Closing post
Time to wrap up.
The Bank of England should be able to cut interest rates “fairly soon”, argues Franklin Templeton’s head of sustainability and European fixed income, David Zahn.
Zahn told Reuters:
The UK economy has continued to disappoint, inflation is coming down quickly and the economy is more responsive to rate hikes, and rate cuts, than Europe or the U.S.”
“Therefore the central bank should be able to cut rates fairly soon, I wouldn’t be shocked if they cut in the next 2-3 months.”
One of the Bank’s hawkish policymakers, Jonathan Haskel, has revealed that his vote to raise interest rates was “finely balanced” (he was outvoted).
Haskel wants more proof that inflation pressures are easing, saying:
“The signs that we’ve seen thus far are encouraging. I don’t think we’ve seen quite enough signs yet.
City traders now expect just three rate cuts in 2024, half as many as back in December.
In the financial markets, Japan’s Nikkei hit a 34-year peak…
..while the US S&P 500 has hit a new alltime high….
..and cocoa prices are at a record high, which will push up chocolate prices.
Saturday is Chinese New Year, and investors will be hoping that the Dragon brings them more luck than the Rabbit.
China’s Shanghai Composite Index finished the Year of the Rabbit with a 12% loss, as shares were hit by worries over China’s economic slowdown, and the crisis in its property sector.
Hong Kong’s Hang Seng index had a worse year, losing almost 29% during the Year of the Rabbit.
Chinese equities underperformed global stock markets in 2023, so shareholders will be hoping for a better 2024 – especially if Beijing rolls out new stimulus measures to help the economy.
Dzmitry Lipski, head of funds research at interactive investor, says:
While there are short-term challenges such as property and geopolitical risk – the threat of conflict with Taiwan is a concern right now - improving fundamentals, strong consumer and technological advancements will be key drivers of the market.
“And as China is increasingly recognised as being a major driver of global growth, investors should consider having exposure to China when building a balanced portfolio. China currently represents nearly 18% of world GDP but less than 3% of world market capitalization, having previously comprised over 5% in late 2020.
“The broad derating of Chinese companies over the past two years means that valuations look attractive, both when compared to historic averages and versus other world indices. Valuations are supported by strong MSIC China consensus earnings estimates of more than 14%.
“For these reasons, the recovery in Chinese equities should continue considering depressed/compelling valuations versus history and other developed markets combined with institutional holdings the lowest in five years, the risk/reward ratio for Chinese equities is favourable.
Updated
The US stock market has hit a new record high today, as investors continue to hope for cuts in interest rates.
A day after hitting the 5,000 point mark for the first time, the S&P 500 index has climbed by 0.25% to 5,010.
The news that US consumer prices rose less than initially estimated in December (see earlier post) supported hopes that the Federal Reserve will lower interest rates this year.
Shares in pharmaceuticals group Moderna have dropped by over 5% today, which is being attribued to a study showing the efficacy of its experimental respiratory syncytial virus (RSV) vaccine falls off over time.
The data shows a vaccine efficacy of about 63% after 8.6 months, from 84% at 3.3 months, a faster drop than some rivals (more details here).
There’s been a tiny tweak to the latest US inflation data.
US consumer prices rose by 0.2% in December instead of 0.3% as reported last month, the latest annual revisions of the CPI data show. But that improvement’s been balanced out by a tweak to November’s data – showing CPI increasing 0.2% rather than 0.1% as previously estimated.
⚠️ US DECEMBER CONSUMER PRICES REVISED LOWER
— PiQ (@PiQSuite) February 9, 2024
Full Story → https://t.co/WWkfERWhoH
Luxury goods maker Hermès has proved immune to the cost of living squeeze, thanks to strong demand for its handbags and fashion offerings.
Hermès has reported a 16% jump in revenues in 2023, with double-digit sales growth of 20% or more in Asia, America and Europe.
Sales of leather goods – such as handbags costing thousands of pounds – were up 17%, while sales in the the ready-to-wear clothes and accessories sector were up 28%.
Axel Dumas, executive chairman of Hermès, said:
“In 2023, Hermès has once again cultivated its singularity and achieved an outstanding performance in all métiers and across all regions against a high base. These solid results reflect the strong desirability of our collections and the commitment and talent of the house’s women and men. I thank them all warmly.
Worries about economic activity, and a stronger dollar, have both knocked the copper price this week.
