A quick recap
- Britain’s budget deficit has widened, giving Britain’s next prime minister a headache before they even get to work.
The UK had to borrow £7.2bn in June to cover the gap between spending and tax receipts, more than expected and more than twice as much as in June 2018.
- Economists fear that Britain could miss its borrowing targets for the current financial year.
- Donald Trump has renewed the pressure on the US Federal Reserve to cut interest rates this month. The US president blasted ‘faulty’ thinking at the Fed, and urged it to cut borrowing costs.
- Hopes of an imminent US rate cut helped to drive the gold price to a six-year high today. An ounce of bullion hit $1,450 for the first time since 2013, with rising tensions in the Middle East also boosting demand for the metal.
- Motoring groups have warned that UK drivers face an expensive summer, after petrol prices hit their highest for any July in five years.
- Stocks have fallen in Italy, on fears that Rome’s government could be on the brink of collapse.
US consumers don’t appear to share Donald Trump’s concerns about interest rates.
The University of Michigan’s monthly survey of consumer sentiment has shown a small increase, to 98.4 from 98.2 last month. That’s close to a 10-year high.
Americans reported that they were more optimistic about their financial prospects — perhaps thanks to recent stock market gains, and hopes of a US-China trade war deal.
What does Donald Trump mean when he says he preferred New York Fed President John Williams’ “first statement much better than his second”?
Well, Williams caused excitement yesterday when he outlined the virtue of pro-active, early, interest rate cuts – rather than waiting for problems to develop.
By comparing a rate cut to a vaccination jab sparked excitement among investors, and speculation that he could be backing a large cut to borrowing costs.
But this prompted the New York Fed to issue a clarification to its leaders’ speech, insisting that he wasn’t trying to guide the market (to Trump’s obvious disappointment).
“This was an academic speech on 20 years of research. It was not about potential policy actions at the upcoming FOMC meeting.”
Trump attacks Federal Reserve (again)
Another day, another attack on the US central bank from the White House.
Central bank independence looks ancient history, as president Trump argues that US interest rates should be a LOT lower.
Retail news: a private equity firm has bought a controlling stake in department store Liberty London, in a deal valuing the landmark at £300m.
We mentioned this morning that gold has hit a six-year high, but it’s actually an EIGHT year high once you priced it in sterling rather than dollars.
That’s because of the pound’s recent weakness following the EU referendum.
Adrian Ash, director of research at online and mobile-app trading platform BullionVault, explains:
“Rising debt and falling interest rates are conspiring with the UK’s Brexit mess to push down Sterling as gold sets multi-year highs.
“The last and only other time gold traded this high for UK savers was summer 2011, when the global financial crisis peaked with the near-collapse of the Euro and the worst rioting across England in modern times.”
Shares in Microsoft have hit a record high, after it reported strong revenue growth from cloud computing services and its Surface laptop business.
Over in New York, stocks are rising at the start of trading as investors anticipate US interest rate cuts soon.
The Dow Jones industrial average has gained 110 points, or 0.4%, to 27,333, while the S&P 500 has gained 0.35% to 3,005 — close to this week’s record highs.
St. Louis Federal Reserve president James Bullard has boosted stocks, by saying that a 0.25% cut in US interest rates this month would be appropriate.
UK petrol prices hit five-year summer high
As if the weak pound was enough trouble, families are also facing higher petrol costs .
The AA reports that fuel prices hit 128.72p a litre in July, while diesel cost 131.61p on average. That’s the highest for any July in five years.
That will drive up the cost of a UK staycation, if people face a long drive to and from their summer getaway.
Infuriatingly for drivers, wholesale energy costs have actually fallen over the last few months. Brent crude was $75/barrel in April, but just $63/barrel this week.
However, import costs have risen, due to the pound hitting a 27-month low against the US dollar.
The AA’s Luke Bosdet says:
“The tragedy with soaring summer pump prices is not only hard-earned holidaymakers’ money disappearing at the pump but the loss of income for the tourism industry.
“If every car that heads to the South West, Wales, the Lake District, Scotland or other UK holiday destinations pays an extra £7 a tank for fuel compared to two years ago, that is many millions of pounds not being spent in places where a good tourist season is make or break for those communities.”
