Closing summary: Stocks drift lower ahead of Fed minutes

While Asian markets rose following five days of declines, stocks in Europe and the US are drifting lower ahead of the minutes of the US Federal Reserve’s last meeting, out at 7pm BST, with chair Jerome Powell holding a press conference shortly after.

UK inflation slowed more than expected to 2% in July from 2.5% in June, the first easing since February, official figures showed today. But economists think this is merely a blip and that inflation will head towards 4% (as forecast by the Bank of England) in coming months.

Eurozone inflation was confirmed at 2.2% in July, the fastest in almost three years, and above the European Central Bank’s 2% target.

Rail fares in England and Wales are on track to rise at their fastest rate in a decade unless ministers decide to prevent steep price increases to encourage commuters back on to trains, writes my colleague Jasper Jolly.

Annual increases in rail fares are usually governed by the July retail prices index (RPI), plus another 1%. The Office for National Statistics (ONS) said on Wednesday that RPI for July was 3.8%, meaning prices could rise by 4.8% in January. That would be the steepest increase since 2012.

UK house prices are rising at their fastest rate in almost 17 years after a dash to beat a stamp duty holiday deadline in England and Northern Ireland pushed the annual rate of property inflation to 13.2% in June.

The American tobacco giant Philip Morris International has moved a step closer to its controversial £1.1bn takeover of British asthma inhaler maker Vectura. It has acquired 22.6% of Vectura in the market, and is looking to buy more shares at 165p apiece as part of its takeover deal.

Shareholders have until 15 September to decide whether to sell their shares to PMI, which has touted its ambitions for a “smoke-free” future but still generates three-quarters of its revenue from cigarettes. PMI needs the backing of holders of over 50% of Vectura shares for the deal to be successful.

Some 35 health groups, public health experts and anti-smoking charities have written to Vectura shareholders (which include BlackRock and Vanguard), urging them to reject the deal, citing the “business risks and the moral conflict of the proposed takeover”.

Australia’s flag carrier Qantas will require all of its employees to be fully vaccinated against Covid-19, as debate about mandatory vaccination in Australian workplaces intensifies.

Thank you very much for reading. We’ll be back tomorrow. cheerio! - JK

Wall Street opens lower

Wall Street has opened lower, further retreating from the record highs set by the Dow Jones and S&P 500 on Monday and last week.

  • Dow Jones down 127 points, or 0.36%, at 35,215
  • S&P 500 down 11 points, or 0.26%, at 4,436
  • Nasdaq down 19 points, or 0.1%, at 14,636

Updated

US housing starts fall 7% in July

The number of US housing starts fell sharply in July, by 7% to 1.5m, following June’s 3.5% increase (revised from 6.3%), according to the latest new residential construction data from the US Census Bureau and the Department of Housing and Urban Development. You can read the full report here.

Building permits rose by 2.6% to 1.6m, following a 5.3% decline in June. The number of houses completed increased 5.6% to 1.4m.

Updated

In the US, mortgage applications fell by 3.9% last week owing to a drop in both refinancing and purchase activity, mostly the former. This comes as the long-term mortgage rate climbs back above 3% for the first time in about a month, noted currency analyst Justin Low at ForexLive.

MBA says:

Mortgage rates followed an overall increase in Treasury yields last week, which started higher from the strong July jobs report before slowing because of weaker consumer sentiment and concerns about rising Covid-19 cases. The eligible pool of homeowners who stand to benefit from a refinance is smaller now.

US MBA mortgage applications w.e. 13 August -3.9% vs +2.8% prior https://t.co/9qyRMhHq9t

— ForexLive (@ForexLive) August 18, 2021

And here’s our full story on UK house prices –

House prices are rising at their fastest rate in almost 17 years after a dash to beat a stamp duty holiday deadline in England and Northern Ireland pushed the annual rate of property inflation to 13.2% in June.

Figures from the Office for National Statistics showed the average house price across the UK increased by £31,000 to £266,000 over the past year – or just over £2,500 a month.

Here’s our analysis of today’s UK inflation figures.

