Closing post
And finally, European stock markets have ended the day higher.
Spirits were lifted by the latest rally on Wall Street, and hopes that the global economy is recovering. Top risers in London included airline operator IAG, which surged 7.6%, mining group Glencore (_2.3%) jet engine maker Rolls-Royce (+2.8%).
- FTSE 100: up 35 points or 0.6% at 6,111
- German DAX: up 95 points or 0.75% at 12,977
- French CAC: up 39 points or 0.8% at 4,977
- Italian FTSE MIB: up 209 points or 1% at 20,055
- Spanish IBEX: up 50 points or 0.7% at 7,094
Wall Street is trading at fresh record highs still, with the S&P 500 nearing 3,400 points for the first time ever, partly thanks to Apple surge to a new high.
Chris Beauchamp of IG says:
“Tech stocks continue to solidify their lead over the rest of the market, and Apple’s push to $2 trillion in market cap is yet another lesson in how investors continue to back the winners, clinging to the proven performance of the smartphone titan and other FAANG stocks even as concerns grow about the pace of the economic recovery.
The big theme driving this market is growth, and Apple, along with the other big tech stocks, has shown that it can still demonstrate this even in these rare times. Low inflation, rock-bottom bond yields and economic disruption have meant that dividend stocks and growth stocks are the biggest winners, and Apple does fall into both categories (although it has never been much of a dividend payer).
Despite all expectations to the contrary its products continue to be highly sought-after, retaining the cachet that they developed in the wake of the arrival of the first iPhone.
Here’s a reminder of the main stories:
Goodnight. GW
Updated
Randeep Somel, associate fund manager at M&G Investments, says the tech sector faces an uncertain future, but they’ll still benefit from the ‘secular trends’ which are being accelerated by the pandemic.
“Apple’s new milestone today reflects the progress of the FAANG stocks in recent years, as well as consumers’ increased focus and reliance on technology more recently since the outbreak of the pandemic. However, while this has been very positive for technology large cap technology companies, the future outlook for the sector is less clear. Most notably, the increasing size and influence of these companies has brought with it greater scrutiny from regulators. The ability of technology companies, all of whom are sitting on vast cash reserves, to buy out new/challenger technology companies going forward will not be as easy as it has been in the past.
“The large cap technology stocks are falling under greater scrutiny of regulators, as shown by the US congressional hearings on antitrust in July this year. The CEOs of Facebook, Alphabet (Google), Apple and Amazon were all remotely summoned to answer questions on the power of their companies ranging from use of data, pricing, and the treatment of smaller competitors. Technology platforms are very strong, but they have buttressed their positions by acquiring smaller competitors, such as Facebook’s acquisition of Instagram and Whatsapp. If there is greater scrutiny of large cap tech acquiring smaller companies going forward it will allow smaller companies to challenge and provide greater competition. As such, whilst the potential purchase of TikTok may also allow Microsoft to get footing in social media with an existing platform, an area that it has lacked relative to some of the other large cap tech companies, due to competition rules its main competitors would not want the public scrutiny of such an acquisition (Microsoft was not part of the congressional anti-trust hearings).
“In terms of secular trends, the cloud/public computing businesses will continue to serve Microsoft (Azure) and Amazon (AWS) well. They are two companies that invested early and are now already seeing the benefits of scale. The longer office workers continue to work remotely from home, the increased likelihood we have that this becomes a more permanent fixture. This benefits cloud operators as companies scale down on-site presence (including own servers), and continue moving them to the cloud.
“Picture studios releasing films to on-demand (and not exclusively) to cinema first will embolden the appeal of platforms such as Netflix and Amazon Prime. Although original content providers are producing their own direct to customer platforms such as Disney+.
“The upcoming rollout of 5G will be a good opportunity for handset makers to refresh their products with new technology and provide a strong update cycle. This should benefit Apple.”