On the other hand, climate activists might welcome anything that keeps cars off the road – or encourages a move to electric.
Our economics editor, Larry Elliott, says June’s public finances in June show the scale of the challenge facing Boris Johnson or Jeremy Hunt:
In what analysts called a “reality check” for the two Conservative prime ministerial contenders, the Office for National Statistics said the government needed to borrow £7.2bn last month – more than double the £3.3bn in the same month a year ago.
Higher spending and lower tax receipts were responsible for the highest June deficit – the gap between government income and spending – in four years, amid signs that the economic slowdown is starting to feed through into the public finances.
Hunt and Johnson have promised big cuts in corporate and personal taxes while campaigning to succeed Theresa May, prompting a warning from the independent Office for Budget Responsibility on Thursday that there was no fiscal “free lunch”. The OBR warned that the contenders’ proposals were uncosted and would be likely to raise government borrowing by tens of billions of pounds.
2019 has been a strong year for stock markets so far, with Wall Street up 20%, Britain’s FTSE 100 gaining 11% and China’s CSI 300 rallying by 17%.
But we’re now entering the summer lull, and analysts are wondering if a correction is close.
Mike Wilson, chief investment officer of Morgan Stanley, believes stocks could soon shed 10% of their value in the next few months, telling Marketwatch:
“We’re not looking for the bottom to fallout like last year, but I do expect a 10% correction in the next three months,”
He argues that earnings estimates are too frothy, and may come down over the summer – very plausible, if the world economy loses momentum.
It also appears that a US interest rate cut is rather ‘priced in’ to valuations, so traders could take profits when it actually happens.
“We think there’s still some unfinished business and it’s not going to be scary, but it will be a better opportunity to buy stocks over the next three to six months, and maybe 18 months. We tell people don’t chase break outs when everyone is getting excited.”
Over in Milan, stocks are sliding as investor worry that Italy’s coalition government could collapse.
Tensions have been growing for weeks between the right-wing League party, and the anti-establishment Movement Five Star. Now, League leader Matteo Salvini (Italy’s deputy PM) has criticised his coalition partners, revealing he will meet M5S’s Luigi Di Maio soon.
Salvini is unhappy that M5S are blocking certain government policies, saying:
“We will certainly meet … the problem is not Di Maio, but opposition coming from many 5-Star politicians.
“There is an obvious and total block on proposals, initiatives, projects and infrastructure by some 5-Star ministers that hurts Italy.
Salvini’s attacks on migration, and his decision to block migrant rescue ships from docking at Italian ports, have also angered M5S politicians.
Opinions poll show that the League are leading the polls — which might encourage Salvani to push for an election….
Italy’s FTSE MIB has lost 1% today, with bank shares down 2.5%.
Here’s our news story on how gold had been boosted by tensions in the Gulf, and the prospect of interest rate cuts:
The jump in UK borrowing casts a shadow over the coronation of the next Conservative Party leader next week.
Howard Archer of the EY Item Club says the swelling deficit is “hardly the best backdrop” to the race to Downing Street.
Both Boris Johnson and Jeremy Hunt have made expensive pledges in their battle for votes (which chancellor Philip Hammond say are impossible under a no-deal Brexit….)
Disappointing news on the public finances to greet the new Prime Minister and Chancellor when they shortly take office with the June shortfall on the budget deficit more than doubling year-on-year.
Furthermore June meant that the public finances have seen year-on-year deterioration through the first three months of fiscal year 2019/20.
Archer adds that it’s too early to say definitively whether the UK will hit, or miss, it’s budget target this year.
Much will depend on whether the economy can shrug off its current weakness as well as on Brexit developments. It will also be influenced by any changes to fiscal policy by the new Prime Minister and Chancellor.
Bloomberg’s Jill Ward points out that the cost of servicing Britain’s national debt rose in June — helping to push the deficit higher.
- Spending including capital investment rose 7.2%, boosted by debt interest costs — higher RPI pushed up payments on inflation-linked bonds — and government outlays on goods and services.
- Receipts rose 1.5%, with dividends and national-insurance contributions driving the increase. Excluding these categories, tax income was virtually unchanged.