UK house prices rise at fastest rate since 2004

Staying with the inflation theme... while overall UK consumer prices inflation cooled more than expected in July to 2%, house prices picked up in June, the last month before the phasing out of chancellor Rishi Sunak’s stamp duty cut.

According to data from the Office for National Statistics, house prices rose 13.2% in June from a year earlier, the fastest annual rate since 2004. The surge came as buyers sought to beat the deadline for the stamp duty cut.

Lucy Pendleton, property expert at the estate agents James Pendleton, says:

Prices went berserk as the stamp duty taper closed in. The pace of growth set in the North West is frankly astonishing. This is the last time this year, or even in our lifetimes, that you’ll see growth spurts like this in response to government support.

Needless to say, as soon as July arrived we entered a very different market, and some of this exuberance will have to unwind. London is probably most protected from that eventuality. Prices are still approximately double the national average in London but the capital hasn’t had its running shoes on like the rest of the country.

London remains the dark horse of the property market. It’s much harder to predict where it will go over the remainder of the year, though demand is certainly broadening out. The rental market is once again on fire, demand is spreading to a greater range of property types as the race for space fades and even the supercars are back in Knightsbridge.

These new trends have been forming ever since the country had unlocking in its sights. The capital could well turn the tables on the rest of the country over the next 12 months.

Updated

Eurozone inflation confirmed at 2.2%, above ECB target

Eurozone inflation picked up to 2.2% in July from 1.9% in June – marking the highest annual rate in nearly three years, above the European Central Bank’s 2% target, final data released by the EU’s statistics office showed this morning. It confirmed an earlier estimate.

The ECB is predicting further increases in inflation in the coming months, but sees this as largely temporary.

Underlying price pressures remain muted, with a core measure of inflation that strips out volatile food and fuel rising at an annual rate of 0.9%, the same as in June. This is also the same as the earlier reading.

More Australian news... Wage growth remained sluggish even before the Delta outbreak, while the fear of job losses still looms, according to two new economic reports painting a less than rosy view of the Australian economy, writes Amy Remeikis, Guardian Australia’s political reporter.

The latest data from the Australian Bureau of Statistics shows wage growth fell to 0.4% in the June quarter, down from 0.6% in the proceeding two quarters, while public sector wages were growing at their slowest pace in 24 years.

The FTSE 100 index is now down 0.37%. Mining giant BHP is the biggest loser on the blue-chip index, down 3.9%, after it confirmed yesterday that will exit the FTSE and move its main listing to Australia as part of a bigger corporate overhaul.

Russ Mould, investment director at the stockbroker AJ Bell, says:

The FTSE 100 started Wednesday modestly lower as UK inflation eased back more than anticipate. This is good news for those fretting about rising prices but potentially raises some questions about the strength of the UK economic recovery.

Mining firm BHP proved to be a drag on the index after confirmation yesterday that its corporate restructuring would mean an exit from the FTSE 100 as the primary listing for the shares goes to Australia.

This move will mean products which track the FTSE 100 and funds with investment policies barring them from buying shares with their main listing overseas will have to exit their shareholding.

The turmoil in Afghanistan and continuing threat posed by the Delta variant of Covid is seeing funds flow into the dollar – a traditional safe haven – with Chinese and US equities both falling overnight.

Philip Morris acquires 22.6% stake in Vectura

Returning to the controversial £1.1bn takeover of British asthma inhaler maker Vectura by the American tobacco giant Philip Morris International: PMI has acquired 22.6% of Vectura in the market, and is looking to buy more shares at 165p apiece as part of its takeover deal.

Vectura shares are currently trading at 164.8p.

Shareholders have until 15 September to decide whether to sell their shares to PMI, which has touted its ambitions for a “smoke-free” future but still generates three-quarters of its revenue from cigarettes. There is no vote on the takeover; and PMI needs the backing of holders of over 50% of Vectura shares for the deal to be successful.

The company’s main shareholders are a series of American investment funds, including BlackRock and Vanguard. The largest investor, with a 6.7% stake, has been Brown Capital Management, a Baltimore firm with $18bn (£13bn) assets under management. Started in the 1980s by Eddie Brown, it is one of the oldest African American-founded asset management companies in the US.