Updated
Apple bestrides list of top companies
We’ve just been crunching the numbers on our Reuters terminal, and think this is the current top ten most valuable companies:
- Apple: $2tn
- Saudi Aramco: $1.8tn
- Amazon: $1.66tn
- Microsoft: $1.6tn
- Alphabet: $1.06tn
- Facebook: $747bn
- Alibaba: $701bn
- Tencent: $625bn
- Berkshire Hathaway: $498bn
- Visa: $423bn
The most valuable companies on Europe’s Stoxx 600 are (I think) Nestle ($346bn), Roche Holdings ($300bn) and LVMH ($231bn).
In London, the most valuable firms are Unilever ($154bn) and AstraZeneca ($146bn).
(thanks to Refinitiv for the data)
Apple has defied a lot in its march to the giddy heights of $2tn.
The pandemic has disrupted its supply chains, and also threatened consumer spending as the global economy has plunged into recession. But the tech giant has shrugged this aside, along with the US-China trade conflict, concerns about anti-competitive practices.
As Marketwatch’s Emily Bary writes:
Despite fears about what store closures and economic pressure would mean for the company’s hardware sales, Apple demonstrated the resilience of its business last quarter with sales that exceeded estimates even from before the pandemic came into view. The company’s Mac and iPad sales have been especially strong given that more people are studying and working from home.
The company is expected to roll out its first 5G-enabled iPhone this fall, with management telling investors to expect a day of a few weeks compared with last year’s launch timing.
Apple shares have continued marching higher even amid renewed scrutiny of the company’s App Store practices. Chief Executive Tim Cook appeared at a House of Representatives antitrust hearing in July and faced questions on the company’s fee structure for the App Store, in which Apple retains up to 30% of sales of digital goods purchased through third-party apps that users download from the App Store.
The company also faces a lawsuit from “Fortnite” developer Epic Games, which accuses Apple of monopolistic practices for retaining a big cut of digital purchases and not allowing developers to take purchases within apps using their own payment mechanisms.
The tech stock rally has been quite remarkable over the last couple of years, as this tweet shows:
Here’s a neat chart showing how Apple has doubled its value in two years.
Full story: Apple is Wall Street's first $2tn company
My colleague Rob Davies writes:
The $2tn (£1.52tn) valuation means the company, co-founded to sell personal computers by the late Steve Jobs in 1976, is valued at significantly more than half of the US’s 2019 tax take.
Apple hit a $1tn market capitalisation in 2019, 42 years after it was founded and 117 years after US Steel became the first company to be valued at $1bn in 1901.
But it is not the first company in the world to smash the $2bn barrier.
Saudi Aramco reached the watermark after the Saudi state-backed oil company made its stock market debut last year.
Some snap reaction to Apple hitting a $2trn market cap.
Apple hits $2tn valuation
Newsflash: Apple has become the first US company to be worth two trillion dollars.
The tech company’s shares just rose over $467.76, the level which values the iPhone maker at $2trn.
This means Apple’s shares have now surged by 59% this year, as part of the boom in FAANG tech stocks.
Astonighingly, its’s only two years since Apple hit $1trn.
Updated
Is about Apple about to become a $2trn company?.... It’s getting very close
David Miller, Investment Director at Quilter Cheviot, argues that the surge in the US stock market shows that investors are acting rationally.
He points out that they’re driving up the value of companies who have fared well during the pandemic, and who appear to have a healthy future:
“With equity markets on a roll since late March and the S&P 500 having reached an all-time high, the question asked by many is have investors taken leave of their senses? Don’t we know quite how bad things are in the real world.
“There are two ways of looking at this. Either investors are behaving rationally or this is a bubble of irrationality.
“We have to remember that central banks and governments have pumped huge amounts of liquidity into the global economy in recent months. Multiples of Roosevelt’s New Deal in the 1930s and the Marshall Plan after the Second World War. Money speaks when it comes to asset prices. What seems to be happening is that newly printed money is being saved rather than spent. The same goes for people and business. Uncertainty affects all. Whether this is a temporary phenomenon or not is to be seen. However, for now excess cash is being invested in financial assets.
“I would argue that this is not a bubble that is about to burst. Investors are behaving rationally. Indices have been driven higher by successful companies. The US tech giants are leading the way out of the Covid crisis generating extra revenue during the lockdown and reopening. Ratings are high, but not stratospheric. Investors have allocated more money to companies that are thriving with those able to survive close behind. On the other side of the coin those companies with products or services that we no longer need or require are struggling for attention. Many will not survive.
