Travel on Britain’s rail network was still more than half its usual levels yesterday - another sign that businesses agree with the Bank of England.

Transport correspondent Gwyn Topham explains:

Three million fewer passengers travelled on Britain’s trains on Tuesday than a year ago, with only a slight increase in commuters rather than the widespread post-Covid return to offices that the government had urged.

Figures from train operators indicated that total journeys were just 38% of the equivalent day in 2019, a proportion that had been steadily increasing over the last two months but is only marginally higher than last week. An average 5 million passengers a day were travelling by rail in late 2019.

Network Rail said footfall in its managed stations, the busiest in London, England and Scotland, was 6% higher than the same day last week but still 60% lower than usual.....

Here’s a video clip of BoE official Alex Brazier explaining why MPs can’t expect a ‘sudden and sharp’ return of office workers to their desk, despite pressure from the government to dial back home working.

Here’s a quick recap of the main points from the Treasury Committee hearing.

The Bank of England has warned MPs that it isn’t possible for all workers to return to their desks yet.

Alex Brazier, the Bank of England’s executive director for Financial Stability Strategy and Risk, told the committee that the return to normality must be gradual - due to health worries, and the challenges of making offices safe.

Brazier explained:

The first is people have a caution about the public health issues. I feel safe coming to work, but I quite understand why many people might not.

Public transport capacity is a related factor there.

It’s not possible to use office space, particularly in central London and dense places like that, with the intensity that we used to use it.

Fellow policymaker Dame Collette Bowe also reminded MPs that it’s very hard for parents to return to work:

That is a major issue for a great many parents. They have to feel that their children are being properly cared for, and that their children’s education is being taken care of.

Deputy governor Dave Ramsden revealed that the Bank staff had run its latest stimulus package from their homes - a sign that central banking has adapted to the pandemic.

Bank of England governor Andrew Bailey told MPs that while consumer spending has picked up, credit card usage in London is weaker than the rest of the country. He also warned that business investment is weak, due to the economic uncertainty caused by the pandemic.

The committee were also warned that the economic scarring caused by Covid-19 could be more serious than the Bank currently forecasts. Commercial property companies, and traditional retailers, are at particular risk.

Incidentally, our main Covid-19 blog is here:

While the Treasury Committee was quizzing the Bank of England, the UK stock market closed higher.

The FTSE 100 index of blue-chip shares ended 78 points higher at 5940, a gain of 1.3%

That’s a recovery from yesterday’s three-month low. Housebuilding stocks led the rally, after this morning’s news that prices have hit a record high and demand has surged.

Paul Craig, portfolio manager at Quilter Investors, hopes the government will heed the Bank of England’s warning that Covid-19 will scar the UK economy.

“The Bank of England has spelled out pretty clearly that this crisis will leave a scar on the UK economy. It expects GDP to be 1.5% lower as a permanent impact but uncertainty still prevails and as such we can’t be sure how exactly the economy is going to respond. Live data points provide some comfort but it is right to remain cautious on how the recovery will play out.

“What is clear is that the economy is going to need to be reshaped in order to recover. A sharp rise in unemployment is expected when the furlough scheme ends, while businesses will increasingly look to automation in order to plug gaps in their workforce and help control costs. As such some sectors and industries could be decimated despite consumption returning to pre-pandemic levels. It is becoming more and more obvious that the government will need to step in with more targeted fiscal support and provide more support for jobseekers.

Reuters have filed a report on the Treasury committee hearing - here’s a flavour:

Bank of England Deputy Governor Dave Ramsden and another interest-rate setter, Gertjan Vlieghe, warned on Wednesday of risks that Britain’s economy could suffer more damage than spelt out by the central bank last month.

Ramsden told lawmakers that the BoE had estimated the level of Britain’s economic output would permanently be about 1.5 percentage points lower than it would have been without the pandemic.

“For me all the risks are really that that number will be greater than 1.5%,” Ramsden said.

Vlieghe said there was “a material risk” that it could take several years for Britain’s economy to return to full capacity after its coronavirus shock.

More here: Bank of England policymakers warn UK economy facing bigger risks

Back on Brexit, Andrew Bailey criticises the EU’s approach to equivalence in financial services regulation.

The BoE governor insists that the UK has submitted all the information sought by the EU, but is concerned that Brussels is still seeing London as a rule-taker, he tells the Treasury Committee.

