left banks unusually short of ready cash.
The Fed anticipated this issue, Powell says, but was surprised by the extent of the problem - as were markets.
But he insists he’s not worried.
Q: You are trying to speak for a divided Fed. What’s your own view?
Powell says the diversity of views on the FOMC is a “healthy” sign.
Q: But do you think the Fed should wait for data to deteriorate, or take action ahead of time?
Powell says it is “better to be pro-active”, when appropriate. If you see danger coming, it makes sense to steer round it.
But.... the Fed is heavily data-dependant, he insists. That data includes the evolving risk picture....
Journalists are asking Jerome Powell for more clarity about future interest rate moves.
It very much depends on the flow of data, the Fed chair replies.
Jay Powell is now taking questions, having run through today’s statement (posted earlier).
Q) Do you still see this as a mid-cycle rate cut?
Powell says the Fed sees a favourable economic outlook for the US.
But there are risks - namely weak global growth and rising trade tensions. If those risks materialise, and the economy weakens, “more extensive cuts” may be needed.
So we will continue to monitor these developments, and act appropriately, he adds.
Trump: The Fed has no guts
Donald Trump has just tweeted his displeasure - accusing the Fed of lacking guts, sense and vision.
He also takes a personal swipe at Powell, calling him a ‘terrible communicator’.
Jay Powell and the Federal Reserve Fail Again. No “guts,” no sense, no vision! A terrible communicator!
— Donald J. Trump (@realDonaldTrump) September 18, 2019
Jerome Powell explains that the US economy seems strong, with solid job creation.
But, weakness abroad is weighing on the growth. He says this is partly due to trade tensions (a clear reference to the US-China trade war).
Jerome Powell's press conference begins
Federal Reserve chair Jay Powell is giving a press conference now. You can watch it here (I’ll try to embed it at the top of the blog too).
Powell begins by explaining that the Fed is “dedicated to serving the American people”, and committed to making the best decision they can.
That’s a pretty defensive way to start a monetary policy press conference -- suggesting that Donald Trump’s criticism has hit home.
An interest rate cut ought to weaken a currency (as investors receive a lower rate of return). But the dollar is strengthening...
Looks as if mkts see the 25bps cut as "hawkish cut." Dollar Index jumps 0.3%. pic.twitter.com/p646HGSn3Y
— Holger Zschaepitz (@Schuldensuehner) September 18, 2019
This is a hawkish rate cut, argues Naeem Aslam of Think Markets.
We have a hawkish rate cut - meaning even though the Fed has cut the interest rate today but there are no clear signals in relation to further rate cuts. In other words, the fed is no rush to cut the interest rate again.
The current move by the Fed has made the dollar stronger and pushed the gold price lower. But remember it is all about Trump twitter rant and it is something that traders can not ignore.
Stocks have fallen since the Fed decision. The Dow Jones industrial average is down 183 points at 26,926, down almost 0.7%.
That suggests traders had expected the Fed to be more dovish. They may also be concerned that policymakers are divided about the future path of rates.
As Reuters puts it:
New projections showed policymakers at the median expected rates to stay within the new range through 2020. However, in a sign of ongoing divisions within the Fed, seven of 17 policymakers projected one more quarter-point rate cut in 2019.
Five others, in contrast, see rates as needing to rise by the end of the year.
Stocks lower as only 7 of 17 Fed officials project another rate cut in 2019. Very different views on what the US economy needs inside the FOMC... pic.twitter.com/tY3jJKKj9r
— Caroline Hyde (@CarolineHydeTV) September 18, 2019
This chart shows how the Fed raised interest rates nine times since the end of the financial crisis, followed by two cuts (July and today).
Will today’s quarter-point rate cut satisfy President Trump, who recently called the Fed ‘boneheads’ for not cutting rates?
Possibly not.
Richard Carter, head of fixed interest research at Quilter Cheviot, argues that Trump would have liked to see a bigger cut (so James Bullard might be on his Christmas card list!)
“The decision by the Fed to cut interest rates by 0.25% was largely as expected. Donald Trump would like them to have done more judging by his regular rants on Twitter but the US economy remains in fairly good shape and there is no sign of an imminent recession so a cautious approach makes sense.