“Indices are merely a way of keeping track of reality.”
The Dow Jones industrial average is also rallying a little, up 114 points or 0.4% at 27,892.
Financial stocks, industrial groups and miners are leading the Dow risers. Goldman Sachs and JP Morgan are both up 1.5%, Boeing has gained 1.4%, Nike has risen by 1.25%.
Apple is up 1% at a new record high of $467, putting it on the brink of becoming the first US listed company to be worth $2trn.
Travel stocks are also rallying on Wall Street.
United Airlines are up 6.8%, with American Airlines gaining 5.8%. Cruise operators are also in demand, with Norwegian and Royal Caribbean both 5% higher.
Target shares surge after strong sales
Retailer Target is the top risers on the S&P 500, surging by 11% after posting really strong sales figures today (including a tripling of online sales).
Here’s CNBC’s take:
During the second quarter, Target’s shopping traffic picked up, customers filled up their baskets with more items, and even beauty and apparel sales were strong. Sales were also up across all five of Target’s merchandise categories.
The retailer reported its strongest sales in electronics, which was up by more than 70% overa year earlier as customers bought home office items and video games. Home and beauty grew respectively by more than 30% and 20%. Two categories — food and beverage and essentials — were up by about 20%
With Wall Street at record highs, some investors will be wondering if they should pile in...and others whether they should cash out.
We don’t give investment advice here, of course (for your own good!).
Instead, here’s Seema Shah, chief strategist at Principal Global Investors on the situation
“The new equity market high, coming despite the historic social and economic upheaval, is a testament to proactive and aggressive policymaker action. The economy remains fragile, confidence is still shaky, and the pandemic is still going strong. Without the synchronised action from the Fed and government, markets would likely have followed the economy into a far more dismal and worrying state.
“And yet, at these lofty levels, investors are right to be cautious. As long as there is such significant dislocation between economy and markets, it will be imperative the Fed remains present and money continues to flow from the government. Additionally, until there is a broadening in the sectoral recovery, Big Tech will need to continue delivering and the tremendous equity market rally will remain vulnerable to the performance of a handful of companies.”
The S&P 500 is now 5% higher for the year, something which looked a little unlikely back in mid March:
The Nasdaq is up a blistering 25% since January, after rocketing back from the February/March crash:
Wall Street hits new record high
In New York, stocks have opened a little higher - pushing the market to a new all-time high.
The S&P 500 has just risen above yesterday’s record high of 3,395.06, and the Nasdaq is over its own previous high of 11,230 points
Investors are cheered by the blowout results from retailer Target today, and hopeful that America’s recovery will not be derailed by a second wave of Covid-19 cases.
Liz Ann Sonders of Charles Schwab points out that the rally isn’t desperately broad, mainly driven by tech shares and other companies profiting from the pandemic.
But with the US Federal Reserve vowing to keep monetary policy loose, and politicians on Capitol Hill trying to agree a new stimulus package, Wall Street is optimistic.
Naeem Aslam, chief market analyst at Avatrade, explains:
There is no doubt that the tech sector leads this coronavirus stock market rally. The fiscal and monetary policy aid has also played a big part in this.
Speaking of aid package, the second stimulus coronavirus package seems to be delayed due to better than expected U.S. economic numbers and the fact that the second quarter’s corporate earnings were better than expected.
My colleague Rob Davies has a desperately sad story about the UK’s gambling sector, and how one vulnerable addict was allowed to lose half a million pounds from a compensation claim, rather than being protected.
MPs say that Liam McCarron’s tragic tale shows that tougher rules are needed to protect gamblers from predatory companies.
Here’s the details:
Two leading bookmakers helped a severely disabled gambling addict fill out betting slips as he squandered his compensation from a botched operation, it has been claimed.
Lawyers for Liam McCarron say that Ladbrokes Coral and Paddy Power failed to intervene over more than three years as his losses reached at least £500,000.
