- UK public finances better than expected….
- ….but factory order growth disappoints
- Dollar slips after Trump lashes Federal Reserve
- Greece at the beginning of a new era – Tsipras
The dollar is still in the doldrums after President Trump hit out at the Federal Reserve for raising interest rates.
The dollar index against a basket of six other currencies is down 0.37% at 95.54, having earlier touched a near two week low of 95.4.
Over in Greece the government is heralding a new era free from the fiscal oversight of foreign creditors as the debt-stricken country marks its first few hours of post-bailout existence.
In a symbolic gesture Prime minister Alexis Tsipras has flown to the island of Ithaka to hail what he described as “a historic day … a day of redemption.”
Slightly less good news for the UK economy from the manufacturing sector.
Growth in factory orders slipped to a three month low in August, according to the Confederation of British Industry. Its industrial trends survey showed a balance of +7, down from +11 in July and below the +9 expected. CBI economist Anna Leach said:
Manufacturing growth remains strong, supported by the lower level of sterling and strong global economy. But risks to that growth remain high in light of international trade tensions and the uncertainty caused by Brexit.
Firms will be keen to see urgent progress on the Withdrawal Agreement to lock in transition, which is crucial to continuing frictionless trade as the UK leaves the EU.
Here’s our report on the public sector finances:
Britain has recorded the biggest July budget surplus since the millennium, giving a boost to Philip Hammond as he considers ways to pay for greater NHS spending in the autumn budget.
The Office for National Statistics said public sector net borrowing, excluding the state-owned banks, went into surplus for July by £2bn, meaning the government received more in tax income than was spent on public services.
Unsurprisingly, Labour is not impressed with the better than expected budget surplus. Shadow chancellor John McDonnell said:
The Chancellor has passed on the deficit to his colleagues in other departments: record NHS deficits, schools begging parents for money for essentials, and a growing social care crisis.
Hard pressed families and underpaid public sector workers have been made to pay for the price of Tory failure on the economy, with brutal cuts to social provision and relentless pay restraint.
The better than expected public finance figures should give chancellor Philip Hammond some room to manoeuvre in the autumn budget, said Ruth Gregory, senior UK economist at Capital Economics:
If the reduction in borrowing is sustained, public sector net borrowing excluding the banks would undershoot the Office for Budget Responsibility’s 2018/19 forecast by £13bn or so.
Admittedly, an undershoot of this magnitude is unlikely. The recent improvement has been partly due to temporary factors, such as the timing of gilt issuance and redemptions. And self-assessment tax receipts – which were the highest July level since records began in 1999 – can shift between July and August.
The long hot summer also brought some sunshine for the Chancellor, with the public finances £2bn in surplus in July, the largest such July budget surplus for 18 years. That was not just before the financial crisis, but actually before Gordon Brown started spending the war chest he built up in the late 1990s…
Although it is still early days in the current financial year, the latest data point to public borrowing coming in some way below the OBR’s £37.1bn forecast for 2018/19 as a whole. In addition, this year’s structural budget deficit should be comfortably below the Chancellor’s 2% of GDP target for 2020.
The continued growth throughout July is in line with projected forecasts for 2018. However, when the government comes back from the summer in September there will be a lot to do. The publication of the 2018 Fiscal Sustainability Report by the Office from Budget Responsibility has made clear that the public sector finances are not sustainable over the long run and with interest rates rising the prospect for the government being able to meet its obligations does not appear promising. Alongside this, there is economic uncertainty and increasing pressure on the Government to strike a deal with the EU over the ever looming exit.
The UK state is like a just about managing household, struggling to pay the rising bills for public services and with nothing put by for emergencies. The Chancellor must start focusing more on the long-term to ensure that public sector finances are put on a sustainable footing.
Here is the Treasury response to the latest UK data:
We have made great progress repairing the public finances.
Thanks to the hard work of the British people, government borrowing is down by three quarters and debt is due to begin its first sustained fall in a generation.
Public borrowing in the first four months of this yr has been 40% lower than in 17/18. Even stripping out volatile interest payments and EU contributions, deficit 25% lower.
Upshot: Chancellor will be able to run neutral fiscal policy in 2019 and 2020 and still meet his targets pic.twitter.com/e4p9gP0P9x
UK Public Finances: Borrowing (PSNB ex) in current financial year-to-date was £12.8 billion: £8.5 billion less than in the same period in 2017; lowest year-to-date for 16 years (2002) https://t.co/I314qlS342 pic.twitter.com/Cg3y6ZERiA
UK Public Finances: Borrowing (PSNB ex) in July 2018 was £2.0 billion in surplus; a £1.0 billion larger surplus than in July 2017; largest July surplus for 18 years (2000) https://t.co/wVw9WsAVfn pic.twitter.com/3NRYCBmh3d
The UK public finances have come in better than expected in July, the government has announced.
The budget surplus last month came in at £2bn, the best July figure since 2000 and nearly double the £1.1bn figure expected by economists. The improvement was driven by large tax receipts and takes the deficit for the first four months of the financial year to £12.8bn, down 40% on the same time last year.