We are likely to see more gradual interest rate cuts over the course of the year though as the US China trade war continues to hinder the global economy.”
The Fed Statement
Here’s the statement from America’s central bank, explaining why it has cut US borrowing costs.
As you can see, the Fed argues that the US economy is still in good shape, with companies creating jobs, and inflation low.
Information received since the Federal Open Market Committee met in July indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports have weakened. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-3/4 to 2 percent. This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.
Fed split on cutting rates to 1.75%-2% range
The Fed has split 7-2-1 on today’s vote, with two hawks and one dove dissenting from the rest of the room.
Seven policymakers agreed to cut by 25 basis points, to a range of 1.75% to 2%. They were chair Jerome Powell, John Williams, Michelle Bowman; Lael Brainard; Richard Clarida; Charles Evans; and Randal Quarles.
James Bullard called for a 50-basis point cut, to 1.5%-1.75%.
Esther George and Eric Rosengren pushed to leave rates unchanged.
Fed cuts interest rates
NEWSFLASH: The Federal Reserve has cut borrowing costs by a quarter-point.
This lowers the Fed funds rate to 1.75%-2%. This is the second such cut in less than two months.
BUT.... three policymakers have dissented from the decision. One wanted a deeper cut, while two wanted to leave rates unchanged.
Bullard voted for 50 bps rate cut and Rosengren and George wanted to keep rate unchanged #Fed
— DailyFX Team Live (@DailyFXTeam) September 18, 2019
And the Fed’s new forecasts show that the Fed is badly divided about the future - just 7 of its 17 policymakers expect another rate cut this year.
Five expect another rate cut, while five expect a hike in 2019!
BREAKING: Fed cuts interest rates 25bps but does not sound in a hurry for more cuts
— Heather Long (@byHeatherLong) September 18, 2019
-Only 7 of the 17 Fed leaders predict another rate cut this year
-5 predict rates will stay same. 5 predict an increase.
-Statement says Fed will "act as appropriate" to keep economy growing
More to follow....
Updated
It will be quite a shock if the Fed doesn’t cut US interest rates by 0.25% in a couple of minute.....
18 Sep - 01:53:04 PM [RTRS] (FFZ9 FFX9) - FEDERAL FUNDS FUTURES IMPLY TRADERS SEE 70.4% CHANCE OF A 25-BPS RATE CUT VS 48.5% LATE TUESDAY - CME GROUP'S FEDWATCH
— Alastair Williamson (@StockBoardAsset) September 18, 2019
I'm going out on a limb here, but I think, just maybe:
— Ed 'Canny Bear' Walt (@EdVanDerWalt) September 18, 2019
The Fed's gonna cut.
25bps.
Financial commentator Heidi Moore has written a good explainer on the repo market problems, which non-financial experts may find handy:
Okay, for everyone who is confused: Here is a quick-and-dirty explainer thread on the overnight lending market that the Federal Reserve just bailed out.
— Heidi N. Moore (@moorehn) September 18, 2019
This is also called the "repo" market because the specific borrowing-and-paying-back is called a "repurchase agreement." But it's basically pawning.
— Heidi N. Moore (@moorehn) September 18, 2019
The repo market should be the most secure in finance because 1) you expect banks to know how much cash they need for 12 hrs or so
3) This issue involves the ghosts 👻 of 2008, when banks were so freaked out about which one of them might suddenly collapse that they stopped lending to each other. Banks not lending to each other is VERY BAD.
— Heidi N. Moore (@moorehn) September 18, 2019
The overnight lending market is a big part of that.
— Heidi N. Moore (@moorehn) September 18, 2019
So when that's shaken, it indicates there's a trust issue somewhere.
Right now, we have no details and no facts about what shook the repo market enough for the Fed to come in and bail it out.
Okay but wait: The Federal Reserve injected $53 billion today and plans to inject another $75 billion into the repo market tomorrow.
— Heidi N. Moore (@moorehn) September 18, 2019
That doesn't mean the market NEEDS $75 billion but it means the Fed REALLY wants to avoid anyone worrying.https://t.co/AEoXHHkUQL
So is this good? Is this bad?