London-traded copper is on track for its biggest weekly loss since last September, having lost around 3% since Monday morning.
Troubles in the Chinese property sector have hit demand for copper, with China’s drop into deeper deflation suggesting weaker economic demand.
2024-02-09#Copper Futures
— Copper Price Bot (@TheCopperBot) February 9, 2024
Price: $3.70
1 day: $-0.00 (-0.08%) 📉
YTD: -4.30%
5 Year Graph:https://t.co/99bi4zJ712
Judge approves settlement in Woodford fund saga
The long-running saga over the settlement scheme for investors in Neil Woodford’s failed fund has finally reached a conclusion.
A judge has approved a scheme that will return £230m to investors in the fund, after they “voted overwhelmingly” in support of the plan.
The Financial Conduct Authority says:
We are pleased that the Court has decided to approve the scheme. We understand that LFS [Link Fund Solutions] expect to start making payments to scheme creditors as soon as possible, if there is no appeal of the Judge’s decision.
Investors voted overwhelmingly in support of the scheme. The small minority have now had their representations fully considered by a judge, who did not agree with their arguments.
Some investors and law firms had argued that £1bn should have been paid to Woodford investors.
The FCA had previously ruled that the Fund’s administrator, Link Fund Solutions, had made “critical mistakes and errors” managing Woodford equity investment fund, particularly in ensuring it was able to easily repay customers who might want to withdraw their investments.
Link was responsible for monitoring and supervising the investments executed by Woodford before the fund failed in October 2019, leaving hundreds of thousands of pensioners and small investors nursing big losses.
Workers at Asda’s Gosport store in Hampshire walked out on strike for 48 hours on Thursday night in what’s thought to be the first ever industrial action at one of the group’s supermarkets.
The GMB union said workers had voted to strike after rejecting a company offer relating to wage errors and health and safety concerns . Asda has said the majority of staff at the site will continue as normal.
Franklin Templeton's Zahn: BoE could cut rates fairly soon
Franklin Templeton’s head of sustainability and European fixed income, David Zahn, argues that the Bank of England should be able to cut interest rates in the next few months.
Zahn told Reuters:
“The UK economy has continued to disappoint, inflation is coming down quickly and the economy is more responsive to rate hikes, and rate cuts, than Europe or the U.S.”
“Therefore the central bank should be able to cut rates fairly soon, I wouldn’t be shocked if they cut in the next 2-3 months.”
The money markets currently predict the first rate cut will come by June this year.
The Bank has left interest rates on hold at 5.25% since last summer. As flagged at 10.36am, the markets now only expect three cuts this year – not the six that were priced in at the end of 2023.
That change has come amid a wider market repricing, after stronger-than-expected economic data out of America has undermined hopes that the US Federal Reserve would cut rates soon.
As flagged in the intro, two Bank of England policymakers wanted to raise UK interest rates last week.
One, Jonathan Haskel, has said that he wants to see more signs that UK inflation is persistently falling to the Bank’s 2% target before changing his vote.
Updated
Just three rate cuts expected in 2024
It’s notable that the City has dialled back its expectations for the number of UK interest rate cuts this year, even as the Bank of England has indicated that rates have peaked.
The money markets now indicate UK rates will be cut three times this year, from 5.25% to 4.5% by the end of 2024.
At the end of last year, some analysts thought we’d see six quarter-point rate cuts, bringing Bank Rate down to 3.75%.
Last week, the BoE said there had been “good news” on inflation, but it wants more confidence that price rises will slow.
Last Friday, the City expected four cuts this year, bringing Bank Rate down to 4.25%. But the money markets have adjusted this week.
Updated
Professor Costas Milas, of University of Liverpool’s management school, has analysed how geopolitical risks and oil prices have influenced UK monetary policy over the decades, through higher inflation and lower output.
He tells us:
MPC member Haskel is (arguably) ‘partly’ correct to wait until further evidence shows that inflation risks are waning.
My colleague, Mike Ellington and I assess just that. We look at the impact of geopolitical risks on the UK economy. We find that geopolitical risks and higher oil prices depress UK output and that oil prices lift UK inflation. So, there is a ‘subtle’ tradeoff between higher inflation and lower output in making interest rate decisions.
Crucially [see chart below], higher inflation raises public dissatisfaction with the BoE. However, the Bank’s policymakers ‘have not lost their nerve’. That is, public dissatisfaction does not sway the MPC’s decision on the level of interest rates which is really a positive:
Here’s the full blog:
Do geopolitical risks influence UK monetary policy?