A no-deal Brexit crisis would make the UK public finances look even worse, points out Mike Jakeman, senior economist at PwC:
There remains an unusual amount of uncertainty around the short-term future of the public finances at present. A no-deal Brexit would hit both government revenue (through lower tax receipts) and expenditure (through the need for fiscal stimulus package). The government would be likely to have to reconsider its medium-term targets for the deficit and debt.
But even if a no-deal Brexit is avoided, a new chancellor is likely to bring new priorities and, with a spending review on the horizon, could sanction a period of looser fiscal policy.”
Capital Economics: UK public finances are deteriorating
Britain’s public finances appear to be ‘heading off track’, warns Ruth Gregory of Capital Economics.
She says the jump in borrowing last month, from £3.3bn to £7.2nbn, shows that Britain is set to miss its borrowing targets for the 2019-20 financial.
That will leave Boris Johnson or Jeremy Hunt with less wriggle-room to fund some of their campaign promises, such as tax cuts or public sector pay increases — unless they rip up the government’s borrowing targets.
June’s public finance figures continued the underlying deterioration in the fiscal position evident since the beginning of the financial year, providing a timely reminder that the new PM won’t get a free “fiscal lunch”….
There will be further bad news for the new PM in September as a change in the accounting treatment of student loans in September will raise the deficit by more than £10bn a year.
However, this might not stop the new PM from loosening fiscal policy, she adds.
Economist Rupert Seggins shows how government spending has outpaced the tax take this financial year:
John McDonnell MP, Labour’s Shadow Chancellor, is concerned that Britain’s deficit is going up….
“With the Conservatives obsessed with No Deal Brexit and a race to the bottom on taxes, the outlook for our public services after years of austerity is grim.
“Instead of investing to grow they have passed on the deficit to hospitals and local councils, overseeing stagnating wages and productivity.
“Only a Labour Government will deliver the radical transformation that is desperately needed to boost living standards and eliminate in-work poverty.”
June’s budget deficit figures are much worst than expected, points out Helia Ebrahimi of Channel 4.
The rising deficit may limit the next prime minister’s ability to deliver tax cuts or spending increases, unless they’re happy to drive borrowing higher.
The surge in borrowing in June suggests Britain could miss its borrowing targets this financial year.
The UK was expected to borrow £29.3bn in the 2019-20 financial year, up from £23.5bn in the 12 months to March.
Just three months into the financial year, and Britain has already borrowed £17.9bn, compared with £13.5bn at this stage a year ago.
UK budget deficit swells as spending outpaces income
Newsflash: Britain’s budget deficit is rising faster than planned, after the government was forced to borrow more than seven billion pounds last month to balance the books.
That’s the largest deficit for a June in four years, and suggests that the UK’s fiscal position may be weakening ahead of the Brexit vote.
The increase in borrowing was driven by a large jump in public spending.
Total central government expenditure rose by £4.3bn compared with a year ago, while government income (ie from tax receipts) only rose by £800m.
That lifted the deficit by £3.8bn, from £3.2bn in 2018 to £7.2bn in June 2019.
The Office for National Statistics reports:
- Borrowing (public sector net borrowing excluding public sector banks) in June 2019 was £7.2 billion, £3.8 billion more than in June 2018; the highest June borrowing since 2015.
- Borrowing in the current financial year-to-date (April 2019 to June 2019) was £17.9 billion, £4.5 billion more than in the same period last year; the financial year-to-date April 2018 to June 2018 remains the lowest borrowing for that period since 2007.
More to follow….
Iran insists that America has not shot down one of its drones… and is now suggesting that US forces could have downed one of their own!
The deputy foreign minister, Abbas Araqchi, tweeted that he was “worried” that the USS Boxer had accidentally hit one of its own side’s unmanned aerial systems (UAS).
This has taken some of the heat out of the gold price, which has dipped back to $1,440 per ounce.
The oil price has jumped 1% today, after America claimed to have shot down an Iranian drone.
Brent crude has risen to $62.645 per barrel, reversing several day of losses, as investors brace for more skirmishes in the Gulf region.