— Heidi N. Moore (@moorehn) September 18, 2019
It's...not great. But it's not a crisis in itself.
This market should be rock solid. It should never need intervention. So any intervention is concerning. But also, things seem under control; the Fed offered $75bn and only $53bn was used.
The Fed may also update us on the unusual spike in borrowing costs between US banks this week.
As explained earlier, this ‘repo’ rate is the cost of borrowing from another bank until the next day, in return for various collateral. It should be a) seamless, b) inexpensive, and c) boring. But it was none of those things yesterday, when the repo rate spiked to 10%.
This prompted the Fed to run two multi-billion dollar liquidity auctions, to make sure banks can get the cash they need.
It’s probably just a temporary glitch in the underlying money markets, rather than a sign of a serious problem that is making banks nervous.
Goldman Sachs (who have lived through a few proper crises) isn’t worried....
GOLDMAN: "We do not believe that this widening in repurchase spreads is a precursor to a period of financial market stress – it appears to be driven by technical factors, rather than diminishing investor confidence in the market, as we saw in 2008 .."#Repo
— Carl Quintanilla (@carlquintanilla) September 18, 2019
Fed decision: a preamble
Tension is building in the markets, with less than 30 minutes until the Federal Reserve releases its latest decision on US interest rates.
Investors widely expect the Fed to cut its headline funds rate to 1.75%, having lowered it to 2% back in July.
But they also expect the Fed to keep cutting in the months ahead -- and Fed chair Jerome Powell could dampen those expectations today. He insisted that July’s cut was an “insurance move”, rather than the start of a deep cutting cycle.
As this chart from BNY Mellon shows, the markets expect rates to be cut more rapidly than Fed policymakers -- so at least one of them is wrong :)
BNY Mellon’s John Velis explains:
Market expectations see slightly more than one additional cut after this one before year-end, and nearly 100 bps in collective cuts by the end of 2020 (although they had been even more dovish a week ago).
As such, there is a risk that absent a strong signal that the Fed is clearly at the beginning of a sustained easing cycle, we could see some disappointment.
The Fed decision is released at 2pm in New York, or 7pm London time, followed by a press conference 30 minutes later.
Britain’s FTSE 100 has ended the day down 6 points, at 7,314.
That’s two subdued day’s trading in a row (yesterday the Footsie only lost a single point). City investors want to hear what Fed chair Jerome Powell says at his press conference in just over two hour’s time.
Summary
Time for a recap
- UK house prices are now rising at their slowest pace since 2012. The average price only rose by 0.7% year-on-year in July, with prices falling in London, the South East of England, the East and the North East.
- Britain’s inflation rate has also dropped, by more than expected. CPI rose by 1.7% in the year to August, down from 2.1% in July, taking it back below the Bank of England’s 2% target.
- This means real wages are continuing to rise faster than prices. Cheaper computer games, and a smaller-than-usual rise in clothing costs, kept inflation low.
- The oil price has dropped below $64, as the diplomatic response to last weekend’s attack on Saudi Arabia’s crude production facilities gathers pace. Donald Trump has announced new sanctions will be imposed on Iran, as secretary of state Mike Pompeo flies to the region for talks.
- The pound weakened this morning, as EU officials warned that there is a “palpable” risk of a no-deal Brexit.
- World stock markets are calm, as investors await tonight’s Federal Reserve meeting. The Fed is likely to cut borrowing costs for the second time this summer, to 1.75%. We’ll find out at 7pm UK time, or 2pm in New York #staytuned
Updated
Newsflash: Britain’s Bapla trades union has just called off a pilot strike at British Airways, scheduled for next Friday.
Shares in BA’s parent company, IAG, have just jumped - up 1% today, having been down 1%.
The strike was called as part of a row over pay and benefits at BA.
Balpa says it reserves the right to call fresh strikes, if BA’s management doesn’t hold “meaningful new negotiations”.
Balpa says a strike planned by British Airways pilots on 27 September in a dispute over pay has been called off
— Sky News Breaking (@SkyNewsBreak) September 18, 2019
FexEx plunges after profits warning
Ouch! Over in New York, shares in courier and shipping company FedEx have slumped by 13% after it issued a profits warning.
