Time to wrap up…

The Bank of England has warned that financial markets are at risk of a “sharp correction” in the future, as investors are only focusing on good economic news.

The BoE says:

The prices of many assets such as shares and bonds remain high relative to historical norms, and some have continued to rise. This suggests that investors in financial markets are continuing to expect the economy to recover and inflation to fall.

They are placing less weight on risks, such as geopolitical developments or continued high inflation, that might cause weaker growth or interest rates to stay higher than expected.

These risks make it more likely that there could be a sharp correction in asset prices that could ultimately make it more costly and difficult for UK households and businesses to borrow.

In its latest financial stability report, the BoE also warned that millions of UK households who are paying relatively low mortgage rates will see monthly repayments jump in the next two years.

It also flagged the risk that global elections could destabilise the UK financial system…. while China’s property slowdown is another threat.

In other news…

The US economy grew a little faster than thought in the first quarter of the year, by an annual rate of 1.4%.

Japan has issued fresh warnings over the weakness of the yen, which has hit a 38-year low against the US dollar this week at around 160 yen to the $.

Elon Musk’s SpaceX has been valued at about $210bn based on the value of insider shares being sold in a tender offer,

There are new signs of weakness in the US housing market today.

Contracts to buy U.S. previously owned homes unexpectedly fell in May, by 2.1%, indicating that high mortgage rates and expensive homes are deterring buyers.

The National Association of Realtors (NAR) reported that pending home sales fell in the densely populated South and the Midwest on a monthly basis, but rose in the Northeast and West.

Year-over-year, all U.S. regions registered reductions.

“The market is at an interesting point with rising inventory and lower demand,” said NAR chief economist Lawrence Yun, adding:

“Supply and demand movements suggest easing home price appreciation in upcoming months. Inevitably, more inventory in a job-creating economy will lead to greater home buying, especially when mortgage rates descend.”

Just in: the US economy grew a little faster than previously thought in the first quarter of this year.

New data from the Bureau of Economic Analysis show that US gross domestic product increased at an annual rate of 1.4% in the first quarter of 2024.

That’s the equivalent of growing by 0.35% quarter-on-quarter….and is up from the prevoius estimate of 1.3% annualised growth.

The BEA says the increase primarily reflected increases in consumer spending, housing investment, business investment, and state and local government.

But, a fall in inventory investment weighed on GDP, as did a rise in imports.

Uncertainty caused by a global wave of elections, starting this weekend in France, risks destabilising the UK’s financial system, the Bank of England has warned.

Officials are concerned about the kind of policies that newly elected governments may enforce in large economies, including the US, where Donald Trump is vying for another term as president in the run-up to the election in November.

The French president Emmanuel Macron’s shock announcement of a parliamentary election, with a first round of voting on 30 June and Marine Le Pen’s far-right National Rally party forecast to make significant gains, had shown how political uncertainty could impact economic growth forecasts and cause volatility in financial markets, affecting government debt prices, the Bank’s financial policy committee (FPC) said.

More here.

The Bank of England also warns that “significant downside risks remain” from China’s property market.

Today’s financial stability report points out that activity in the mainland Chinese residential property sector continues to decrease, with the prices of new and existing homes falling this year:

Disorderly defaults by property developers have been avoided so far, the Bank of England says, even though some large Chinese property developers have missed bond payments without agreed extensions.

Chinese authorities have put various measures into place to support the housing market, which has helped support housing demand.

The Bank warns, though, that the ongoing market adjustment will weigh on China’s economy for some time – and could potentially spill over to the UK economy, saying:

The adjustment in the property sector, alongside broader structural trends, is likely to weigh on growth in China for some time. Property accounts for a significant proportion of household wealth in China; much higher than in the US, for example. That means falls in sales and residential property prices are likely to continue to impact Chinese consumption and growth.

There have been limited spillovers to the UK so far from the adjustment in mainland China’s property market. However, significant downside risks remain. More widespread crystallisation of risks in mainland China could lead to spillovers to the UK and other countries, and could be larger if the crystallisation of property sector vulnerabilities were to spread to other sectors in the Chinese economy. Risks could spill over to the UK financial system through channels including weaker trade, financial markets, and global risk sentiment.

The Bank of England is concerned that the flurry of elections taking place this year could cause financial instability.

Today’s report says:

Geopolitical risks remain high and there is policy uncertainty associated with elections set to take place globally. This could make the global economic outlook less certain and lead to financial market volatility.

The Bank cites the drop in French government bond prices, and shares in Paris, this month after Emmanuel Macron called snap parliamentary elections.