McCarron had been a successful businessman until 2007, when he sustained “catastrophic” injuries during a medical procedure, leading to permanent and severe impairment of his movement and speech.
In a letter seen by the Guardian, McCarron’s lawyers say it should have been obvious to both companies that he was a vulnerable person who could not have been earning a salary and was likely to be gambling beyond his means.
According to the claim, which has been forwarded to the Gambling Commission, staff at Ladbrokes were aware that he was using the diminishing proceeds of a one-off payout, writing in internal notes in 2014 that he had “received substantial compensation”.
Canadian inflation falls sharply
Over in Canada, inflation has fallen unexpectedly, partly due to tumbling air fares and petrol.
The annual Canadian Consumer Prices Index dropped to just 0.1% for July, down from June’s 0.7%. Economists expected an annual CPI of 0.5%.
On a monthly basis, prices shrank by 0.1%
Statistics Canada attributes the drop to “a broad-based slowdown in price growth” which across both goods and services - especially plane tickets and accommodation.
It explains:
In July, air transportation prices (-8.6%) fell for the first time on a year-over-year basis since December 2015, when prices declined amid low prices for crude oil and airline fuel.
Although many flights remained cancelled or suspended as a result of the COVID-19 pandemic, airlines were offering various incentives such as reduced fees, discounts and promotions to encourage a return to travel. Prices for traveller accommodation fell 27.0% year over year, posting record declines for the third consecutive month.
Canadians has also enjoyed cheaper petrol, with gasoline prices fall 14.9% on a year-over-year basis in July. However, prices did rise month-on-month (as in the UK).
Updated
Back in the US, the mortgage market appears to have cooled a little.
The US mortgage market index dropped by 3.3% last week, due to a sharp drop in people refinancing their loans.
Mortgages for new purchases picked up, though, suggesting more interest in house-buying now lockdown measures have eased and unemployment has dropped (although there’s a long way to go there)
Our economics editor, Larry Elliott, also reckons inflation will fall back this summer...but that’s no relief to rail passengers facing another price hike.
He writes:
Oil prices rose sharply. The summer sales for clothing, footwear and household goods were less generous than they were a year ago. Activity across the economy has started to recover. As Britain begins to return to normal, it should come as no surprise that the annual inflation rate has ticked up to 1%.
In truth, it is a bit more complicated than that. The UK does not have an inflation problem and is unlikely to have one for some time. July’s official cost-of-living data was a one-off: the next move will be sharply down.
That will come too late, of course, for rail travellers, who will be clobbered with a 1.6% fare increase in January because the government insists on using the July retail prices index – a gauge of inflation considered flawed by the Office for National Statistics – to calculate the annual fare increase.
More here....
Some deal news, to brighten up a quiet day:
US conglomerate Johnson & Johnson is buy Momenta Pharmaceuticals for about $6.5bn in cash to bolster its portfolio of treatments for autoimmune diseases.
Reuters has more details:
The deal gives J&J’s Janssen unit access to Momenta’s experimental therapy, nipocalimab, being tested for myasthenia gravis, a neuromuscular disease that causes weakness in muscles.
The drug is being developed to treat diseases where the body’s own antibodies attack or damage proteins and cells.
Over in America, retail group Target has smashed forecasts for sales during the pandemic.
Online sales at Target nearly tripled in the May-July quarter, amid strong demand for videogames, kitchenware and clothes shipped to their doors quickly, thanks to its same-day delivery offer.
Overall sales rose by 24%, with strong demand for in-store pick-up too.
Chief executive officer Brian Cornell told reporters that demand had held up strongly last quarter:
“The biggest change we saw from Q1 to Q2 ... was the exceptional growth we saw in in-store shopping in an environment where many Americans were turning to digital to fulfill their needs.”
Janet Mui, investment director at Brewin Dolphin, reckons the UK needn’t fear a spike in inflation - even though clothing, fuel and furniture prices all picked in July:
“Unexpectedly strong, headline inflation from +0.6% YoY in June to +1.0% in July (consensus forecast +0.6%), was partly due to energy effects, as fuel price inflation rose from -16.4% to -12.0%.