FedEx slashed its outlook for the current financial year last night after missing profit forecast for the last quarter.
It made $745m, or $2.84 a share, in the last three months, compared with $835m, or $3.10 a share, a year ago.
Chief executive Frederick W. Smith pinned some of the blame on Donald Trump’s trade war with China, saying:
“Our performance continues to be negatively impacted by a weakening global macro environment driven by increasing trade tensions and policy uncertainty.”
FedEx has also suffered from losing Amazon as a client this summer.
Fedex is down 14% since Deutsche first published this chart in July.$FDXpic.twitter.com/fPt2gpe4AL
— Carl Quintanilla (@carlquintanilla) September 18, 2019
Trump announces new sanctions on Iran
Just in: President Donald Trump has announced he is imposing new sanctions on Iran - but it’s not clear what that will mean in practice.
Trump also repeated his claim that America is energy independent (although this has only been true in certain months):
I have just instructed the Secretary of the Treasury to substantially increase Sanctions on the country of Iran!
— Donald J. Trump (@realDonaldTrump) September 18, 2019
So nice that our Country is now Energy Independent. The USA is in better shape than ever before. Strongest Military by far, biggest Economy (no longer even close), number one in Energy! MAGA = KAG!
— Donald J. Trump (@realDonaldTrump) September 18, 2019
Interestingly, the oil price has fallen since Trump’s tweet. Brent crude is down one dollar, at $63.90.
Traders may be calculating that
a) There’s much more that America can sanction. Washington is already blocking Iranian oil sales, targeting its “energy, shipping and shipbuilding, and financial sectors”, and sanctioning more than 100 individuals.
b) If America is using sanctions, then it’s not dropping bombs. We’re not at Churchill’s “jaw-jaw” phase, as Trump and Rouhani have no plans to meet, but’s not “war-war” either.
#OOTT slides after Trump tweet on sanctions pic.twitter.com/R5gxKsKdch
— Neil Wilson (@marketsneil) September 18, 2019
Today’s fall in inflation can’t come soon enough for families struggling through the aftermath of the financial crisis.
A fresh report from the New Economics Foundation today shows that average living standards are still below their levels in 2008.
NEF’s head of economics, Alfie Sterling, says:
Official statistics suggest average livings standards returned to 2008 levels in 2015. But when calculated to reflect the true costs of living, NEF analysis has shown that a combination of the depth of financial crisis, austerity and the vote to leave the EU has meant that average living standards are in fact still yet to recover pre-recession levels – by around 1.6% or £128 per head.
Outside of Westminster and Whitehall, it’s little wonder most people care more about not having shared in the last recovery, than they do about the chances of the next recession.
Here’s our full report on NEF’s findings:
NEF has also shown how the slump in the pound after the 2016 referendum has pushed consumer prices up (in blue), ahead of output prices (the orange line)
The drop in UK house price inflation will be welcome news to those hoping to get on to the property ladder, but it’s still a stretch.
Although wages are now outpacing house price growth, affordability is still a huge issue – not least in London, as the Resolution Foundation explains here:
But despite the slowdown in house price growth – and a welcome pick up in earnings growth – the gap between growth in house prices and earnings since 2011 remains huge. pic.twitter.com/vsSxZEndaP
— ResolutionFoundation (@resfoundation) September 18, 2019
But across London, pay growth has only just started outpacing house price growth. The bigger picture is that since early 2011 house prices have increased six times faster than earnings in the capital. Home ownership in London remains far out of reach for many families. pic.twitter.com/dM038RRUkD
— ResolutionFoundation (@resfoundation) September 18, 2019
Updated
UK car dealer slashes 300 jobs as Brexit looms
What does Brexit uncertainty mean in practice?
If you’re Britain’s biggest car dealer, it means nervous customers, falling sales, and job cuts.
Pendragon has announced that it plans to close 22 of its 34 Car Store branches and a preparation centre in Stoke with the loss of about 300 jobs.