They say:

Markets responded to the unexpected announcement that French parliamentary elections would be held on 30 June and 7 July. For example, the spread between French and German 10-year government bond yields rose to its highest level since 2017.

The US presidential elections, in November, are also an obvious source of risk and uncertainty, with Joe Biden and Donald Trump due to face off in a debate tonight.

The City has been unspooked by the UK election next week, though, with JP Morgan suggesting that a Labour election victory will be a “net positive” for financial markets.

Millions of UK households will be hit by rising mortgage costs over the next two years, the Bank of England says, even though interest rates may have peaked.

Its new Financial Stability Reprt shows that around 30% of mortgagors are likely to see mortgage costs rise by more than £100 a month by the end of 2026.

That’s because borrowers will continue to come to the end of their fixed-rate deals, meaning they’ll have to refinance onto higher rates.

Today’s Report says:

With continued strong income growth and low unemployment, the aggregate amount of debt held by UK households relative to their income has fallen further since Q1. That said, many UK households, including renters, are still facing pressures from the increased cost of living and higher interest rates.

The share of households spending a high proportion of their income on mortgage payments is still expected to increase slightly over the next two years. But the overall share of households who are behind in paying their mortgages remains low by historical standards.

It adds:

Over the next four years, the vast majority of fixed-rate mortgagors were expected to refinance, most at rates higher than they currently paid. A smaller group, predominantly those on variable-rate mortgages, could see a reduction in their monthly payments.

The Bank also predicts that mortgage arrears will increase further, but are likely to remain well below their early 1990s and post-GFC peaks of 4.0% and 2.4%, respectively.

This is despite interest rates having risen by more since 2021 Q4 than in past tightening cycles, it adds.

Newsflash: The Bank of England has warned that financial markets remain at risk of a sharp correction.

In its latest financial stability report, the BoE says that high inflation, or geopolitical risks, could trigger a selloff.

The Bank says risks to the UK financial system are “broadly unchanged” since the first quarter of the year.

But some asset prices have continued to rise, it points out, while the risk of a sharp correction persists.

European markets are up around 8% so far this year, while the US Nasdaq Composite index has surged by 18%.

The report, which is designed to track the stability of the financial system, says:

The prices of many assets such as shares and bonds remain high relative to historical norms, and some have continued to rise. This suggests that investors in financial markets are continuing to expect the economy to recover and inflation to fall. They are placing less weight on risks, such as geopolitical developments or continued high inflation, that might cause weaker growth or interest rates to stay higher than expected.

These risks make it more likely that there could be a sharp correction in asset prices that could ultimately make it more costly and difficult for UK households and businesses to borrow.

The report also warns that

• Global risks are material, including geopolitical risks, which remain high.

• Overall, UK households and businesses have remained resilient to the impact of higher interest rates.

• The UK banking system is strong enough to support households and businesses, even if the economy does worse than expected.

Some analysts are forecasting that Tokyo could intervene to support the yen if it fell as low as 165 to the dollar.

ING point out that the intervention two months ago was triggeed by a 10 yen move in USD/JPY.

They told clients:

In April, USDI/JPY had risen from a low of 150 to a high of just below 160 over a little less than a month when Japan intervened…

In the past 30 days, the low was 154.60, which would by the same logic place the intervention level at 164/165.

The yen is still trading over 160 to the dollar, above this new “line in the sand” of 165….

The number of job openings at UK companies has dropped by a fifth compared with a year ago, hiring platform Indeed reports.

In its Mid-Year Labour Market Update, Indeed shows job postings are slowing as the labour market cools.

The technology industry, and the beauty & wellness sector, are among those seeing the fastest slowdown in hiring.

The report also found, though, that wage pressures remain strong, particularly in lower-paid roles.

Here’s the key points:

• Foreign jobseeker interest is up— the share of searches for UK jobs from abroad is up 40% from its pre-Covid average.

• Roles remain hard-to-fill despite foreign interest - the jobs foreign jobseekers are most drawn to are software development, engineering and mathematics. However, engineering and software development roles remain some of the hardest-to-fill in the UK, meaning barriers remain in hiring this talent.

• Wage pressures still persist — Despite the labour market cooling, the Indeed Wage Tracker shows that posted wage growth rose to a four-month high of 6.5% year-on-year in May, driven by lower-paid roles, with childcare wages up the most at 8.6% year-on-year.

• Flexibility is a mainstay — the share of job postings mentioning remote or hybrid work has remained steady at around 15% of job postings in 2024, up from 13% in May 2022. Around 2.4% of jobseeker searches contained remote/hybrid terminology with the share remaining stable since 2022.