UK mortgage rates have inched a little higher today, data provider Moneyfacts reports.
They say:
The average 2-year fixed residential mortgage rate today is 5.59%. This is up from an average rate of 5.58% on the previous working day.
The average 5-year fixed residential mortgage rate today is 5.23%. This is up from an average rate of 5.22% on the previous working day.
Tesco to sell bulk of banking business to Barclays
Tesco has struck a deal to sell the bulk of its banking business to Barclays for £700m in a deal that will include the transfer of about 2,800 staff to the bank.
Britain’s biggest supermarket group has agreed to sell its credit card, loans and savings operations to Barclays but will retain profitable elements of Tesco Bank, including its insurance, ATM, travel money and gift card operations.
Tesco will receive £600m in proceeds from Barclays followed by a further £100m in net cash once regulatory and other costs associated with the transaction are settled.
Under the terms of a wider 10-year exclusive agreement, Barclays will sell Tesco-branded banking products and services, as well as utilising the Tesco Clubcard scheme. In return, Tesco will receive £50m in annual income from royalty, new account and Clubcard participation fees.
Japan’s Nikkei hits 34-year high
Elsewhere the financial markets, Japan’s Nikkei share index has hit a new 34-year high today, and is closing in on its alltime peak.
The Nikkei rose over the 37,000-point line for the first time in 34 years today, putting the all-time peak of 38,916 points set in December 1989 in sight.
The Nikkei has gained 10% so far this year, helped by expectations that the Bank of Japan will maintain its ultra-accommodative monetary policies.
Japan’s Nikkei Scales Fresh 34-Year High
— TRADING ECONOMICS (@tEconomics) February 9, 2024
The Nikkei 225 Index jumped 1% to above 37,000 on Friday, scaling its highest levels in 34 years as strong corporate earnings, a weakening yen and a dovish outlook on Bank of Ja...
More here: https://t.co/FyutRFryAk pic.twitter.com/Qco0U4yUwG
Richard Hunter, head of markets at interactive investor, explains:
In Japan, the Nikkei again tested highs not seen since 1990, encouraged by comments from the Bank of Japan suggesting that the current easy monetary policy is likely to largely remain in place.
In addition, the region has seen an influx of overseas investors who have chosen to flee Chinese markets in light of the country’s ongoing economic woes.
Unlike Western central banks, who have raised borrowing costs over the last two years, the BoJ still operates negative interest rates to spur demand.
Yesterday, BOJ deputy governor Shinichi Uchida said it was hard to see Japan raising its policy rate continuously and rapidly even after negative interest rates end, which provided reassurance to markets. That pushed down the yen, which helps Japanese exporters.
Earlier today, IMF deputy managing director Gita Gopinath said the BoJ should move slowly when it decides to start raising rates.
That high in 1989 was followed by an almighty crash, as Japan’s absurdly high share and property price unwound.
Updated
Cocoa price at record highs
Bad weather in West Africa have driven cocoa prices to record highs this week
Benchmark London cocoa futures hit a record £4,670 a metric ton yesterday, up over 7% – and have more than doubled since the start of last year.
West Africa is home to three quarters of the world’s production, but its cocoa crop has been hit by strong Harmattan winds – very dry and strong winds which blow from the Sahara region towards the West of Africa.
Global cocoa prices hit fresh record highs as traders continued to scramble for supplies, predicting ever wider deficits this season and with concerns growing for the next
— Reuters Business (@ReutersBiz) February 9, 2024
Read more: https://t.co/v0cdNVyXMK pic.twitter.com/pIoUipRSL2
Last night, chocolate maker Hershey warned that ‘historic’ cocoa inflation could push prices higher.
Hershey’s CEO Michele Buck told analysts:
“We can’t talk about future pricing [but] given where cocoa prices are, we will be using every tool in our toolbox, including pricing, as a way to manage the business.”
Updated
Housebuilder Bellway: Reservations up as mortgage rates fall
UK housebuilder Bellway has reported that falling mortgate rates has spurred demand.
It told the City this morning that reservations in January were higher than a year ago:
The reduction in mortgage interest rates throughout the first half has led to encouraging levels of customer enquiries in the traditionally quieter winter trading period, and an improvement in the private reservation rate during January to 0.59 per outlet per week (January 2023 - 0.45).