This will drive the company deep into the red. It has reported a £131m loss for the first half of 2019, mainly due to cost of slashing used car prices, and expects to make a bigger-than-expected loss for the full year.
It says:
The heightened political and Brexit uncertainty, as to both outcome and timing, is adversely affecting customer confidence. We are not anticipating any improvement in this for the rest of our financial year.
Obviously it’s tempting to blame Brexit when things go wrong. But in Pendragon’s case, its auditors agree! KPMG says:
Brexit is one of the most significant economic events for the UK, and at the date of this report its effects are subject to unprecedented levels of uncertainty of outcomes …
An interim review cannot be expected to predict the unknowable factors or all possible future implications for a company and this is particularly the case in relation to Brexit.
Updated
Despite the slowdown in the south, English house prices are significantly higher than the rest of the UK.
Here’s the details from the ONS:
- Wales: prices up 4.2% year on year; average house price now £165,000.
- Scotland: prices up 1.4% year-on-year; average house price now £154,000.
- England: prices up 0.3% year-on-year; average house price now £249,000.
- Northern Ireland: prices up 3.5%; average house price now £137,000
- UK: prices up 0.7%; average house price now £233,000
Share in UK building firms have been knocked by the slowdown in house price growth.
Persimmon, Britain’s second-biggest house-builder, are the biggest faller on the FTSE 100 - down 2%. Taylor Wimpey has lost 2.1%, while Barratt is 1.5% lighter. Their profits will suffer if prices continue to fall in the lucrative London and South-East region.
Jean-Claude Juncker’s warning of a “palpable” risk of a no-deal Brexit is also weighing on UK-focused companies.
We now know that UK wages are rising more than twice as fast as inflation.
Last week’s labour market report showed total pay (including bonuses) has jumped by 4.0% in the last year. Basic pay rose by 3.8%.
Marina Mensah-Afoakwah, senior economist at the CEBR, says:
The figures mean more good news for households following last week’s wage data.
In the three months to July, UK workers saw their average weekly earnings (including bonuses) increase by 4.0%, the highest growth rate in 11 years. With year-on-year CPIH inflation at 1.7% real wages are set to continue growing, boosting households’ spending power.
The economist and Conservative party councillor Olive Cooper agrees:
Average UK wages are now rising:
— Oliver Cooper (@OliverCooper) September 18, 2019
🛒 2.5 times as fast as the cost of living
🏠 3 times as fast as average private rents
🏘 6 times as fast as house prices
It’s been a long, long time since living standards have risen as quickly as they’re rising now.
Updated
Core inflation, which strips out volatile items, also fell to a near three-year low.
It’s now just 1.5%, down from 1.9% in July, confirming that inflationary pressures weakened over the summer.
This is from the Resolution Foundation:
Despite this potential for rising inflation in the future, low inflation now is helping boost real wages – and provide welcome increases in households’ incomes. pic.twitter.com/F7PPPAPhun
— ResolutionFoundation (@resfoundation) September 18, 2019
The NIESR thinktank have crunched through today’s inflation data, and concluded that Brexit uncertainty is holding prices down.
Jason Lennard, NIESR’s senior economist, explains:
Consumer price inflation was lower than expected at 1.7 per cent in the year to August 2019. Our analysis of 130,000 goods and services included in the basket suggests that fewer firms raised prices than is typical for this time of year.
Firms are probably waiting to see beyond 31 October before adjusting prices. The slowing of inflation was widespread, falling in 10 of the 12 regions of the United Kingdom with the biggest drops in Northern Ireland and Wales.
According to #CPI data out today. #inflation fell by 0.4 pp to 1.7%. Our #analysis suggests the slowing of inflation was widespread across the country, driven by fewer firms increasing prices. - read @jason_lennard 's take in full:https://t.co/AI6WIS0VBl
— NIESR (@NIESRorg) September 18, 2019
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Inflation falls: what the experts say
The drop in UK inflation to 1.7% last month is clearly good news for consumer, says Ian Stewart, chief economist at Deloitte:
Sharply lower inflation is great news for the UK economy. Along with soaring earnings, low inflation boosts consumer spending power just when the economy needs it.