But the core measure (ex. food, energy and tobacco) also picked up from +1.4% to +1.8%, as clothing inflation jumped from -2.2% to 0.0% and furniture inflation rose from +0.5% to +1.5%.
“But UK CPI is likely to slow again, as the effects of the cut in the VAT rate for hospitality/tourism on 15th July is not captured in the inflation data yet and August’s “Eat Out to Help Out” scheme will kick in. Also, sterling has strengthened recently and that should feed through to lower imported prices in due course. We think higher inflation is still not a near-term concern because of the huge output gap to generate enough inflationary pressure in the economy.”
The Telegraph’s Tim Wallace has spotted that the cost of camping kit and ice creams also soared in July, as the pandemic encouraged the UK public to holiday at home.
He adds that the price of garden furniture jumped by 7.5% over the year, perhaps as families tried to make homeworking conditions nicer. More here.
World Bank chief warns pandemic will create depression, poverty and famines
The head of the World Bank has called for a more ambitious debt relief plan for poor countries after warning that the Covid-19 recession is turning into a depression in the most challenged parts of the globe.
In an interview with the Guardian, David Malpass raised the prospect of the first systematic write-off of debts since the 2005 Gleneagles agreement as he said fresh Bank figures due out next month would show an extra 100 million people had been pushed into poverty by the crisis.
Poor countries had been worse hit by the economic fallout from Covid-19, Malpass added, and a growing debt crisis meant it was necessary to go beyond the repayment holidays offered by rich countries earlier this year.
“This is worse than the financial crisis of 2008 and for Latin America worse than the debt crisis of the 1980s,” the World Bank president said.
Here’s a plausible theory for the stunning recovery in the US stock market this year:
Sam Tombs of Pantheon has spotted that dental visits became much pricier last month (hopefully not more painful too).
Wall Street on track for fresh record
Wall Street is on track to hit fresh record highs when trading begins later today.
Having hit a record high on Tuesday, the S&P 500 is on track for further gains. All the losses suffered during the pandemic have now been recovered (unlike in the UK, where the FTSE 100 is still down 19% for the year).
But why has the US market done so well?
Partly it’s the dominance of the technology giants, who have outperformed the rest of the market in the pandemic.
The Federal Reserve’s huge money-printing stimulus programme has also sparked a revival in asset prices - forcing investors to buy equities in search of returns.
Marios Hadjikyriacos of XM says optimism over a new US fiscal stimulus package is also helping, as is a slowdown in new Covid-19 cases.
There’s no stopping the US equity freight train. The S&P 500 erased all its losses since the pandemic rocked global markets to capture new records on Tuesday, pulling off its quickest ever return to new highs after entering a bear market. The primary driver of this rapid recovery is the avalanche of liquidity that’s been unleashed by the Fed and other central banks, which has virtually made bonds uninvestable, forcing investors looking for any returns to rotate into equities.
In the smaller picture, the steady slowdown in new US virus cases may have played a role as well, alongside encouraging housing data showing that homebuilding is roaring back and fresh signals from Congress that a stimulus compromise may be looming.
Democratic House Speaker Nancy Pelosi seems to have blinked in this political standoff, following reports that she is willing to meet the Republicans “halfway” on the size of the package. Even after this concession, the two sides would still be far apart on the dimensions of the bill, but the fact that the Democrats are watering down their demands is encouraging in itself.
Updated
In the City, a subdued’s morning session has seen the FTSE 100 rise by just 10 points, or 0.17%.
IAG, which owns British Airways, has risen by almost 3% this morning to the top of the FTSE 100 leaderboard. That may suggest that anxiety over Covid-19 quarantines are easing a little.
Morrisons is up 1.2%, after Amazon placed the supermarket’s offerings on its website. That could boost Morrisons sales, as it gives millions more customers access to free same-day deliveries.
The move could help Amazon challenge Ocado in the online grocery business. Ocado’s shares are 0.3% higher.
Here’s a reminder of how UK inflation has risen to its highest level since the pandemic lockdown:
The prospect of rail season tickets going up again next year will not cheer commuters, and may encourage some to stick with home working in 2021.