Bailey adds that ‘equivalence’ between the UK and EU’s financial sectors is worth having, as it would mean open, well-regulate markets. But, it’s not worth having on any terms.

Alex Brazier, director for financial stability, weighs in too - saying that forcing the UK to stick extremely closely to an equivalence regime can undermine financial stability and be inefficient. Given the size of the City, London needs to be able to tweak its rules to prevent damaging problems.

The Treasury Committee are also tweeting some key points, including the Bank’s warning that the return to work will be gradual:

More highlights from the Treasury committee session:

Q: Onto the housing market. Are first time buyers being squeezed out because lenders are demanding high deposits or imposing higher interest rates on them?

MPC Gertjan Vlieghe says that it’s true that the rates offered to those with large deposits, and small ones, have widened recently - back to the levels seen a few years ago.

But lenders are reflecting the higher risk that comes when you lend to people with small deposits, he adds. With the economy weakening and unemployment rising, these high LTV mortgages are riskier, and being priced accordingly.

Q: But the housing market addresses a basic need - should lenders really be prioritising buy-to-let lenders over people trying to get onto the housing ladder?

Vlieghe says that’s an issue of social priorities , not a monetary policy issue.

Governor Andrew Bailey darts down the pitch, saying that the ‘batting average’ of LTV mortgage costs has gone up because some cheaper offers have been withdraw (as we’ve seen with HSBC today).

Q: Will the loans made to small businesses to help them through the crisis have a long-term negative effect on investment?

Bailey says there will be companies who come through the crisis with higher debt levels than they expected.

Some of those firms have quite high cash balances, so will be able to repay those precautionary loans quite quickly, he predicts.

But others may need a ‘delicate’ workout procedure to get debt levels down.

For medium and large companies, that could include ‘equity provision’ (I think he means issuing new shares, eg: though a rights issue, to bring debt down)

Q: So are there zombie companies out there who will have a damaging impact on the economy?

Deputy governor Dave Ramsden says this question has been rumbling since the last financial crisis - is productivity being dragged down by struggling firms who are just keeping afloat thanks to low interest rates?

Some of the firms who have taken on debt this time will not be ‘viable’, he predicts. Policymakers need to develop more targeted measures to support struggling sectors - such as the Eat Out to Help Out scheme.

Q: What does the Bank of England see in business investment?

It is weak, in comparison with consumer spending, governor Andrew Bailey replies.

That’s, sadly, not surprising, he adds -- there is a close relationship between economic certainty and investment.

The pattern is uneven, as well as weak. Some sectors which are faring well in the pandemic, such as online retailing, could see higher investment.

Restaurants, though, are less likely to see investment.

Deputy governor Dave Ramsden weighs in too, saying there is a limit to what the Bank can do to address disruption at the ports after a no-deal Brexit.

But, the Bank can step up the pace of its QE scheme significantly, he adds, if there is financial market disruption [QE means buying government bonds, and some corporate debt, with newly created money].

That could prevent damage feeding from the markets to the real economy, Ramsden adds.

Q: What would the Bank do if the UK economy suffers a no-deal Brexit this winter and a second wave of Covid-19 cases?

Governor Andrew Bailey repeats his earlier point that the impact of a no-deal Brexit all depends how much trade is disrupted. He cites a Bank survey that found 60% of firms thought they were well prepared for Brexit.

Calculating the hit from Covid and a no-deal Brexit is complicated, he points out (they both disrupt trade).

The short-term downside risk from Covid-19 is much bigger than Brexit, though, he adds.

Dame Collette Bowe, an external member of the Bank’s Financial Policy Committee - says there’s another important reason why people haven’t returned to work -- children, and the return to school for the autumn term.

She tells MPs:

That is a major issue for a great many parents. They have to feel that their children are being properly cared for, and that their children’s education is being taken care of.

Onto Brexit, and the risk of a WTO-style no-deal at the end of this year.

Bailey says the key question is how much disruption is caused to trade.

Q: What is the price of gold telling the Bank of England about the economy, and inflation?

MPC member Gertjan Vlieghe swats this question away. It’s a “terrible idea” to look at the nominal price of gold, because you’d expect a perfectly stable asset to hit fresh record highs each month in nominal terms.

The fact it’s at all-time high tells you nothing.