Cailin Birch, Global analyst at The Economist Intelligence Unit, says they’re right to worry:
“Reports that the US brought down an Iranian drone in the Strait of Hormuz will escalate tensions even further. Iranian officials have thus far taken care not to react to the incident in a way that provoke further conflict; officials’ immediate response was to deny that any Iranian aircraft had been lost. Nonetheless, Iran has made it clear in recent weeks that it rejects any Western presence in the Strait of Hormuz–officials warned the UK to withdraw its ships from the region earlier this month, saying that it could ensure regional security alone. The latest skirmish with the US is likely to put Iran even more on guard.
We still do not expect either party to willingly enter into open conflict; Iran is ill equipped to wage an expensive conflict, and doing so would probably alienate its remaining allies in Europe. The US government will not want to start a deeply unpopular foreign conflict just as the campaign season ramps up for 2020. However, the risk of a policy miscalculation remains high in this heated environment, meaning that more skirmishes are likely in the coming weeks.”
Billionaire investor Ray Dalio has fuelled the gold boom this week, arguing that investors should pile into the precious metal.
In a blogpost, Dalio argued that gold was a sensible asset to invest in, as geopolitical tensions are rising and central bankers are likely to ease monetary policy to ward off a slowdown.
“Those [investments] that will most likely do best will be those that do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold.
Dalio also pointed to the slump in government bond yields, as investors have piled into safe-haven assets such as German debt:
I believe that it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio.”
Gold struck its all-time high back in 2011, after the financial crisis, when it peaked over $1,900.
We’re nowhere near those levels yet, but Fawad Razaqzada, market analyst at Forex.com, suspects bullion will keep rising through 2019.
He cites the weakening US dollar (which pushes up commodity prices) and the fact that bonds provide so little income at present.
The underlying trend is bullish for gold and silver, due to the falling government bond yields and the recent struggles for the dollar and stocks. So, as things stand, these are good times for buck-denominated and noninterest-bearing precious metals.
Stock markets are taking a cue from gold this morning, with gains across the globe.
Japan’s Nikkei has jumped 2%, and China’s CSI 300 index gained 1%, on hope of a US interest rate cut soon.
In London, the FTSE 100 has jumped by 48 points, or 0.6%, to 7,543.
Introduction: Gold is booming
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Gold, that perennial barometer of investor nervousness, has hit a six-year high today.
Bullion jumped through $1,450 per ounce for the first time since May 2013, extending its recent gains.
This means gold has now surged by 25% since last August, a sparkling run that outpaces most other assets.
The rally is being driven by several factors. One is that America’s central bank seems certain to cut interest rates later this month. That would be inflationary — and gold is seen as a store of value in such times.
There’s even chatter that the Federal Reserve could slash borrowing costs by half a percentage point, rather than the typical quarter-point cut.
John Williams, the vice chairman of the Fed’s policy-setting board, raised these rate cut hopes on Thursday when he said policymakers need to be pro-active, rather than waiting for a disaster to unfold.
Comparing monetary policy to vaccination, Williams said:
It’s better to deal with the short-term pain of a shot than to take the risk that they’ll contract a disease later on.”
Gold’s popularity also comes as government bond prices surge to record highs. Many are now trading with negative yields, meaning investors are guaranteed to lose money if they hold the debt until it matures. Gold doesn’t pay a dividend or a coupon, but can still deliver a profit if prices keep rising.
Gold is also popular when geopolitical tensions escalate. The news that America says it has shot down an Iranian drone over the Strait of Hormuz yesterday (which Tehran denies) has worried investors, given recent attacks on oil tankers in the Gulf region.
Nicholas Frappell, global general manager at ABC Bullion, says gold was further lifted by Iran announcing the capture of a foreign oil-smuggling tanker in the Gulf:
“The extra push for gold prices came from comments by NY Fed President John Williams which implied quite aggressive rate-cutting, plus the Iranian drone news and the seizure of a tanker by the Iranians in the Straits of Hormuz.”
More to follow…
Also coming up today
We learn how much Britain borrowed to balance the books last month, plus get a new gauge on American consumer confidence.
- 9.30am BST: UK public finances for June (£3.9bn deficit expected)
- 3pm BST: University of Michigan’s survey of US consumer confidence
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