Pressure group Transport Focus points out that Covid-19 means there’s much less demand for a season ticket that gives unlimited travel.
People want different products, and the government should help develop them to encourage passengers safely back onto the railways.
Spokesperson Louise Coward told Sky News:
People just aren’t travelling right now, so the notional idea that a season ticket is going to rise by 1.6% is interesting information - but people aren’t buying those kind of tickets at the moment.
People generally aren’t travelling as they did pre-Covid.
Inflation is also rising across the eurozone, but not as fast as in the UK.
Euro-area consumer prices rose 0.4% year-on-year in July, up from 0.3% in June, according to new data from Eurostat (confirming an earlier ‘flash’ reading).
In the wider EU, inflation jumped to 0.9% from 0.8%.
But there were notable changes across the region:
The lowest annual rates were registered in Greece (-2.1%), Cyprus (-2.0%) and Estonia (-1.3%). The highest annual rates were recorded in Hungary (3.9%), Poland (3.7%) and Czechia (3.6%). Compared with June, annual inflation fell in ten Member States, remained stable in three and rose in fourteen.
The cost of renting a property also kept rising in July.
New data from the ONS shows that the average private rental prices paid by tenants in the UK rose by 1.4% in the 12 months to July 2020, down from 1.5% in the 12 months to June 2020.
It says:
Private rental prices paid by tenants in the UK increased by 1.4% in the 12 months to July 2020, down from 1.5% in the 12 months to June 2020. For example, a property that was rented for £500.00 per month in July 2019 that had a rent increase of the average UK rate would be rented for £507.00 in July 2020.
Growth in private rental prices paid by tenants in the UK has generally slowed since the beginning of 2016, driven mainly by a slowdown in London over the same period. Rental growth has started to pick up since the end of 2018, driven by strengthening growth in London. Rental growth has remained broadly flat since November 2019.
Private rental prices grew by 1.4% in England, 1.6% in Wales and 0.6% in Scotland. In London, private rental prices rose by 1.1% in the 12 months to July 2020.
Here’s a summary of the key points in today’s inflation report [based on CPIH, another inflation measure that included housing costs, which was slightly higher than CPI]
Pound rises but bond yields calm
The pound has risen against the US dollar this morning to $1.3267, its highest level since 1st January.
But there’s not much reaction to today’s jump in consumer prices in the government bond market.
That suggests investors don’t think inflation will rise sharply. If it did, the Bank of England’s monetary policy committee might have to rethink its stimulus plans.
Simon French of Panmure Gordon tweets that bond yields (the interest rate on the debt) remain subdued.
Updated
Here’s Reuters take on the jump in UK inflation:
Clothing and footwear prices were the biggest contributor to the rise in inflation, the ONS said.
In most years retailers slash clothes prices between June and July to clear out their summer ranges in preparation for autumn.
This year, the drop in clothing and footwear prices was unusually small, perhaps reflecting discounting early in lockdown.
Higher petrol prices - and greater costs for haircuts, dentistry and physiotherapy - also contributed to higher inflation, the ONS said.
“Prices for private dental treatment, physiotherapy and haircuts have increased with the need for PPE (personal protective equipment) contributing to costs for these businesses,” ONS Deputy National Statistician Jonathan Athow said.
Here’s our news story on today’s inflation data, and the impact on rail fares:
Haircut prices and dentist bills jump
Private dental treatment, physiotherapy and haircut prices also rose in July.
These businesses have all had to spend money on protective equipment, and introduce physical-distancing measures, so they can work safely. That has pushed up their costs, and some are being passed onto consumers.
The ONS reports that healthcare costs were 3.2% higher than a year ago, the biggest jump since October 2017.
Health prices overall rose by 1.0% between June and July this year, compared with a rise of 0.1% a year ago.
The effect came almost entirely from private dental examinations and non-NHS physiotherapy sessions, where price collectors reported that prices had risen, in part, as companies make their workplace COVID-secure.
The ONS also estimates that hairdressing and personal grooming prices jumped by 4% month-on-month as barbers reopened.