But could that change? Paul Donovan at UBS says:
Markets have not particularly liked US President Trump’s comments, seeing them as a threat to the independence of the central bank. The Fed’s independence has little legal standing. It is independent by custom more than by statute. There is a shocking lack of economists amongst the voting members of the FOMC at the moment, and a high number of vacancies.
Kit Juckes at Societe Generale says Trump has less influence over his country’s central bank than Erdogan does:
[Trump] would like easier monetary policy, or at least, he would not like to see interest rates marching higher to offset the boost to the economy from his fiscal and trade policies. His liking for low rates is something he has in common with Turkey’s President Erdogan, possibly because at heart, both are in the real estate business. The difference, of course, is that President Erdogan can influence monetary policy, because the [Turkish central bank] is clearly not independent; whereas President Trump can feel let down by Fed under Chair Powell, but he can’t do much about it.
Back with Trump and his comments on the Fed, Michael Hewson, chief market analyst at CMC Markets UK, said:
Two months before he was elected President of the United States in September 2016, Donald Trump said Fed chair Janet Yellen should be “ashamed of herself” for keeping interest rates low and creating a “false stock market” saying that the central bank’s policies were hurting savers and pension plans.
It therefore seems rather strange that he should now be criticising the current incumbent, and his choice as Fed chair for not keeping rates low, and pushing rates higher.
If anything the President’s comments in driving down the US dollar could well make it easier for the Fed to hike rates, as they could mitigate the upside in the US dollar, as a strong currency tends to have a deflationary effect.
In any case, even before yesterday’s comments by the President, there was already a debate going on in the markets, as to the wisdom of the Fed going too quickly where rates are concerned. The crisis in emerging markets, concerns about trade, as well as geopolitics, were causing some to question as to whether the Fed should look at revising its guidance.
The latest UK grocery market share figures are out:
Kantar Grocery Market Share Update 21/08/2018 pic.twitter.com/71uZLqGjxW
The grocery market experienced strong growth buoyed in particular by the recent heatwave. Over July, thirsty Brits spent an additional £67 million on alcoholic drinks, while non-alcoholic beers were cheered on by the sun with sales up 58% compared to this time last year. Soft drinks also increased – up 28%. Meanwhile, Love Island not only tugged on shoppers’ heartstrings but also their purse strings as men’s skincare products jumped by 16%.
As expected, there is a caution tone to early trading in Europe.
The FTSE 100 opened down 0.2%, Germany’s Dax has dipped 0.1%, France’s Cac is 0.2% lower and Spain’s Ibex is off 0.1%.
With the FTSE 100 expected to open lower, Artjom Hatsaturjants at Accendo Markets, said:
Calls for a negative open come in spite of upbeat trading on Wall St and in Asia, where markets were hopeful for an easing in Sino-US trade tensions, and after China’s banking regulator called for local banks to increase infrastructure lending amid a slight pullback of Chinese economy.
Most of the FTSE negativity is generated by dollar losses after President Trump criticised the Fed Chair Powell’s interest-rate hiking policy in an interview with Reuters. The Fed is independent in setting monetary policy and markets were spooked by yet another comment from Donald Trump criticising higher interest rates (his property magnate background seeping through?).
European markets are expected to edge lower when trading begins shortly:
European equities … are still underperforming their US counterparts. The currency crisis is still hanging over Turkey, as the revelation that S&P and Moody’s downgraded the nation’s debt rating got traders wondering if individual Turkish banks could be in line to be downgraded next. Should that be the case, that could be the catalyst for a move lower in the euro and or eurozone banks. President Trump will keep his tough stance against Turkey, and won’t make any concessions for the release of US pastor Andrew Brunson, and this is likely to keep pressure on Turkey too.
Moody’s will carry out their review of Italy’s debt rating by October. In the grand scheme of things, Italy has the potential to be a much bigger problem for the eurozone than Turkey. The European Central Bank can only buy investment grade bonds for their stimulus package, and should Italian debt be classified as ‘junk’, it could spark a sell-off in Italian government debt, and in turn drive up their borrowing costs.
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Kicking out a well respected central banker and replacing them with your own appointee should guarantee an easy ride for the newcomer, you would have thought. But these days we live in Trump world and Jerome Powell, the president’s choice to chair the Federal Reserve as a replacement for Janet Yellen, got it in the neck from the White House on Monday.
I’m not thrilled with his raising of interest rates, no, I’m not thrilled.
We’re negotiating very powerfully and strongly with other nations [on trade]. We’re going to win. But during this period of time I should be given some help by the Fed. The other countries are accommodated.
Trump could be sowing the seed for market perception problems later down the line. For example, should the stronger dollar result in weaker economic data moving towards December and the Fed decides not to hike. The market could question whether the Fed opted not to hike on the basis of data or to appease Trump? So, whilst Trump will not influence the path of rate hikes, his comments could impact on market’s perception of what is happening, which is an equally dangerous game to be playing.
Link : UK records biggest July budget surplus since 2000 – business live