Falling inflation gives the Bank of England more headroom to loosen monetary policy. Corporate investment and manufacturing are weakening, and consumers need to keep consuming to keep UK growth going - lower inflation will help them do just that.
But...Yael Selfin, Chief Economist at KPMG UK, fears it could show the economy is weakening:
The falling inflation rate could be an early signal of a cooling economy, in line with what we have seen in the US and the Euro Area, with the rate of price inflation falling across both goods from 1.7% to 1.3% and services, from 2.5% to 2.2%, showing the wide-ranging effects of the slowdown.
“Recent falls in the value of the pound and the spike in oil prices over the weekend should boost the headline rate in the coming months, with higher prices for fuel and for imported goods putting pressure on households’ purchasing power and business margins, and further curtailing demand.
PwC economist Jing Teow points out that the recent fall in the pound, and rising tensions in the Middle East, could push inflation up again
Today’s inflation data show that consumer price inflation has fallen to 1.7% in August, driven by lower prices overall for recreational goods, and clothing and footwear. These figures, combined with the fastest wage growth in many years, delivers a substantial boost to UK households’ spending power that will help to support the economy.
However, there remain a number of short-term risks to inflation, particularly from external supply shocks. The recent disruption to Saudi oil supplies could manifest as higher energy costs with knock-on impacts on non-oil sectors and UK households if they persist. This, combined with recent sterling weakness in August, could contribute to higher input costs and imported inflation. There is also the possibility that additional supply side shocks could materialise from a no deal Brexit, which could result in higher tariffs and supply disruptions, thus exerting further upward pressure on the price of consumer goods.
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Wales is bucking the UK housing slowdown, with prices up a punchy 4.2%:
Four regions of the UK seeing average house price falls in July. N. East had the biggest fall (-2.9%y/y), with London, the S. East & the East also seeing average prices drop. Wales at the top of the table with 4.2%y/y. pic.twitter.com/DPBum5JPPZ
— Rupert Seggins (@Rupert_Seggins) September 18, 2019
House prices fall in FOUR English regions
Across England, house prices are now falling in nearly half of all regions.
The average house prices fell in London, South East England, the East of England and the South East in July, compared to July 2018, the ONS reports.
It’s a sign that economic and political uncertainty is putting people off from moving house.
However, they did rise strongly in Yorkshire and the North West, helping to close the North-South divide.
Overall, prices are now rising at their lowest rate in almost seven years, up just 0.7% year-on-year.
The ONS says:
Average house prices in the UK increased by 0.7% in the year to July 2019, down from 1.4% in June 2019. This is the lowest annual rate since September 2012, when it was 0.4%.
Over the past three years, there has been a general slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England.
The lowest annual growth was in the North East, where prices fell by 2.9% over the year to July 2019. This was followed by the South East, where prices fell by 2.0% over the year.
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The drop in inflation last month, to a 32-month low, is welcome news for consumers, says economist Howard Archer of the EY Item Club.
He points out that wage growth hit 4% in July, meaning real wages are rising, adding:
Improved consumer purchasing power is particularly welcome news for an economy currently struggling markedly amid major Brexit, domestic political and global economic uncertainties – consumers have been the most resilient sector of the economy and their purchasing power will be critical to whether this resilience can continue.
The bad news for households is that food and drink prices jumped last month.
The ONS explains that food and drink prices rose by 0.5% in August alone, compared with July, adding:
Food and non-alcoholic beverage prices rose by more between July and August 2019 than between the same two months of 2018.
The effects were relatively small from all categories within this heading, with the largest upward ones coming from bread and cereals (from products such as dried potted snacks, breakfast cereal and packs of individual cakes), and meat (principally cooked ham).
Mike Hardie, head of inflation at the Office for National Statistics, explains:
The inflation rate has fallen noticeably into August, to its lowest since late 2016.
“This was mainly driven by a decrease in computer game prices, plus clothing prices rising by less than last year after the end of the summer sales.
The drop in inflation, from 2.1% to 1.7%, is the biggest fall since late 2014, points out Reuters.
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Why inflation fell
This chart shows how UK inflation was dragged down by recreation and clothing costs last month, to just 1.7%.