Prices overall rose this year by more than a year ago, with the main upward contributions coming from hairdressing for women and men.
Eat Out to Help Out will take bite out of inflation
The government’s meal discount deal are both likely to push inflation back down again in August.
Eat Out to Help Out will knock up to 50% off the cost of a meal - and has already been used on at least 35m meals. That, and the temporary cut on VAT at hospitality and tourist venues, will push down costs.
Ruth Gregory of Capital Economics explains why this should pull inflation down from July’s 1% level.
The rise in clothing inflation may reflect retailers delaying summer discounting, as non-essential stores reopened in the middle of the month. Retailers may need to do more to entice people through the doors in the coming months. And food price inflation may continue to fall back as the re-opening of restaurants and cafes causes demand for supermarket food to decline.
What’s more, in August, the effects of the cut in the VAT rate for hospitality/tourism on 15th July (prices were collected on 14th July so this won’t be captured until August’s data) and August’s “Eat Out to Help Out” (EOHO) restaurant discount scheme will kick in. If 50% of eligible businesses pass on the VAT cut and 50% participate in the EOHO scheme, then inflation may fall by 0.7ppts. If the pass-through of both the VAT cut and the EOHO scheme is 75% rather than 50%, then inflation may be 1.1ppts lower than otherwise.
UK inflation jumps: Snap reaction
City economists and investors are surprised by the jump in inflation last month, and fear it will hurt consumers. Here’s some early reaction:
Jai Malhi, Global Market Strategist at J.P. Morgan Asset Management (JPMAM):
Investors have been questioning whether a sudden rise in inflation is on the cards given the sheer amount of money governments and central banks are showering round the economy. Today’s inflation release shows that prices in the UK are certainly bouncing again.
The upside inflation surprise highlights to us that Covid-19 was a shock to supply as well as demand. Companies having to operate at lower capacity may have to raise prices to cover sunk costs. At this stage we doubt this will prevent the Bank of England providing further support to the economy. But if these upside surprises continue it may add some hesitancy.”
Jeremy Thomson-Cook, Chief Economist at Equals Money comments:
“Inflation is showing signs of a v-shaped recovery - not what consumers need at all – following an increase to 1% in July compared to this time last year. The rise was underpinned by increases in clothing prices as well as furniture and transport costs with gains also seen in culture and recreation and health. Consumers evidently had a pent up demand for summer clothes, haircuts and road trips to the beach.”
“While an inflation rate of 1% is still well below the Bank of England’s targeted figure of 2%, a period of rising inflation alongside the other well-known issues that the UK economy has to navigate in the coming months – an end to the furlough scheme and a decision one way or the other on Brexit – would make things even more painful for those whose incomes have been hit by the pandemic.”
Neil Birrell, Chief Investment Officer, Premier Miton:
“The consensus expectation for the month on month CPI was for it to be down, but it surprised with a rise of 0.4%, which was reflected in the year on year core CPI up 1.8%. It’s a bit early to call the return of inflation, but it does show that there is activity in the economy.”
Updated
Surging petrol prices push inflation up
Drivers, as well as rail passengers, face higher transport costs.
Today’s inflation report shows that petrol prices have surged at the fastest rate in almost a decade.
The ONS says:
Between June and July 2020, petrol prices rose by 4.9 pence per litre, to stand at 111.4 pence per litre, and diesel prices rose by 4.0 pence per litre, to stand at 116.7 pence per litre.
In comparison, between June and July 2019, petrol and diesel prices fell by 0.9 and 2.3 pence per litre, to stand at 127.3 and 132.0 pence per litre, respectively. This month’s rise in petrol prices was the largest monthly increase since between December 2010 and January 2011, when prices rose by 5.4 pence per litre (to stand at 127.4 pence per litre).
That suggests that the recovery in crude oil prices in May and June has been swiftly passed onto drivers. Plus, there will be increased demand for petrol now more people are returning to their workplaces.
Most of the upward move in clothing prices came from women’s garments, says the ONS, because the usual summer price cuts aren’t happening.
