Closing post
Time for a recap.
Pressure is building on the US central bank to cut interest rates next month, following comments from several Federal Reserve officials.
Mary Daly, San Francisco Federal Reserve Bank president, got the ball rolling by telling the Financial Times that it is time to consider adjusting borrowing costs.
She told the Financial Times that it was “prudent” to take a gradual approach to monetary policy, adding that the labor market, while slowing, was “not weak.”
Daly explained:
“After the first quarter of this year, inflation has just been making gradual progress towards 2%.
We are not there yet, but it’s clearly giving me more confidence that we are on our way to price stability.”
Minneapolis Fed president Neel Kashkari weighed in too, saying it was appropriate to consider a rate cut in September as “The balance of risks has shifted”.
Speaking to the Wall Street Journal, Kashkari cited the weak US jobs report for July, saying:
“I’m still unclear how tight policy is, but the balance of risks in my view have shifted more towards the labor market and away from the inflation side of our dual mandate.”
The U.S. Federal Reserve will cut interest rates by 25 basis points at each of the remaining three meetings of 2024, one more reduction than predicted last month, according to a slim majority of economists polled by Reuters.
Goldman Sachs has cut the odds of a US recession in the next 12 months, from 25% to 20%, due to recent stronger data.
Elsewhere today…
The tech entrepreneur Mike Lynch is among those missing after a superyacht with 22 people onboard sank off the coast of Sicily during a violent storm
Cosmetics company Estée Lauder has reported a 2% drop in sales in the last financial year, due to weak demand in China.
Gold is trading near a record high, having hit $2,500/ounce for the first time on Friday.
The housebuilder Barratt is pushing ahead with its £2.5bn takeover of rival Redrow this week despite concerns raised by the government’s competition watchdog.
Shares in European defence companies have dropped following a report that Germany will not agreed to more military aid to Ukraine.
Energy bills across Great Britain could rise by 9% from October to an average of £1,714 a year for the typical household’s gas and electricity, according to forecasts.
Updated
Over in Washington DC, Federal Reserve governor Christopher Waller has just opened a workshop on Money, Banking, Payments, and Finance.
However, Waller does not offer any new insights into monetary policy – disappointing those who were hoping for fresh guidance on the interest rate outlook.
When you wait all day for comments from Fed's Waller and he doesn't comment on monetary policy pic.twitter.com/bb0xQSbONK
— Newsquawk (@Newsquawk) August 19, 2024
Instead, Waller points out that broader financial stability issues is very important.
Waller says:
Financial stability vulnerabilities, such as run risk, excessive leverage, and bubbly valuations, could amplify the effect of adverse shocks, potentially resulting in big economic losses and a slowdown in economic activity.
Understanding the mechanisms that allow these vulnerabilities to grow and transmit stress to the rest of the financial system requires rigorous theoretical research and solid micro-foundations
A small majority of economists predict the US Federal Reserve will cut interest rates by 25 basis points at each of the remaining three meetings of 2024, a Reuters poll has found.
That’s one more cut than they expected last month, following the weaker-than-expected July jobs report released at the start of August.
Although some Fed officials have hinted rate cuts are coming, most economists were not expecting a rapid series of rate cuts.
Reuters polled 101 economicss, and 55 – or 54% – predicted the US central bank will cut the federal funds rate by 25 basis points in September, November and December.
The poll was conducted from 14 August until today.
UK tech entrepreneur Mike Lynch ‘missing’ after yacht sinks off Sicily
British tech entrepreneur Mike Lynch is missing after a luxury yacht was struck by a violent storm and sank off the Sicilian capital Palermo today.
The Guardian understands that Lynch, the former chief executive of Autonomy, is among those who are missing.
Four Britons, two Americans and a Canadian person are missing after a superyacht with 22 people onboard sank off the coast of Sicily during bad weather.
Fifteen people were rescued from the 56-metre sailing boat Bayesian by coastguard patrol boats and firefighters, including a one-year-old child.
More here:
Lynch was cleared two months ago of 15 counts of fraud he faced over the $11.1bn purchase of Autonomy by Hewlett-Packard in 2011.
