Time to recap

Expectations of a UK interest rate rise have jumped today, after the Bank of England governor gave another warning about inflationary pressures.

The markets are now pricing in a rate rise from 0.1% to 0.25% as early as November. That would be the first rise in borrowing costs since the pandemic, with Bank rate seen at 1% by the summer of 2022.

The yield, or interest rate, on UK two-year bonds jumped to its highest level since May 2019, another sign that traders were rapidly reassessing the prospects of a 2021 rate hike.

The move came after Andrew Bailey told the G30 group of central bankers that the BoE will have to act if it sees a risk of medium-term inflation and medium-term inflation expectations.

The markets are now pricing in a November hike at around 85%.

Rightmove reported that asking house prices have rallied this month, as buyers and sellers try to nail down moves before interest rates rise.

China’s economy has stumbled, as power outages, supply chain problems and the downturn in its property sector all weigh on growth.

Chinese GDP only expanded by 4.9% year-on-year in the last quarter, and only by 0.2% on a quarterly basis.

Fu Linghui, spokesperson for the National Bureau of Statistics, told a press conference that:

“After entering the third quarter, risks and challenges at home and abroad increased with the pandemic continuing to spread and the recovery of the world economy slowing down.”

The growth report showed that:

• Industrial output growth slowed to 3.1% in September.
• Fixed-asset investment growth missed forecasts, rising 7.3% in the first nine months from a year ago.
• Retail sales rose by 4.4% in September; median forecast was 3.5%
• The jobless rate fell to 4.9% at the end of September

US factories also disappointed, with industrial production falling by 1.3% in September as chip shortages and hurricane disruption hit output.

Those semiconductor shortages and transport problems also hit Dutch electronics giant Philips, which said ‘chips and ships’ had hurt its growth in the last quarter.

Stock markets were hit by worries about China’s economy, supply chain woes and rising inflation. Wall Street fell, after losses in Europe and Asia.

Brent crude hit a new three-year high of $86 per barrel, while UK wholesale gas prices rose after hopes of a surge of gas from Russia faded.

In other news...

Nightclubs are suffering from a growing shortage of bouncers, in the latest staffing squeeze to hit the UK’s economic recovery, with some estimates suggesting venues are having to pay security staff as much as 25% more.

The lack of security personnel comes at a time when hospitality businesses are being hit by a cocktail of rising costs and are trying to rebound from months of closures during the pandemic.

The trade body for British manufacturers has hit back at ministers’ accusations that firms have relied for too long on cheap foreign labour, urging them to work in partnership with business instead of viewing it “as the enemy within”.

Ford has announced it will invest £230m in a Merseyside transmission factory to upgrade it to make parts for electric vehicles, in a significant fillip for northern England’s automotive industry.

Justin Benson, partner and automotive sector specialist at management consultancy, Vendigital, says it’s a ‘major milestone’, but points out that the UK needs more ‘gigafactories’ to produce electric batteries:

“Following on from Nissan’s Gigafactory investment announcement earlier this year, Ford’s decision is a major milestone on the UK automotive sector’s journey to a zero emissions future. It’s also a stamp of approval from inward investors, signaling their confidence in the UK’s position within the global EV industry.

“Other carmakers. such as JLR, also have well-publicised plans to meet clean air and zero emissions regulations by moving to EVs over the next five years. As such, we’re likely to see more automotive manufacturers following in Ford’s footsteps in the near future.

“However, while these kinds of announcements bode well for the UK’s net-zero transition, it’s important to bear in mind that a significant investment in Gigafactories will also be vital. This will be the next big challenge for the Government and will be key to level the playing field with other major EV manufacturing hubs.”

Facebook is creating 10,000 jobs in the EU as part of its push to build a virtual world for its users.

The company has trumpeted the “metaverse” as the next big phase of growth for large tech companies and recently announced a $50m (£36m) investment programme to ensure that this metaworld is built “responsibly”.

Matthew Moulding, the founder and chief executive of The Hut Group, is giving up his “golden” share of the company in an attempt to regain the confidence of the City after a sharp fall share in recent weeks.

Goodnight. GW

Europe’s stock markets have started the new week with losses.

The FTSE 100 index of blue-chip shares has closed 30 points lower at 7203, down 0.4%, having hit its highest levels in 20 months on Friday.

Airlines and hospitality firms were among the fallers, with IAG down 4% and Whitbread losing 2.4%, along with conference group Informa (-3%), catering operator Compass (-2.2%), property developer Land Securities (-2.1%).

Luxury goods maker Burberry fell 1.9%, as the slowdown in China’s growth hinted that Chinese consumers could rein in their spending.