It says:
arments prices overall fell this year by less than a year ago, with the main upward contributions coming from garments for women, in particular formal trousers, casual jackets, jumpers, nightdresses/pyjamas, cardigans and dresses; garments for infants and children, in particular jumpers/sweatshirts/cardigans, T-shirts, trousers and pyjamas; and men’s casual jackets/coats
UK rail passengers face 1.6% ticket hike
The UK’s retail prices index, another measure of inflation, jumped by 1.6% per year in July.
And that’s bad news for rail passengers, as my colleague Gwyn Topham explains:
Rail fares are set to rise by another 1.6% in January, adding around £100 to the cost of many annual season tickets.
The passenger watchdog, campaigners and unions have all called on the government to abolish the policy of annual fare rises at a time when passenger numbers on the railway have plummeted due to coronavirus.
The rise is set by the July RPI inflation figure, announced by the ONS this morning. It will apply to regulated fares, which include season tickets, anytime urban tickets, and off-peak long-distance returns.
The rise means fares will once again rise well above the more commonly used measure of inflation, CPI, which was just 1% for July. Fares rises have also outstripped wage rises for most of the last decade, at a time when fuel duty for motorists has been frozen.
The RMT union claimed fares could be cut by 5% by diverting funds currently paid to private operators during the coronavirus crisis, where the government has suspended franchises and underwritten losses on the railway, where passenger numbers are still less than a quarter of pre-Covid 19 levels.
The passenger watchdog, Transport Focus, has called for cut-price deals to incentivise the return to the railways, and joined the RMT and others in calling for season tickets for part-time commuters to reflect new working patterns and make rail travel more affordable.
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Charts: Clothing and fuel push inflation up
This chart shows how UK inflation is now at its highest since March (just as the economy entered the Covid-19 lockdown).
This chart shows how clothing and transport costs had the biggest impact, with prices rising month-on-month.
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Introduction: UK inflation jumps to 1%
Good morning,and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Inflation across the UK economy has risen faster than expected, in a blow to households struggling under the pandemic.
Figures just released by the Office for National Statistics show that the Consumer Price inflation rate jumped to 1.0% in July, up from 0.6% in June.
CPI was pushed up by clothing, transport costs and household items, as people returned to the shops as the lockdown eased.
The Covid-19 lockdown has disrupted the usual pattern of summer sales in the shops, while the recent recovery in the oil price is now pushing up petrol prices again.
But there are also signs that food prices are easing.
The ONS says:
- Clothing, rising prices at the petrol pump, and furniture and household goods made large upward contributions to the change in the CPIH 12-month inflation rate between June and July 2020.
- Falling food prices resulted in a partially offsetting small downward contribution to the change.
Economists had expected inflation to remain unchanged at 0.6%, so this suggests that inflationary pressures are building faster than thought....
More details and reaction to follow...
Also coming up today
We get inflation data from the eurozone and Canada too later today. They were expected to show muted price pressures, but this UK data may prompt a rethink...
Investors will be watching the US dollar closely, after it fell to a two-year low on Tuesday. That slide pushed up precious metal prices, and also pushed stocks on Wall Street to a fresh record high last night.
European stock markets are expected to open a little higher, with investors perhaps looking enviously at the faster recovery across the Atlantic. The S&P 500 is now up 5% this year, lifted by tech stocks, while the Stoxx 600 is still down 11%...
Trade war worries are also building again, after President Donald Trump said he called off last weekend’s trade talks with China and blasted Beijing’s handling of the coronavirus.
I postponed talks with China. You know why? I don’t want to deal with them now. I don’t want to deal with them now.
With what they did to this country and to the world, I don’t want to talk to China right now. Okay?
That suggests US-China tensions will keep rising as November’s election approaches.
The agenda
- 7am BST: UK inflation data for July
- 10am BST: Eurozone inflation data for July - expected to rise to 0.4%, from 0.3%
- 12pm BST: US mortgage applications data
- 1.30pm BST: Canadian inflation data for July - expected to fall to 0.5%, from 0.7%
- 3.30pm BST: US weekly oil inventory statistics
- 7pm: US Federal Reserve publishes minutes of its last meeting
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