Vlieghe also slams gold as being a “terrible predictor of inflation.” It peaked in the 1980s, which was start of a long decline of inflation

Q: Is the Bank more worried about inflation, or deflation?

Deputy governor Dave Ramsden says disinflationary risks gone up since January.

Q: Do your brakes work faster than your accelerator?

Governor Andrew Bailey says the Bank slammed the accelerator down pretty hard in March (by slashing interest rates to record lows and increasing its QE programme)

More reaction to the payroll report:

Today’s underwhelming ADP Payroll report raises the possibility that Friday’s non-farm payroll (NFP) will miss forecasts.

The government’s own employment report is expected to show that 1.4 million new jobs were created in August. If ADP are right, and there were just 428,000 new private sector hires, then the NFP could fall short.

One proviso, though -- last month the NFP was much stronger than the ADP’s own count of payroll changes (which is odd, as they’re counting the same thing...)

ADP’s payroll report also shows that small US companies created the fewest new jobs last month.

In contrast, large companies had the strongest job gains, with the highest job creation in the leisure and hospitality sector.

Wall Street financier Steven Rattner says this highlights the need for a new US stimulus package to help the economy.

Over in the US, two retailers have beaten forecasts with their latest results.

Macy’s, the department store, posted a loss of 81 cents per share, much better than the $1.77/share which analysts had pencilled in.

Sales fell 35% year-on-year - a major fall, but not as bad as expected. Chief executive Jeff Gennett told investors that sales had held up better than feared:

Macy’s, Inc. performance for the quarter was stronger than anticipated across all three brands: Macy’s, Bloomingdale’s and Bluemercury, driven largely by the sales recovery of our stores.”

Macy’s shares have surged 8% in pre-market trading.

Handbag and accessories firm Vera Bradley did even better - posting a surprise profit for the second quarter. It’s shares are up 20% in pre-market trading.

In other political/economics news, work and pensions secretary Thérèse Coffey has argued that her colleague Rishi Sunak shouldn’t raise taxes to cover the cost of the pandemic.

In a move that would cheer Arthur Laffer, Coffey argued that cutting taxes would actually raise more money.

She told Times Radio:

In the past, when we have actually cut tax rates, we have seen taxes increase.

Tax rates are a very dynamic situation, and we need to make sure the chancellor has the best opportunities when he announces to the country.

There’s been speculation in recent days that Sunak could raise certain taxes in this autumn’s budget, to address the UK’s soaring deficit (likely to exceed £300bn this year).

But with borrowing costs at record lows (just 0.25% per year for a decade!) there’s no sign that investors are shunning British gilts, so no need to fret about this year’s deficit....

Over in parliament, Boris Johnson has rejected calls to extend the UK’s furlough scheme.

During Prime Minister’s Question’s, several MPs urged Johnson not to end the job retention scheme at the end of October, warning that it will lead to higher unemployment

Johnson, though, argued that an indefinite furlough scheme was ‘not the answer’. It’s already cost £40bn, and (he says) keeps people in suspended animation.

My colleague Andy Sparrow’s Politics Live blog has all the action as MPs return to the Commons (although physical distancing rules mean few are actually in the chamber).

Anyone who stuck in cash and missed out on the stock market recovery since March should take comfort that at least they didn’t bet against it.

Some of the companies which speculators have bet against, such as Tesla, have rallied strongly in the last few months - meaning burnt fingers in the hedge fund world.....

Shares in UK housebuilders are continuing to rally, following the jump in house prices and the pick-up in demand reported by Barratt Developments.

Barratt is now up 8%, with Taylor Wimpey 5% higher, as the market holds onto this morning’s gains.

Chris Beauchamp, chief market analyst at IG, says investors are encouraged by rising sales in July and August, and ignoring Barratt’s slump in profits in the year to June.

“Markets continue to seek the positive and ignore the negatives, but it is odd to see such relentless positivity in US markets when the pandemic has yet to subside, the economic impact is only just being felt and we have a US presidential election just a few weeks’ away.

“The reaction to Barratt Developments’ full-year figures is a case in point of the market being as forward-looking as possible.

“The dire numbers for the past 12 months have been entirely disregarded, investors choosing instead to look at the admittedly-promising recovery in sales levels.

“With the Nationwide HPI pointing to strength in house prices too the outlook for the sector seems quite bright, or at least much brighter than a few months ago. But those hoping for a smooth ride know that the prospect of a no-deal Brexit is rising, casting a huge pall over Barratt and its peers.”