It is not clear at the moment which investors have sold shares to PMI.

Some 35 health groups, public health experts and anti-smoking charities have written to Vectura shareholders urging them to reject the deal, citing the “business risks and the moral conflict of the proposed takeover”.

Updated

European shares move into the red on Covid worries

Europe’s major stock indices have all moved into the red, as investors worry about rising Covid cases around the world.

  • UK’s FTSE 100 index down 0.2% at 7,167
  • Germany’s Dax down 0.17% at 15,894
  • France’s CAC down 0.26% at 6,802
  • Italy’s FTSE MiB flat at 26,210

New Zealand prime minister Jacinda Ardern warned of more cases to come, as the country went into another national lockdown. Its coronavirus cluster has grown to 10, with genomic sequencing linking it to the Delta outbreak that began in Sydney. You can read more on our Covid live blog:

Also in Australia, environmentalist groups have flagged concerns over mining group BHP’s dumping of oil and gas fields onto Woodside Petroleum.

Woodside Petroleum has not given a guarantee it will pay for billions of dollars in decommissioning and remediation costs linked to a portfolio of oil and gas fields it has agreed to take over from BHP, write my Australian colleagues Ben Butler and Royce Kurmelovs.

Green groups say Woodside lacks credibility in paying for clean-ups after selling a floating rig, Northern Endeavour, for a nominal amount to a company that collapsed three years later without paying decommissioning costs estimated at between $200m and $1bn. Woodside has claimed the sale was reviewed by regulators and approved.

“We are committed to working with the Australian government and our industry peers to collaboratively develop and improve the decommissioning framework so that it strengthens protections for the environment, taxpayers, the government and industry.”

Australia’s flag carrier Qantas will require all of its employees to be fully vaccinated against Covid-19, as debate about mandatory vaccination in Australian workplaces intensifies.

By 15 November, all frontline employees, including cabin crew, pilots and airport workers, will need to be fully vaccinated. All remaining employees will have until 31 March 2022 to get vaccinated.

Here’s our story from last night on Nando’s temporary restaurant closures:

Peri-peri chicken wings have become the latest casualty of Covid-related upheaval in the food industry, with a shortage of chicken forcing Nando’s to temporarily close a 10th of its restaurants, writes our consumer affairs correspondent Zoe Wood.

The chain blamed the need to shutter outlets on staffing issues at its suppliers’ factories as well as the shortage of HGV lorry drivers that has resulted in gaps on supermarket shelves in recent weeks.

Updated

In other news, shareholders in the UK asthma inhaler maker Vectura have been urged to reject a £1.1bn takeover by the tobacco company Philip Morris International (PMI), in an open letter signed by 35 health charities, public health experts and doctors from around the world.

Investors in the Wiltshire-based respiratory medicine specialist have until 15 September to decide whether to sell their shares to PMI, which has touted its ambitions for a “smoke-free” future but still derives 75% of its revenue from cigarettes, writes my colleague Rob Davies.

Vectura’s board members have already recommended that investors accept the offer, which surpassed an earlier £958m bid from US private equity group Carlyle, pointing to PMI’s ability to fund research and development.

Here is our full story on inflation:

Kevin Brown, savings specialist at Scottish Friendly, is also not impressed:

The misery of rising costs is heavily compounded for rail commuters today. It is scandalous that rail fares are set by such an outdated measure. Those who rely on trains to get to work – many of which are now being told to return to the office – now face bumper rises in costs.

Many will have been able to forgo a season ticket during the pandemic, even perhaps putting away some much-needed savings instead. That so many office workers are now set to return to ‘normal’ though, and the high costs that entails, could be a huge blow in financial terms. The pandemic had an unexpected positive impact on many people’s savings as they were able to stay home and save more. That is now unfortunately at risk of being unwound by the return to normal.

Rail fares could rocket by 4.8% next year

A separate inflation measure released by the ONS, the retail prices index, showed a 3.8% rise – nearly double that of the annual increase in the consumer prices index. The RPI measure serves as a basis for increases in rail fares.