As the head of the Federal Reserve Bank of Minneapolis, Neel Kashkari’s views on monetary policy are significant.
However, he isn’t actually a member of the Federal Open Market Committee this year (the membership operates on rotation) so he won’t vote on monetary policy in 2024.
In his interview with the WSJ, Minneapolis Fed President Neel Kashkari is clear that the rise in the US unemployment rate is nudging him towards considering a cut in interest rates in September.
Kashkari explained that the conversation has shifted because “inflation is making progress and the labor market is showing some concerning signs.”
As he put it it:
“If we were not seeing evidence that the labor market was weakening, if the unemployment rate was still in the 3.7% to 3.8% range, I don’t think I would be even debating, ‘Hey, is now the time to cut rates?’”
More here.
The list of the final 31 Ted Baker stores which are to close this week, putting more than 500 jobs at risk, has been released.
They are located in:
Ashford
Bath
Belfast
Bluewater
Braintree
Brent Cross (London)
Bridgend
Cannock
Cheshire Oaks
Dublin, Grafton Street
Gatwick North
Gatwick South
Glasgow Buchanan Street
Gloucester Quays
Heathrow T2
Heathrow T3
Heathrow T4
Heathrow T5
Kildare
Livingston
Luton
Manchester Shambles
O2 Outlet
Portsmouth
Regent Street (London)
Sheffield
St Pancras (London)
Stansted
Swindon
White City (London)
York
Updated
Estée Lauder sales hit by China weakness
Just in: Cosmetics company Estée Lauder has reported a drop in sales, due to weak demand in China.
Estée Lauder racked up net sales of $15.61bn in the year to 30 June, a decrease of 2% from $15.91 billion in the prior year.
The company says:
Organic net sales decreased 2%, primarily reflecting ongoing softness in overall prestige beauty in mainland China and a decline in Asia travel retail driven by the decrease in the first half of fiscal 2024, reflecting actions taken by the Company and its retailers to reset inventory levels as well as lower conversion.
Pretax profits in the last year dropped by 45%, from $1.397bn to $772m.
For the current financial year, Estée Lauder predicts revenues will be between 1% lower and 2% higher than in the 2024 fiscal year.
Fabrizio Freda, President and CEO says:
“In fiscal 2024’s fourth quarter, we achieved our organic sales outlook and exceeded expectations for profitability, closing a difficult year. Organic sales and adjusted EPS returned to growth in the second half.
“For fiscal 2025, we anticipate continued declines in the prestige beauty segment in China, mainly reflecting persistent weak sentiment among Chinese consumers”.
Estée Lauder has also announced that Freda plans to retire at the end of fiscal year 2025.
WSJ: Fed's Kashkari says it is appropriate to debate September rate cut
Newsflash: A second policymaker at the US Federal Reserve is leaning towards cutting interest rates.
In an intervew with the Wall Street Journal (WSJ), Minneapolis Fed President Neel Kashkari said it was appropriate to debate potentially cutting U.S. interest rates in September. He cited the rising possibility of a weakening labor market.
Kashkari told the WSJ:
“The balance of risks has shifted, so the debate about potentially cutting rates in September is an appropriate one to have.”
That’s another significant intervention, after Fed policymake Mary Daly told the FT it is time to consider adjusting borrowing costs (see opening post).
The Federal Open Market Committee, which sets US interest rates, is next scheduled to meet on 17 and 18 September.
Kashkari’s concerns about a rising possibility that the labor market weakens too much comes after a slowdown in hiring in July.
July’s jobs report also showed that the US unemployment rate rose to 4.3% last month.
That triggered the Sahm Rule, which states that the US economy is in recession when the three-month moving average of the unemployment rate increases by at least 0.5% from its trough over the previous 12 months.
That was why Goldman Sachs hiked the probability of a US recession from 15% to 25% this month. But, they have now cut it back to 20% last weekend (see earlier post), pointing out that retail sales and jobless claims data show no sign of recession.
Sahm herself has argued that the US is not actually in recession, and fears the current rise in the unemployment rate is overstating the recessionary dynamics. The rise in the jobless rate is due to rising worker supply, not just weaker demand, she wrote here.