Terry Smith, chief executive of Fundsmith, isn’t concerned that markets are out of kilter with the real economy.

Speaking on Sky News, he says that record low interest rates are helping investors to look through the current steep downturn and plan for the recovery.

As Smith puts it:

Movements in economies and markets aren’t coterminous.

People will tell you that the only market that ends in a recession is a bear market, because markets are a bit forward looking.

Smith also points out that Spanish flu epidemic of 1918 was followed by the roaring 20s, and an enormous stock market boom in America. Could we see the same again?...

Heads-up, investors. The European Union’s securities watchdog is worried that the stock market is overheating.

The European Securities and Markets Authority (ESMA) said there has been a “potential decoupling” between the recent gains in the financial markets, and the economic damage caused by the COVID-19 pandemic,

ESMA said its latest “trends, risks and vulnerabilities” report continued to see very high risks in markets, suggesting that the market rebound which began in late March may not be sustainable. More here.

On that subject, the CEO of Deutsche Bank has warned that the economic recovery from the pandemic will take time.

Christian Sewing told a banking conference in Frankfurt that there will be “serious consequences”, as the economy would not return to normal this year or next year, meaning lower revenues for companies.

Looking back at house prices, Nobel Francis of the Construction Products Association has shown how UK house prices climbed as mortgage rates fell steadily after the financial crisis:

Alas, Lego don’t make a model stock market. But in the actual City, shares are continuing to rise.

Britain’s FTSE 100 is now up 1.8% or 105 points at 5967, recovering all Tuesday’s fall. European markets are also buoyant, with Germany’s DAX up 1.9% - and nearly positive for 2020.

Strong factory data from America, the UK and China yesterday may be bolstering optimism. Currency moves are also helping - both the euro and the pound are down around 0.4% against the US dollar today.

Investors are also anticipating (yet more) stimulus measures from central bankers to get growth and inflation higher -- meaning more easy money to pump up asset prices.

Marios Hadjikyriacos, investment analyst at XM, says the eurozone’s drop into deflation yesterday should also concern investors:

A strong batch of US manufacturing numbers resurrected the dollar from the ranks of the dead and propelled Wall Street to another record high yesterday. The ISM manufacturing index jumped to its highest level in almost two years, turbocharged by a surge in new orders, which spells good news for economic activity in the coming months.

Something that flew under the market’s radar yesterday was that the euro area officially fell into deflation in August. The yearly inflation rate fell below zero for the first time since 2016, and while the core rate remained positive, it still fell way short of forecasts.

This has profound implications for markets. Under its worst-case scenario forecasts, the ECB still envisioned inflation remaining positive this year. The central bank will therefore be under immense pressure to act again soon, even if verbally, to calm investors’ concerns about a prolonged deflationary episode.

Housing expert Henry Pryor points out that the average house price buyer has, on average, suffered less economic pain from Covid-19 than the rest of the population:

Back in May, Resolution Foundation showed that you were much more likely to lose work or be furloughed if you worked in a low-paid job than a high-paid one.

Overnight, Australia sank into its first recession in decades, due to the economic damage of Covid-19.

My colleague Martin Farrer explains:

Australia has slumped into recession for the first time in nearly 30 years as the coronavirus pandemic finally ended its record run of economic prosperity.

Not since George Bush Sr was US president and Bryan Adams ruled the pop charts has the country’s economy suffered two consecutive quarters of negative growth, the official definition of a recession that was widely forecast after the pandemic hit.

But Wednesday’s figures revealed that a cratering of household consumption forced GDP to shrink by 7% in the three months to the end of June.

It was the biggest fall ever seen since records began in 1959 in Australia, which has ridden the decades-long boom in the Chinese economy and associated demand for its huge reserves of commodities such as iron ore and coal.

Barratt Developments, one of the UK’s biggest housebuilders, has told the City that demand has increased sharply since the lockdown eased.

Barratt reported that reservations are running at 314 per week since the start of July, compared with 250 per week a year ago. Home completion are 62% higher than in 2019, as builders catch up with work delayed by the lockdown.

Barratt says this increased activity is being stimulated by pent-up demand and the Stamp Duty holiday. However, it has still scrapped a ‘special dividend’ planned for 2021, after seeing profits nearly halve due to the pandemic.