This means that season rail fares could rocket by up to 4.8% next year – the biggest increase in a decade.

Passengers were hit with a 2.6% increase on the cost of train travel from 1 March. But fares could rise by another 4.8% next January, if the government continues to use RPI plus 1% as its basis for ticket price increases.

Labour has analysed costs on more than 180 train routes and the projected rises for 2022. It calculated that the average commuter faces is paying £3,295 for their season ticket - £1,101, or 50% more, than in 2010. Average fares have risen nearly three times faster than wages.

Some commuters will be paying over £4,000 more to travel to work than in 2010. The highest increase is projected to be on a season ticket between Birmingham and London Euston which will have risen by £4,016 since 2010 and now costs £12,044.

Jim McMahon MP, Labour’s shadow transport secretary, said:

Rail travel has long been unaffordable for many people, thanks to the Conservatives prioritising the profits of private companies over passengers.

This would be yet another eye-watering hike hot on the heels of the failure of the government’s so-called money saving flexi ticket scheme.

UK inflation
UK inflation Photograph: ONS

Some more reaction to the UK inflation numbers.

Debapratim De, senior economist at Deloitte, says:

June’s inflation figures provide further evidence that supply, of both raw materials and labour, is struggling to keep up with resurgent demand. Central banks in the UK, US and Europe expect supply bottlenecks and inflation to ease next year once the global recovery finds firmer footing and government support schemes are unwound.

With millions still on furlough in the UK and firms operating with greater spare capacity than before the pandemic, price pressures may well be transitory. Policymakers are pricing in a recovery that is just right - with strong growth and temporarily higher inflation. That seems likely. But it is by no means assured.

Martin Beck, senior economic advisor to the EY ITEM Club, says:

CPI inflation slowed from 2.5% in June to 2.0% in July. The ONS attributed almost half of the slowdown to strong base effects caused by a spike in the price of services last year when the economy reopened after the first lockdown. Alongside this, some of the recent price rises in the volatile clothing and recreation and culture categories unwound, suggesting that the pandemic had temporarily altered seasonal pricing patterns. But there was some offset from another significant rise in petrol prices.

July’s data is likely to represent brief respite from the upward movement in inflation rates. August will see base effects push annual inflation up again, with last August having seen both the VAT cut for the hospitality sector and the Eat Out to Help Out scheme. Indeed, it could be possible that the annual CPI rate will rise by as much as one percentage point between July and August.

In addition, inflation is likely to rise further over the remainder of the year due to the partial reversal of the VAT cut, October’s 12% rise in the energy price cap, and the prospect of further upward pressures on global goods prices from component shortages and supply chain challenges. The EY ITEM Club expects the CPI rate to peak at around 3.5% at year-end, but we continue to think the rise will prove transitory and expect inflation to cool as we move through 2022.

European stock markets are just about in positive territory, but pretty flat. The UK’s FTSE 100 is up 6 points at 7,186 while Germany’s Dax is 10 points ahead at 15,932.

Prices for clothes and footwear fell by 2% between June and July, compared with a smaller fall of 0.7% last year. However, the ONS noted that there was less discounting than usual in the summer sales this year, while last year there were big bargains to be had after the first Covid lockdown.

A downward contribution came from restaurant and cafe meals and drinks, where prices rose by less than in 2020. Prices for package holidays are estimated to have fallen slightly this year, compared with a rise a year ago.

Jonathan Athow, ONS deputy national statistician for economic statistics, says:

Inflation fell back in July across a broad range of goods and services, including clothing, which decreased with summer sales returning after the pandemic hit the sector last year. This was offset by a sharp rise in the price of second-hand cars amidst increased demand, following a shortage of new models.

The differing patterns of movement restrictions across the last two years have affected headline inflation. Some of this month’s fall came from products and services, such as foreign travel, where real prices were used last year but have had to be imputed this year.

Separate ONS data for producer prices, measuring the cost of goods leaving factory gates, showed that businesses are being hit by higher fuel and raw material costs, which will at some point feed through to higher prices for consumers. Raw material costs rose by 9.9% in the year to July, up from 9.7% in June, while output prices rose by 4.9%, up from 4.5%.