""The US is not in a recession, despite the Sahm Rule indicator bearing my name saying that it is. That said, the risk of a recession is elevated, strengthening the case for the US Federal Reserve to cut interest rates.""https://t.co/HqsArp0RR8 my @opinion
— Claudia Sahm (@Claudia_Sahm) August 7, 2024
Updated
Demand for gold as a safe-haven asset is being lifted by geopolitical instability, such as the ongoing war in Ukraine and conflicts in the Middle East, says George Khoury, global head of education and research at financial firm CFI.
Khoury adds:
Gold remained at an all-time high, influenced by expectations of a dovish stance from the Federal Reserve and increasing geopolitical tensions in the Middle East.
Traders expect the Federal Reserve to implement a 25-basis-point rate cut in September, as opposed to a more aggressive 50-basis-point cut that was anticipated previously. Although changing expectations could weigh on gold in the short term, the expected direction in interest rates could continue to support gold’s performance.
This outlook has contributed to a decline in US Treasury bond yields, which, in turn, could weaken the US Dollar, benefiting gold prices.
London’s stock market is subdued this morning, after its best week since May.
The FTSE 100 share index has dropped by 4 points, or 0.05%, to 8307 points.
BAE Systems are still the top faller, down 2%, as defence stocks weaken (see earlier post).
But mining companies are rallying, with Glencore up 1.6% and Rio Tinto 1.1% higher.
The number of vacancies across the UK economy has risen in July, for the first month this year.
Job search engine Adzuna has repotred that job vacancies rose “substantially” for the first time in 2024, up +1.1% month-over-month to 862,043.
They add:
Confidence is extending into junior-level hiring with Graduate roles up by +3.7%
In comparison, average advertised salaries increased only slightly, up +0.08% to £38,863
Jobseekers per vacancy climbed to 2.09, making it the most competitive job market since May 2021
With the US dollar weakening, the pound has risen to a one-month high.
Sterling is up 0.2% this morning to $1.2975, the highest since 18 July.
Gold has rallied by over 20% so far this year, as investors have piled into bullion.
Back at the start of January, it traded at around $2,060 per ounce, before climbing to its alltime high over $2,500.
Gold has reached a record high of $2,509.
— Merrion Gold (@MerrionGold) August 19, 2024
That's a 28th record high this year!#Gold $XAU $XAG
Demand for gold remains potent, reports Achilleas Georgolopoulos, investment analyst at XM.com:
The situation in the Israel-Iran-Hamas conflict remains fluid with Iran still expected to make a show of force in response to the recent assassination of Hamas’ political leader. Negotiations for a ceasefire have come to a standstill once again as the US Secretary of State Antony Blinken is visiting the region.
In the meantime, Ukraine’s attempt to reverse the fate of the Russian-Ukraine conflict by mounting an offensive in Russian territories is gathering momentum. However, the possible direct involvement of Belarus and the increased chances of an asymmetric response from the Russian side could potentially scare investors going forward.
Gold near all-time high
The gold price is trading near an alltime high this morning.
Gold hit a record high of $2,509.65/ounce last Friday afternoon. This morning, it’s dipped slightly but still over the $2,500 mark, at $2,503/ounce.
Rising geopolitical tensions have pushed gold higher, explains Susannah Streeter, head of money and markets at Hargreaves Lansdown.
While a lower dollar helps boost demand for the commodity, the uncertain outcome of ongoing conflicts is also pushing up appetite for the safe haven asset.
Ukraine’s incursions into Russia continue, with unknown repercussions, and as negotiations for a ceasefire in the Middle East look set to reach a decisive moment, violence continues to erupt in Gaza and Israel.
The US dollar depreciates once more as the gold price hits a record high above the psychological $2,500 per troy ounce mark as the demand for the precious metal jumped to near the highest level in 14 years in July.https://t.co/e37OC7aEhc
— Arjun Paul (@ArjunP_Official) August 19, 2024
Gold ticked higher in recent days as traders grew more confident that US officials would start lowering interest rates soon.
That would increase the attractiveness of assets, such as gold, which don’t provide interest, and also weakened the dollar.