CEO David Thomas adds:

“While COVID-19 has had a significant impact on our results, our priority has been to keep our people safe, mitigate the effect of the pandemic on our business and be able to emerge from the crisis in a resilient position.

Although uncertainties remain, all of our sites are operational, we are seeing very strong consumer demand and our robust financial position means we enter the new financial year with cautious optimism.

Now this is interesting - and bad news for first-time buyers: HSBC is planning to cut back its ‘low-deposit’ mortgages, following a surge of interest.

My colleagues Kalyeena Makortoff and Patrick Collinson explain:

HSBC, one of the last banks to offer low-deposit “90%” mortgages, is expected to restrict sales within days, in a move likely to leave first-time buyers struggling to find a loan.

The bank’s 400 mortgage advisers are currently flooded with applications from buyers, with customers forced to wait as long as three to four weeks to be interviewed by the bank. Meanwhile, the bank is opening a daily window of as little as half an hour in the morning for brokers to apply for loans before the daily allocation of money runs out.

The Guardian understands that HSBC – which accounts for around 6.8% of the UK’s mortgage market – has been trying to find responsible ways to curb high demand for its low-deposit mortgages.

here’s a note of caution from Andrew Montlake, managing director at UK mortgage broker, Coreco:

“Two words: reality check. As strong as the property market is right now, it will not last.

“Demand is understandably strong after lockdown and the added bonus of the stamp duty holiday, but unemployment is rising by the day and the economic outlook is highly uncertain as the furlough scheme ends.

“In the final months of the year we will start to see a reversal in the current rate of house price growth, as the true impact of Covid-19 on the economy shows through

Lucy Pendleton, property expert at independent estate agents James Pendleton, agrees that the stamp duty holiday is fuelling the housing market -- and pushing prices sharply higher:

“Buyers emboldened by the stamp duty holiday have been engaged in a pitch battle for property, delivering a barnstorming recovery for the market. A stunning proportion of properties are now going for asking price or more, and offers are flooding in. It’s like lockdown was a bad dream.

“The number of buyer registrations is also holding up at a time of the year that would typically see a slowdown.

“The late summer surge is particularly apparent in London where the greatest proportion of buyers will benefit from the maximum discount of £15,000.

“For many, this emerging boom will mean paying so much more for a home that the extra cash eclipses the saving dished out by the Chancellor. That’s more likely to happen the further up the chain you go and that’s the beauty of this policy. It’s great for first-time buyers but everyone’s invited, and once people get it into their heads that they’re moving, it’s like an unstoppable force. People double down on that momentum when they then find a property they love and, armed with some extra cash, they find a way to stretch the seams of their pockets just a little bit more.

Jonathan Hopper, CEO of Garrington Property Finders, says rural estate agents and surveyors have seen a surge in demand this summer.

That includes families looking to quit the daily commuting rat race and move to a greener lifestyle, following the move to home working this year [despite the government’s efforts to get everyone back to their old desks].

“In some areas the property industry is playing catch up. We’re seeing good homes go under offer very quickly but transactions take longer – as demand for surveyors outstrips supply and conveyancing firms race to dial up their capacity to handle a fast-growing workload.

“Prices are rising fastest among coastal and country properties as buyers planning for a new work-life balance built around less commuting seek more green space, fresh air and better value.

Capital Economics’ Hansen Lu points out that house prices inflation is back at pre-pandemic levels:

This jump in UK house prices makes homes even less affordable.

At 3.7% per year, prices are now rising much faster than incomes -- particularly as many people’s earnings fell during the pandemic (because they were furloughed, lost their jobs, or saw work dry up).

As this chart shows, we’re heading back to price/earnings levels seen before the 2007 credit crunch:

Here’s the key points from Nationwide’s house price report:

Nationwide also predicts that house prices will keep rising this autumn, partly thanks to government’s temporary stamp duty freeze [in England and Northern Ireland, anyway].

Chief economist Robert Gardner explains:

“These trends look set to continue in the near term, further boosted by the recently announced stamp duty holiday, which will serve to bring some activity forward.

But, a surge in unemployment in the coming months would then hit demand, he adds:

“Most forecasters expect labour market conditions to weaken significantly in the quarters ahead as a result of the aftereffects of the pandemic and as government support schemes wind down. If this comes to pass, it would likely dampen housing activity once again in the quarters ahead.