The ONS says:
Recreation and culture: the largest effect came from games, toys and hobbies (particularly computer games including downloads), with prices overall falling by 5.0% between July and August 2019 compared with a smaller fall of 0.1% between the same two months a year ago.
Clothing: where prices rose by 1.8% this year compared with a larger rise of 3.1% a year ago. The main effect came from clothing, particularly children’s clothing.
UK inflation falls to lowest since 2016
Newsflash: Britain’s inflation rate has fallen to its lowest level since December 2016.
The consumer prices index rose by 1.7% year-on-year in August, the Office for National Statistics says. That’s down from 2.1% in July, and weaker than expected.
Computer game and clothing prices helped to pull inflation down, the ONS says.
More to follow!
Pound falls after no-deal Brexit warning
The pound is under pressure this morning, after top EU officials warned that a no-deal Brexit is a serious risk.
Outgoing European president Jean-Claude Juncker told the European Parliament there was a “palpable” risk that Britain crashes out of the European Union without a deal.
The EU’s top negotiator, Michel Barnier, also warned not to underestimate the consequences of no-deal.
He told MEPs that key issues such as the divorce payment, the Irish border, and citizens rights wouldn’t suddenly vanish.
I advise everyone not to underestimate the consequences, clearly for the United Kingdom first of all but also for us, of the absence of a deal.
If the United Kingdom leaves without a deal, I want to remind you that all these questions will not just disappear.
He also took a swipe at London for not providing concrete proposals to break the deadlock, saying:
Some three years after the Brexit referendum we should not be pretending to negotiate.”
This knocked the pound down by a third of a cent, to $1.246.
"The risk of a no deal [#Brexit] remains real," warns @JunckerEU at the European Parliament, though he believes it's still possible to avoid.
— Teri Schultz (@terischultz) September 18, 2019
However, Juncker says until @BorisJohnson offers feasible alternatives to the Irish backstop (as requested), there's "no real progress." pic.twitter.com/8O0NwBagPL
The pound, following Juncker’s “palpable” comment pic.twitter.com/G3raFS9kBp
— Nikos Chrysoloras (@nchrysoloras) September 18, 2019
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Oil steady as Pompeo flies in
Attention oil traders: The US secretary of state is heading to Saudi Arabia, as America plans its response to last week’s oil attacks.
Mike Pompeo is due to meet Saudi crown prince Mohammed bin Salman today, followed by Abu Dhabi’s Sheikh Mohammed bin Zayed Al Nahyan on Thursday.
Both countries are US allies in the Saudi-led coalition in Yemen (where war and humanitarian disaster have been raging for several years).
In another development, Saudi Arabia says it has joined a US-led coalition to secure the Mideast’s waterways, after the seizure of several oil tankers.
After two very volatile days, oil is currently calm as a mill pond – with Brent crude down $0.01 at $64.54 (having hit almost $72 on Monday).
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The UK government is often criticised for taking laissez faire approach to takeovers.
But not today. In a rare move, business secretary Andrea Leadsom has intervened in the £4bn takeover of UK defence and aerospace firm Cobham.
Leadsom fears the deal, by a US private equity firm, could endanger national security. More here:
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Why the US repo rate is a big deal
The US repo market is effectively an obscure part of the financial system’s plumbing... which started making alarming clanking noises yesterday.
Reuters has written a handy explanation to this overnight lending market between banks:
The system typically hums along with the interest rate charged on repo deals hovering close to the Fed’s benchmark overnight rate, currently set in a range of 2.00% to 2.25%. That rate is expected to be cut by a quarter percentage point on Wednesday.
But sometimes, investors get fearful of lending, as seen during the global credit crisis, or at other times there are just not enough reserves or cash in the system to lend out, as appeared to be the case this week. And that can cause a squeeze on the market and send borrowing costs zooming higher.
But when investors get fearful of lending, as seen during the global credit crisis, or when there are just not enough reserves or cash in the system to lend out, it sends the repo rate soaring above the Fed Funds rate [to 10% yesterday].