Kyle Rodda, senior financial market analyst at Capital.com, says:
Gold’s rally was partly a function of the weaker US Dollar. However, its fundamentals remain very strong amidst expectations of US rate cuts, solid central bank demand, and simmering geopolitical risk in the Middle East.
Defence shares drop after report Germany won't approve new aid requests from Ukraine
Shares in European defence companies are dropping in early trading, following a report that Germany will not agreed to more military aid to Ukraine.
BAE Systems are the top faller on the FTSE 100, down 2.8% in London.
German arms manufacturer Rheinmetall are down 3.5%, and sensor specialist Hensoldt - which has supplied Ukraine with several high-performance radars – have dropped 6.4%.
French aerospace and defence company Thales, which has supplied Ukraine with two air defence systems, has lost 1.6%.
Italian aerospace and defence group Leonardo has dropped by 1.7%.
The selloff comes after a report that the German government will stop new military aid to Ukraine as part of the ruling coalition’s plan to reduce spending. The Frankfurter Allgemeine Zeitung (FAZ) reported on Saturday that the German Finance Ministry is not planning to approve additional aid to Ukraine as part of budgetary savings this year.
However, the German Foreign Ministry has reportedly refuted claims that Berlin will not provide Kyiv with assistance next year. Instead, the German Finance Ministry clarified that bilateral assistance to Ukraine will be gradually redirected toward international programs – such as supplying aid from frozen Russian assets.
Updated
UK interest rate cut stimulates housing demand
The Bank of England is already ahead of the Federal Reserve when it comes to cutting interest rates, having lowered bank rate at the start of August.
That rate cut is already revitalising the UK property sector, according to property portal Rightmove.
The number of potential buyers contacting estate agents about homes for sale has jumped by 19%, year-on-year, since 1 August (the day the Bank cut rates), Rightmove says.
Rightmove has now raises its 2024 forecast, and now predicts asking prices will rise 1% this year – previously it expected a 1% fall.
In August, though, asking prices dipped by 1.5% or £5,708 to an average of £367,785.
The housing market proved seasonally sticky in August, average asking prices fell -1.5% since July 2024 but remained up against last year by 0.8%.
— Emma Fildes (@emmafildes) August 19, 2024
Buyers, distracted by the base rate cut, which chipped away at interest rates, broke away from their hols to contact estate agents… pic.twitter.com/dqaA7v7Wx4
Tim Bannister of Rightmove, says:
“The first Bank Rate cut since 2020 has sparked a welcome late summer boost in buyer activity.
While mortgage rates aren’t yet substantially lower since the rate cut, the fact that the long-hoped-for first cut has finally arrived, and mortgage rates are heading downwards, is positive for home-mover sentiment. As the summer holiday season comes to an end, the conditions are there for a more active autumn market.
The reaction from home-movers to what is hopefully only the first of several rate cuts over the next year or two, combined with other positive data and trends, has led us to raise our price prediction for the year. We now expect new seller prices to rise marginally by 1% over the whole of 2024. This is a relatively small revision from our original prediction of a 1% fall in prices over the year, since we didn’t initially forecast anything more drastic than a slight drop in prices this year.”
More here:
Key event
In the financial markets, the US dollar has weakened to a seven-month low this morning.
The dollar index (.DXY) has dropped to the lowest level since early January, as traders digest Mary Daly’s comments about how the Fed should consider rate cuts.
Japan’s yen has jumped by 1.7% against the dollar, knocking the Nikkei stock index down by 1.7% today.
ICYMI the dollar index today is trading at just 1,5% fm it’s nov 2023 lows (100.62) ie its 52 weeks low#DXY pic.twitter.com/xvpjM5ZBnw
— Christian Klein (@clkleinmonaco) August 19, 2024
Energy price cap could rise again in 2025
The energy price cap, which relates to customers across Great Britain (but not Northern Ireland) is adjusted every three months.
Cornwall Insight have also forecaast it will rise by a “further modest” amount in January 2025, on top of the increase forecast for October-December 2024.
However, they add….
…recent tensions in the Russia-Ukraine war could see prices rise further at the start of the new year.
Cornwall points out that gas and electricity wholesale prices have rebounded in the last few months, since hitting 30-month lows in February.