Updated

Inflation will head higher again after July’s blip, but that’s no reason to panic, says James Smith, developed markets economist at ING.

Despite a temporary setback in July, UK inflation is unlikely to be far off 3% in August and will probably be fairly close to the Bank of England’s 4% forecast by November. But things are likely to calm down into 2022, and we don’t think inflation will be enough of a concern for policymakers to hike interest rates before late next year.

Introduction: UK inflation cools to 2%

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

UK inflation has slowed more sharply than expected in July, with the annual rate falling to 2% from 2.5% in June, the Office for National Statistics said. Economists had pencilled in a rate of 2.3%.

It is the first easing in inflation since February, but economists said the drop is likely to be temporary. Prices were unchanged between June and July, following a monthly gain of 0.4% in June.

The biggest upward pressure came from transport costs, along with price rises for second-hand cars, compared with falls a year ago. The ONS said demand for used cars had risen as the global semiconductor shortage held back the production of new cars, and there are fewer one-year-old cars coming to the market now because of a fall in new car registrations last year.

Clothing and footwear prices fell as usual during the summer sales season, while computer goods such as routers and web cams and software, CDs and computer games also went down in price.

Another downward effect came from 55 items that became available again in July at the end of the first coronavirus lockdown, such as package holidays and various cultural services.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, says:

July’s decline in CPI inflation is attributable to the sharp increase in prices a year ago, when the economy emerged from lockdown and the ONS stopped imputing prices for goods and services that were previously unavailable.

Looking ahead, the headline rate remains on course to rise sharply, though we think the Bank of England’s forecast for a 4.0% average rate in Q4 and Q1 is a bit too high.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) was 2.1% in the 12 months to July 2021.

This was down from 2.4% in the 12 months to June 2021 https://t.co/5trxIDcP4Q pic.twitter.com/Pz516XPWEG

— Office for National Statistics (ONS) (@ONS) August 18, 2021

Prices for raw materials rose 9.9% in the year to July, up from 9.7% in June, the ONS said.

Factory gate inflation (the price of goods when leaving the factory) rose 4.9% in the 12 months to July 2021.

This was up from 4.5% in June 2021 https://t.co/3xmBtIGBEq pic.twitter.com/DZR0RcAkOQ

— Office for National Statistics (ONS) (@ONS) August 18, 2021

.@ONS data out this morning shows inflation fell back in July with CPIH at 2.1% (compared with 2.4% in June).

But this is likely to prove a temporary blip in inflation’s move towards 4% in the coming months.

Short thread to follow… 🧵

— JamesSmithRF (@JamesSmithRF) August 18, 2021

@ONS data shows UK CPI #inflation slipped to 2.0% in July-21, from 2.5% in June - the first easing in inflation since Feb-21

However, this largely reflects base effects (inflation rose rapidly in July-20), rather than a meaningful shift in the recent upward path for inflation. pic.twitter.com/4CX2HwgIya

— Suren Thiru (@Suren_Thiru) August 18, 2021

Despite share declines on Wall Street, Asian markets rose after five days of falls, as traders were cheered by a drop in reported Covid cases in China.

Japan’s Nikkei gained 0.6%, China’s CSI 300 rose 0.7% while Hong Kong’s Hang Seng added 0.67% and South Korea ended an eight-day losing streak with an 0.8% rise. European stocks are set to open slightly higher.

New Zealand’s central bank defied expectations by not raising interest rates as the country headed back into lockdown after its first Covid case in six months.

Later today, the minutes of the US Federal Reserve’s last meeting will be scrutinised for any hints about the upcoming tapering of its massive bond-purchase programme. Yesterday, Fed chair Jerome Powell said that monetary policy has its limits.

The Agenda

  • 10am BST: Eurozone inflation for July (forecast: 2.2%)
  • 12pm BST: US MBA Mortgage applications for week of 13 August
  • 1.30pm BST: US Building permits and housing starts for July
  • 7pm BST: US Federal Reserve minutes

Updated

Contributor

Julia Kollewe

The GuardianTramp

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