Everything you need to know about the repo market but were too afraid/couldn’t be bothered to ask...https://t.co/ejjnfgtusn
— Peter Hoskins (@PeterHoskinsTV) September 18, 2019
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It’s never good to see banks short of cash.
But yesterday, the cost of overnight borrowing spiked alarmingly, in a sign that financial institutions were struggling to get their hands on dollars.
This overnight ‘repo rate’ briefly hit 10% – an extremely worrying sign – before falling back after the Federal Reserve raced to inject more money into the system.
US overnight repo rate jumps to 10%, highest in years. pic.twitter.com/axRT1hRLGq
— Jamie McGeever (@ReutersJamie) September 17, 2019
The FT explains:
Repos are vital to the financial system because they give companies access to cash overnight using US Treasuries as collateral.
Ashish Shah, co-chief investment officer for fixed income at Goldman Sachs Asset Management, described the abrupt tightening of the US money market as a “big deal”.
Similar spikes were during the financial crisis in 2008, when investors panicked that some banks could be in serious financial trouble (as many were!).
Yesterday’s move seems to be due to a temporary lack of dollars, as banks settle tax bills or pay for recent bond purchases.
But still, it’s not a great sign, so the Fed could announce further measure to support liquidity later today.
Dramatic moves in the money mkt that led to US Central bank shunting $53bn into the system on Tue show that the unexpected can still occur, even in an era of tight bank regulation & relative fin stability. It looked like banks were suddenly short of cash. https://t.co/Dcnof1GlgJ pic.twitter.com/6noMgEgAlZ
— Holger Zschaepitz (@Schuldensuehner) September 18, 2019
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The agenda: Fed rate decision and UK inflation report
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Two issues dominate the City today – August’s UK inflation data, and a likely US interest rate cut.
Following a heavy barrage of criticism from president Trump, the Federal Reserve seems certain to cut interest rates at the end of its policy meeting today. This would be the second rate cut in under two month.
The Fed will probably lower borrowing costs by a quarter-point, from 2% to 1.75%. It could cite the global slowdown, the impact of the trade war with China, Brexit, and even the latest geopolitical uncertainty in the Middle East.
But it’s a difficult decision. Some US economic data has weakened recently – the factory PMI went into contraction last month for the first time in a decade.
But other indicators, such as retail sales, look strong -- so the Fed may dampen expectations of further rate cuts soon.
Trump has already savaged the Fed – calling them “boneheads” for not lowering interest rates faster. On Monday he claimed that America’s top central bankers “don’t have a clue” – which I’m sure went down well at the Fed....
...The United States, because of the Federal Reserve, is paying a MUCH higher Interest Rate than other competing countries. They can’t believe how lucky they are that Jay Powell & the Fed don’t have a clue. And now, on top of it all, the Oil hit. Big Interest Rate Drop, Stimulus!
— Donald J. Trump (@realDonaldTrump) September 16, 2019
Before the Fed fireworks, we find out how the cost of living changed in Britain last month.
Economists predict that Britain’s inflation rate probably dropped below the government’s 2% target in August, bringing some relief to households. That would mean real wages are still growing.
However, the recent slump in the pound to a three-year low is likely to push inflation higher in the coming months.
The Office for National Statistics will also release new UK house price data, which is likely to confirm that fears of a no-deal Brexit are hitting the economy.
It’s possible that house price inflation has hit a new seven year low. Last month, we learned that prices were rising at the weakest rate since 2012, with prices falling in London, the South East and the South West.
Investors will also be eyeing events in the Gulf. The markets are calmer, after Saudi Arabia said yesterday that its oil supplies would be fully restored by the end of September.
Brent crude has fallen back to $64.50, so still some way above the $60/barrel levels last week, before the weekend attack on its production facilities. Any sign of military action against Iran could surely push prices higher again.
The agenda
- 9.30am BST: UK inflation data for August. CPI expected to drop to +1.9%, from +2.1%
- 9.30am BST: UK house prices for July. Annual price rises expected to fall to +0.6%, from 0.9%
- 3.30pm BST: US weekly oil inventories
- 7pm BST: US Federal Reserve interest rate decision
- 7.30pm BST: Fed chair Jerome Powell’s press conference
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