They say:
The rise in wholesale market prices, particularly since the start of August, has been the key driver behind the forecast uptick in bills.
While prices have stabilised somewhat compared to the previous two years, the market has not fully recovered from the energy crisis and the impact of Russia’s invasion of Ukraine. As a result, the market remains highly sensitive to any global events that could disrupt supply. The UK’s reliance on imported energy leaves the country very vulnerable to this global volatility. This is seeing both household and business energy bills forecast to staying far above pre-crisis levels.
Energy price cap tipped to rise 9%
Energy customers across Britain have been warned that the cap on bills will rise this autumn, meaning higher bills for millions over the winter.
Consultancy Cornwall Insight has just released its final forecast for the price cap for October - December 2024 – it predicts it will rise 9% to £1,714 per annum for an average households.
That would be an increase of nearly £150 per year on the curent levels of £1,568 per year set for July-September.
Regulator Ofgem will announce the October cap on Friday (23 August).
The cap is a limit to how much energy firms can charge for each unit of energy, so there’s no restriction to the amount a consumer can actually run up.
Typical gas and electricity bills will rise 9% from 1 October, says @CornwallInsight just in time for Winter and a month before the Winter Fuel Payment would be paid to all pensioners until Chancellor cancelled it for 10 million of them. Official price cap announced Friday.
— Paul Lewis (@paullewismoney) August 19, 2024
Updated
Goldman Sachs lowers odds of US recession to 20% from 25%
What goes up, must come down.
So, just two weeks after raising the odds of a US recession, Goldman Sachs has now cut them again.
The Wall Street bank has lowered the chances of the United States slipping into a recession in the next 12 months to 20% from 25%. This follows encouragingly low weekly jobless claims data, and the rise in US retail sales in July.
In a note released last weekend, Goldman Sachs chief U.S. economist Jan Hatzius said:
“We have now shaved our probability from 25% to 20%, mainly because the data for July and early August released since August 2 shows no sign of recession.”
GOLDMAN lowers its recession odds. 🇺🇸
— Carl Quintanilla (@carlquintanilla) August 17, 2024
“After the July jobs report .. we raised our 12-month US recession probability from 15% to 25%. Now, we have moved it back down to 20% because the data .. including retail sales and jobless claims .. shows no sign of recession.” pic.twitter.com/fQcBcJZ4Ju
Goldman lifted the odds of a US recession from 15% to 25% at the start of August, after a slowdown in job creation in July.
Introduction: Fed’s Daly says its time to consider rate cuts
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
It’s time for the US central bank to consider cutting interest rates, one leading policymaker has said.
Mary Daly, president of the San Francisco Federal Reserve, has called for a ‘prudent’ approach to setting borrowing costs. She insists the economy was “not in an urgent place”, and pointed to recent signs that inflation is easing.
Daly told the Financial Times that recent economic data have given her “more confidence” that inflation is under control.
She said:
After the first quarter of this year, inflation has just been making gradual progress towards 2 per cent. We are not there yet, but it’s clearly giving me more confidence that we are on our way to price stability.
FT UK: Fed’s Daly backs gradual rate cuts as ‘confidence’ grows inflation is tamed #TomorrowsPapersToday pic.twitter.com/W2qZJEwWXp
— Neil Henderson (@hendopolis) August 18, 2024
Stock markets tumbled at the start of this month, amid concerns that the Fed had been too slow to start cutting rates. It left the Fed funds rate on hold - at a 5.25%-to-5.5% range – at the end of July, with its next meeting scheduled for September.
Last week, US inflation fell to a three-year low of 2.9%, bringing relief to investors – as did a 1% rise in retail sales in July.
Daly’s comments come ahead of a major gathering of central bank chiefs at Jackson Hole, Wyoming, later this week. Investors will be looking for hints as to how quickly the Fed will lower borrowing costs, to achieve a ‘soft landing’ and avoid recession.
We’ll hear from another Fed policymaker, governor Christopher Waller, this afternoon.
The agenda
9am BST: Spanish trade balance for June
2.15pm BST: Federal Reserve board governor Christopher Waller gives a speech
Updated