Interest rate worries also weighed on equities.

David Madden, market analyst at Equiti Capital, explains:

The mood in equity markets is downbeat on account of the disappointing data posted by China overnight, in addition to that, the tick higher in government bond yields is hurting stocks too.

It was confirmed the Chinese economy expanded by 4.9% in the third quarter, narrowly missing the 5% that economists were expecting. Keep in mind, the economy grew by 18.3% and 7.9% in the first and second quarters respectively. The country is clearly cooling and that has prompted dealers to trim their exposure to stocks – which enjoyed a bullish run in the latter half of last week. China’s fixed asset investment and industrial production reports for September were 7.3% and 3.1% respectively, both undershot forecasts.

Not all the news was gloomy, as the latest retail sales reading was 4.4%, which was a pleasant surprise, as it beat the 3.5% estimate.

It bodes well for the Chinese economy that internal demand is improving as that could help cushion the slowdown.

European markets also weakened, with France’s CAC down 0.75% and Germany’s DAX losing 0.7%.

Wall Street has opened lower, as the slowdown in China and the surprise drop in US industrial production weighs on the market.

The Dow Jones industrial average has dropped by 109 points, or 0.3%, at 35,185 points.

Entertainment giant Walt Disney (-2.9%) and retail pharmacy group Walgreens Boots Alliance (-2%) are the top Dow fallers, with industrial giants Boeing (-1.3%) and Caterpillar (-1.2%) also down.

Financial stocks are bucking the selloff, though, with Goldman Sachs (+1.7%) and JP Morgan (+0.5%) rising. Bank shares tend to benefit when the markets are anticipating higher interest rates.

Fiona Cincotta, Senior Financial Markets Analyst at City Index, says inflation concerns are hitting the market.

Rising commodity prices, particularly oil prices, which only appear to go in one direction at the moment are boosting expectations of high inflation becoming more entrenched and a sooner move by the Fed to raise interest rates.

Whilst impressive numbers from the big banks set an upbeat tine in the previous week, investors are jittery over whether corporate America can keep up the solid string of earnings.

Adding to the downbeat mood China’s GDP growth slowed considerably to 4.9%, down from 7.9% missing forecasts of 5.2%. The data revealed the impact that the Evergrande crisis and ongoing energy crunch was having on the world’s second largest economy

Ouch! US industrial production has fallen sharply, as carmakers continue to suffer from global chip shortages and factories struggled to recover from hurricane disruption.

Industrial production fell 1.3% in September, new data from the US Federal Reserve shows, while the narrower manufacturing output measure fell 0.7%.

The production of motor vehicles and parts tumbled 7.2%, as “shortages of semiconductors continued to hobble operations”, while factory output elsewhere declined 0.3% the Fed reported.

The output of utilities dropped 3.6%, as demand for cooling subsided after a warmer-than-usual August.

Mining production fell 2.3%, due to the “lingering effects of Hurricane Ida” (which forced oil rigs in the Gulf of Mexico to suspend work.

Much of the weakness in production in September resulted from large decreases for consumer goods and materials, says the Fed:

Business equipment, defense and space equipment, and construction supplies recorded small gains, and business supplies recorded a small loss. The index for consumer goods fell 1.9%, with large declines in durables, particularly automotive products, and in consumer energy products.

Likewise, the index for materials dropped 1.7%; both chemical materials and energy materials posted decreases of more than 3% as a result of the prolonged hurricane-related outages for industries concentrated near the Gulf of Mexico.

August’s industrial output was revised down too, to a 0.1% fall not a 0.4% rise.

UK wholesale gas prices are rising today, with the cost of next-day delivery up 11% at 226.5p per therm.

That’s up from around 60p per therm at the start of the year, before the energy crunch. It spiked over 300p last week, before Russia signalled that it could stabilise the market (by winning approval for its controversial Nord Stream 2 pipeline).

Prices jumped after hopes of a surge of gas from Russia faded. A keenly awaited pipeline capacity auction held today showed no increase from Russia either through the Ukrainian pipeline or lines passing through Poland to north-west Europe.

The auction results are closely watched as Europe has been eagerly awaiting for more gas supplies, especially from Russia, as it tackles skyrocketing natural gas prices, boosted by tight supplies and economic recovery.

The operator of the Nord Stream 2 gas pipeline said today the first of the project’s two lines has been filled with so-called technical gas.

But the pipeline, which runs under the Baltic Sea, is still awaiting clearance from Germany’s regulator to start sales to Europe.