Bellway also reported a 28% drop in housing completions in the six months to the end of January, to 4,092 homes. This knocked its revenues down to £1.25bn, from £1.8bn a year earlier.
The company says it is on track to build 7,500 homes this financial year (to the end of July), down from almost 11,000 in the 12 months to 31 July 2023, adding:
The economic outlook has improved through the period, although the Board is mindful of future risks to customer demand and cost inflation, particularly from ongoing geopolitical tensions. Against this backdrop, we will retain a clear focus on maintaining balance sheet resilience.
Rising energy prices risk complicating the Bank of England’s journey towards cutting interest rates.
The price of Brent crude has climbed from $77.33 a barrel last Friday night to $81.50 this morning, in a week in which Israel rejected the terms of a ceasefire in Gaza proposed by Hamas, insisting victory was “within reach”
January’s UK inflation report, due next Wednesday, will influence how soon the Bank of England might start to cut interest rates.
The annual consumer prices index is expected to have risen slightly last month, reports Sanjay Raja, Deutsche Bank’s chief UK economist:
After headline inflation surprised to the upside in December, we expect a further – albeit marginal – jump in inflationary pressure. Headline CPI in January will likely start the year at 4.1% y-o-y, lifted in large part by positive base effects. Core CPI, we think, will settle at 5.0% y-o-y – dragged lower by core goods inflation. And we see services CPI inching higher to 6.6% y-o-y. For RPI, we see headline inflation staying put at 5.1% y-o-y.
Risks to our forecast? Tilted to the upside. Indeed, weight changes for CPI will add another layer of complexity to our inflation projections. And given volatile moves in catering, travel, and package holidays in general, we could see services prices come in a little stronger than our baseline projections.
Jonathan Haskel also pointed out that the UK has suffered a series of shocks since he joined the BoE in 2018:
“I guess the second thing is ... it’s been a turbulent six years and a lot of ups and downs and Brexit, (the pandemic), Liz Truss and all that kind of thing. I’ve got to say the economy, in some ways, has been amazingly resilient.
“Relative to that magnitude of shocks, we’ve navigated our way through all of this.”
Introduction: Bank of England's Haskel wants more evidence that inflation risks are waning
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
A week on from leaving UK interest rates on hold, Bank of England policymakers have been scrambling to explain their votes, and hint what might make them change their mind.
And this morning Jonathan Haskel, one of two Monetary Policy Committee members who voted to raise rates last week, has said he wants to seee more evidence that inflationary pressures are cooling.
In an interview with Reuters, Haskel says:
“The signs that we’ve seen thus far are encouraging. I don’t think we’ve seen quite enough signs yet.
But if we accumulate more evidence on persistence, then by the very logic I’ve just set out, I’d be happy to change my vote.”
"The signs that we've seen thus far are encouraging. I don't think we've seen quite enough signs yet.” Exclusive: BoE's Haskel wants more evidence that inflation risks are waning before changing rates stance. @david_milliken @haskelecon https://t.co/0mQNQEkIEl
— william schomberg (@BillReuters) February 9, 2024
Haskel revealed that his vote last week, to raise interest rates to 5.25%, was “finely balanced” – perhaps a sign that he could soften his position, if inflation pressures softened first.
But he insisted it was right to worry about inflation becoming embedded, telling Reuters:
“I’m not going to apologise for banging on about persistence because I think we’re right to.”
The BoE left rates on hold at 5.25% in a rare three-way split, with six policymakers voting for no change, and one – Swati Dhingra – pushing for a cut.
Haskel’s fellow hawk, Catherine Mann, revealed yesterday that her vote was “finely balanced” , but also cited risks of “continued inflation momentum and embedded persistence”.
Mann also warned that attacks on cargo ships in the Red Sea could create an “upward inflation shock”, driving up goods prices – and meaning services inflation – notoriously sticky – would need to fall further before rates should fall.
But high interest rates suppresses activity and slows the economy. Earlier this week, Dhingra argued that weak consumer spending and declining inflation means the Bank should have cut rates last week.
The Bank forecast that inflation will drop to its 2% target this spring, down from 4% in December, but will rise again later this year.
The City expects at least three interest rate cuts this year, bringing Bank rate down to 4.5% by the end of 2024.
The agenda
7am GMT: German inflation report for January
9am GMT: Italian industrial production report for December
4pm GMT: Russia’s GDP report for December