Goldman Sachs have raised their forecasts for UK interest rate rises, following the hawkish comments from some Bank of England policymakers including governor Bailey.

The Wall Street bank now expect three hikes at alternate MPC meetings - first in November, then in February and May 2022 - which would lift Bank Rate to 0.75%.

Previously, Goldman had expected a slower tightening - with hikes in intervals of six months following lift-off.

But with the UK labour market looking strong, vacancies at record highs, and inflation expectations rising, they believe the Bank will act faster to ‘nip inflation in the bud’.

Goldman told clients:

• Recent BoE commentary combined with a shrinking activity shortfall, a resilient labour market and a likely further rise in long-term inflation expectations, suggests that the BoE will start hiking this year. While we view it as a close call between a November and December lift-off, we think the November meeting is slightly more likely given it comes with a press conference and updated projections within the Monetary Policy Report.
  
  
• Macroeconomic modelling suggests that the BoE should act pre-emptively and decisively to concerns about knock-on effects from high inflation. As such, we have significantly steepened our expected path for Bank Rate in the near term. We now expect three hikes at alternate MPC meetings, with Bank Rate reaching 0.75% by May 2022.

With inflationary pressures likely to soften, Goldman expects hikes to be “more limited from the middle of next year”, with Bank Rate reaching 1.0% by the last quarter of 2022.

Rising interest rates could take some of the heat out of the UK housing market... which remained pumped up this month.

New figures from Rightmove today show that asking prices jumped by 1.8% this month, the biggest rise at this time of year since October 2015.

Price records were hit in all regions of Great Britain and in all property market sectors.

Rightmove says that some movers are keen to buy and sell in a ‘window of opportunity’ before a likely interest rate rise from the Bank of England, which would lift mortgage costs.

Tim Bannister, Rightmove’s director of property data, says:

New price records have been set across the board, with every region of Great Britain and all of the three market sectors of first-time buyer, second-stepper and top of the ladder hitting all-time highs. This ‘full house’ is an extremely rare event, happening for the first time since March 2007.

The stock shortages started after the first lockdown, and they look set to continue with the underlying housing market fundamentals remaining strong, and an additional incentive to buy and fix your mortgage interest rate before a widely expected rate rise.

Mortgage interest rates are lower than they have ever been before and lenders are keen to lend in a competitive market, with employment and wage growth also robust. The number of sales agreed continue to be strong despite the end of the stamp duty incentives.”

With homes being snapped up quickly, buyers who have already sold their own property subject to contract or have nothing to sell have the most powerful negotiating hand, Rightmove adds.

Britain’s short-term cost of borrowing has surged to its highest level in nearly two and a half years, as the City prices in a UK interest rate rise soon.

The yield, or interest rate, on two-year UK gilts has jumped to its highest since May 2019 this morning.

Two-year gilt yields hit 0.75%, up from just 0.57% on Friday night.

Rising gilt yields are a sign that traders are expecting UK interest rates to rise soon, in an attempt to combat inflation.

The yield on 10-year gilt yields have also risen (from 1.1% to 1.15%), close to the two and a half-year highs seen last week.

The moves comes after the governor of the Bank of England warned it will “have to act” to curb rising inflation, sending a new signal that it is gearing up to raise interest rates.

Andrew Bailey said he continued to believe the recent jump in inflation would be temporary, but he predicted a surge in energy prices would push it higher and make its climb last longer, increasing the risk of higher inflation expectations.

“Monetary policy cannot solve supply-side problems – but it will have to act and must do so if we see a risk, particularly to medium-term inflation and to medium-term inflation expectations,” Bailey said on Sunday.

During an online panel discussion organised by the Group of 30 consultative group Bailey explained:

“And that’s why we at the Bank of England have signalled, and this is another such signal, that we will have to act.

But of course that action comes in our monetary policy meetings.”

The Bank has two more MPC meetings this year, on 4th November and then 16th December.

The Bank recently predicted that inflation will rise over 4% early next year, or more than double its 2% target. The surge in energy prices are adding to inflationary pressures, bolstering rate rise expectations.

Jeremy Thomson-Cook, chief economist at international business payments specialist Equals Money, points out that investors are now pricing in several rate hikes by the end of next year....

...even though UK growth isn’t exactly sparkling.

With markets already fully pricing in a rate hike of 0.15% this year and three more next year, taking the base rate up to 1%, Bailey’s comments are unlikely to push GBP [the pound] significantly higher.

But despite the upbeat rhetoric, Johnson’s government faces an unfortunate fact: the UK’s economy isn’t growing at the rate they desire. August’s GDP figures only rose by 0.4%, which means Q3 growth will likely come in at only half of the Bank of England’s 3% forecast. The economy is still 5% smaller than it would have been if growth had continued on its 2010 to 2019 pre-pandemic trajectory; in contrast, the U.S. achieved this by Q2 2021.

Dutch manufacturing giant Philips has joined the swelling ranks of companies hit by supply chain woes.

Royal Philips NV cuts its forecasts for growth and earnings growth this morning, following problems obtaining parts and materials, and shipping delays.

Frans van Houten, chief executive, told Bloomberg that Philips was sitting on a “massive order book” in the last quarter. But the supply chain crunch meant it wasn’t able to fully deliver on its strong order growth.

It’s really a matter of both chips and ships.

We have a shortage of e-components and we see the delays in the shipping industry and the congestion in the ports.

Group sales fell by 7.6% in the last quarter, due to “headwinds caused by global supply chain challenges” and the recall of ventilation devices used to treat sleep apnea. Those devices have a faulty sound abatement foam that can degrade and become toxic.

Philips now only expects to deliver low single-digit sales growth for 2021, down from the low-to-mid-single digit increase it forecast previously, with profit margins only expected to rise modestly.

Shares in European luxury goods makers have fallen today, on concerns that demand from Chinese consumers could falter.

LVMH Moët Hennessy Louis Vuitton (-2.9%), Pernod Ricard (-1.9%), Hermes (-2.2%) and Burberry (-1.85%) have all benefitted from demand for expensive items like clothes, drinks and handbags from China’s wealthier citizens.

This morning’s disappointing GDP report could be a sign that this boom is fading, if supply chain problems, energy shortages and property sector problems continue.

China’s President Xi Jinping call for progress on a long-awaited property tax that could help reduce wealth gaps could also threaten spending on luxury goods.

In an essay in the ruling Communist Party journal Qiushi, published on Friday, Xi called for China to “vigorously and steadily advance” legislation for a property tax to help reduce wealth gaps, alongside a push for “common prosperity” by mid-century.

The trade body for British manufacturers has hit back at ministers’ accusations that firms have relied for too long on cheap foreign labour, urging them to work in partnership with business instead of viewing it “as the enemy within”.

Make UK is calling on the government to recognise the challenges they are facing – including supply chain disruption and shortages of staff such as HGV drivers – rather than blaming them at a time when they are also facing soaring costs, including for energy and raw materials.

It is urging them to improve cooperation with industry to ensure companies can recover from Brexit and the pandemic, and enable firms to invest and grow over the next decade.

China’s power outages have driven the price of zinc to a 14-year high in Shanghai.

Worries about shortages amid the ongoing energy crisis pushed the November zinc contract on the Shanghai Futures Exchange up 8% to 27,720 yuan ($4,308.16) a tonne.

That’s the highest level since August 2007, for the metal used to rust-proof steel.

The three-month zinc price on the London Metal Exchange hit its highest since June 2007 last Friday.

Soaring energy prices have forced Belgium-based Nyrstar to cut production by up to 50% at its three European zinc smelters, while Glencore is cutting production at three zinc smelters in Europe.

Some of China’s smelters have also been ordered to cut output to save on energy, adding to metal supply cuts that are pushing up factory costs.

Ford has announced it will invest £230m in a Merseyside transmission factory to upgrade it to make parts for electric vehicles, in a significant fillip for northern England’s automotive industry.

The US carmaker’s investment will help maintain about 500 jobs at the plant in Halewood, Knowsley, which currently makes transmission systems for petrol and diesel vehicles. Ford will receive UK government support worth about £30m, according to a source with knowledge of negotiations.

By 2024 the lines at the factory will produce 250,000 electric drive units, components that include electric motors and power electronics, every year.

Ford said in February that all the cars it sells in Europe will be electric by 2030. That matches up to the UK government’s plan to end the sale of pure petrol and diesel cars by 2030, and hybrids after 2035. The carmaker also intends to make two-thirds of commercial vehicle sales all-electric or plug-in hybrid by 2030.

Stuart Rowley, president of Ford of Europe, said Halewood would play an important part in its “very ambitious” plans, but said government action was needed to improve charging infrastructure. He also warned against a possible plan to cut the level of grants for electric cars.

“At Ford we’re all in.

In the industry we’ve made the decision, we’re going electric. But we need to significantly ramp up the infrastructure at home, in the workplace.”

Rowley also warned that shortages of computer chips that have dogged the global car industry for months are “here for a while, well into next year”.

Here’s the full story:

Jim Reid of Deutsche Bank says ‘multiple headwinds’ hit China’s economy:

GDP expanded in Q3 by +4.9% on a year-on-year basis, which is a touch below the +5.0% consensus expectation and a shift down from the +7.9% expansion back in Q2. That’s come as their economy has faced multiple headwinds, ranging from the property market crisis with the issues surrounding Evergrande group and other developers, an energy crisis that’s forced factories to curb output, alongside a number of Covid-19 outbreaks that have led to tight restrictions as they seek to eliminate the virus from circulating domestically.

Industrial production for September also came in beneath expectations with a +3.1% year-on-year expansion (vs. +3.8% expected), though retail sales outperformed in the same month with +4.4% year-on-year growth (vs. +3.5% expected), and the jobless rate also fell back to 4.9% (vs. 5.1% expected).

Julian Evans-Pritchard, senior China economist at Capital Economics, said his consultancy’s “activity proxy” measure now pointed to a “sharp contraction” in GDP.

“Although some of the recent weakness in services is now reversing, industry and construction appear on the cusp of a deeper downturn.

“For now, the blow from the deepening property downturn is being softened by very strong exports. But over the coming year, foreign demand is likely to drop back as global consumption patterns normalise coming out of the pandemic and backlogs of orders are gradually cleared. All told, we expect growth of just 3% on our China activity proxy next year, the slowest pace since the global financial crisis.”

Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd has cut his full-year growth forecast to 8% from 8.3%, warning that:

“The outlook remains vulnerable with power shortages and property curbs.

Helen Qiao, chief Greater China economist at Bank of America Corp, told Bloomberg TV that:

“The investment side of demand is pretty weak, and the power crunch impact on the supply side is also pretty severe.”

The oil price has hit fresh highs this morning, despite China’s slowdown.

Brent crude touched $86 per barrel for the first time since October 2018.

US crude is trading at a fresh seven-year high, over $83 per barrel.

The oil price has been lifted by increased demand as economies reopen, and tight supplies, while the urging gas prices is leading power companies to burn more oil instead.

Analysts from ANZ bank said in a note on Monday that:

“Easing restrictions around the world are likely to help the recovery in fuel consumption.”

The approach of the Northern Hemisphere winter is also lifting demand.

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Beijing has warned that economic risks have risen at home and abroad, after China’s economic growth was dragged down by power shortages and its housing crunch.

China’s GDP grew by just 0.2% in July-September, new figures this morning show, the weakest quarterly growth on record.

That dragged growth over the last year down to just 4.9%, down from 7.9% in the previous quarter, and worse than expected.

The slowdown highlights that China is still struggling after the coronavirus pandemic, amid a slew of problems at home and abroad -- from power outages and supply bottlenecks to ongoing Covid outbreaks and concerns about the struggling property sector typified by the Evergrande crisis.

The GDP report shows a worrying loss of momentum -- industrial production grew just 3.1% year-on-year in September, rising just 0.1% during the month.

Growth in Fixed Asset Investment slowed to 7.3% from 8.9%.

Fu Linghui, spokesperson for the National Bureau of Statistics, told a press conference Monday that:

“After entering the third quarter, risks and challenges at home and abroad increased with the pandemic continuing to spread and the recovery of the world economy slowing down.”

China’s energy crunch has hit manufacturing growth. Recent power shortages led to rationing - causing some factories to shut down -- prompting Beijing to order coal mines to increase production and plan to build more coal-fired power plants

Surging commodity costs have also hit manufacturing, pushing up factory gate inflation as manufacturers have passed on those costs.

China’s CSI 300 stock index fell by 1.3%, with concerns over Evergrande also hitting the real estate sector.

My colleague Martin Farrer explains:

The world’s second-largest economy has staged an impressive rebound from the pandemic but the recovery is losing steam. Problems including faltering factory activity, power cuts in the country’s crucial northern industrial heartland, and a slowing property sector have fanned speculation that policymakers may announce more stimulus measures in coming months.

Chief among the concerns about the giant property sector is the future of China Evergrande Group, the country’s number two developer which is struggling under a $300bn mountain of debt.

It has already missed three repayments on bonds that it owes overseas investors in US dollars, and trade in its shares in Hong Kong has been suspended since 4 October.

The crisis could reach a head this week when the 30-day grace period is up on the first tranche of repayments – worth $83.5m – that were missed in September .

But the head of China’s central bank, Yi Gang, said on Sunday the economy was “doing well” although it faced challenges such as default risks for certain firms due to “mismanagement”.

Reaction to follow...

The agenda

• 2.15pm BST: UK industrial production report for September
• 3pm BST: NAHB housing market index (US) for October