Jack Kennedy, Indeed’s senior economist, says:

“The UK labour market has continued its adjustment in recent months, though it remains somewhat tight and still competitive for employers in many sectors. Highly skilled jobs tend to always be harder to recruit for as they are naturally relevant to a smaller candidate pool. However, there is strong foreign interest in some of these jobs, meaning UK businesses may want to look at jobseekers from outside the country to fill gaps.

While lower-paid jobs are generally easier to recruit for as the candidate pool is larger, persistently higher inactivity post-pandemic and post-Brexit immigration policy have made it harder than it used to be for employers to fill these roles. Tackling inactivity, a longer-term skills strategy and the role of immigration in addressing labour shortages will be agenda items for the elected government.

Just in: Sweden’s central bank, the Riksbank, has left interest rates on hold at 3.75%.

But it also hints that rates could be cut as many as three times in the second half of 2024 if inflation prospects remain the same.

The Riksbank explains:

Inflation is close to the target and economic activity is weak. The Executive Board considers that monetary policy should be adjusted gradually, and has decided to hold the policy rate unchanged at 3.75%.

Shares in Swedish clothing retailer H&M have tumbled 13% after reporting earnings that missed expectations this morning.

H&M also predicted a drop in June sales, suggesting they could fall by 6% in local currencies against the same period last year, partly due to poor weather in many key markets.

It told shareholders:

The unstable weather in many of the H&M group’s large markets at the start of June 2024 had a negative impact on sales, but sales recovered as the weather normalised at the end of the month.

CEO Daniel Ervér says H&M group’s profitability performance during the first half of the year was strong. He warns, though, that external factors such as material costs and foreign currency rates, will have a more negative impact than expected in the second half of the year.

Profits have dropped at motoring and cycling retailer Halfords.

Halfords blamed continuing declines in the markets for car tyres and for cycling equipment, as consumer demand for big ticket purchases wanes.

It made pre-tax profits of £19.9m in the last year, a 45% drop on the £36.2m the previous 12 months.

On an underlying basis, though, profits before tax were in line with market expectations at £36.1m, down 18%.

Halfords reports that the cycling market contracted faster than expected, leading to more promotional activity to shift stock.

Elevated cost inflation continued to be a significant headwind, it adds.

Looking ahead, Halfords predicts that market volumes for cycling and consumer tyres will fall in the current financial year:

Trading since the start of FY25 has continued to be soft, impacted by low consumer confidence around big ticket, discretionary purchases, and poor spring weather, which has reduced store footfall and affected sales of both cycling and staycation products.

Whilst we continue to expect market share gains in the year ahead, based on what we are currently seeing we now expect market volumes to decline in FY25 in cycling and consumer tyres, and to remain broadly flat in motoring servicing and retail motoring products.

It’s also a busy morning for UK retailers, with several companies updating the stock market on their performance.

Electricals seller Currys has reported a 10% rise in adjusted profit before tax, to £118m, but revenues have dropped 2%.

Currys is hoping for a further boost from artificial intelligence, telling shareholders that the coming wave of AI led technology could be the most exciting tech cycle since the Apple iPad in 2010.

Alex Baldock, Currys CEO, says:

Encouraged as we are by our progress, we know we can go further. For one thing, we expect AI-powered technology to be the most exciting new product cycle since the tablet in 2010. With our partnerships, scale and expert colleagues to demystify AI, we’re best-placed to benefit.

Elon Musk’s SpaceX has been valued at about $210bn based on the value of insider shares being sold in a tender offer, Bloomberg reports today.

SpaceX will sell insider shares at $112 apiece in a tender offer, a higher-than-expected price, that boosts the value of Elon Musk’s space and satellite company above its previous valuation of $180bn.

SpaceX is considered one of the most profitable start-ups in the world, Bloomberg says, adding:

The firm, which was founded in 2002 by Tesla Inc CEO Elon Musk, is one of the most prominent private manufacturers of spacecraft and satellites. It also offers satellite-based internet services through its Starlink subsidiary.

The firm also holds a slew of contracts from NASA to provide spacecraft and crew equipment for orbital missions and support for the International Space Station.

Earlier this month, SpaceX recorded the first fully successful test flight of its mighty space rocket Starship, when it splashed down successfully in the Indian Ocean.

Japanese finance minister, Shunichi Suzuki, pledged today that authorities would take necessary actions on currencies after the yen slid to a 38-year low against the dollar.

Japanese authorities are “deeply concerned” about the effect of the yen’s drop on the economy and are watching foreign-exchange moves with a high sense of urgency, Suzuki told reporters.

He said:

“It’s desirable for exchange rates to move stably. Rapid, one-sided moves are undesirable. In particular, we’re deeply concerned about the effect on the economy.

We are watching moves with a high sense of urgency, analysing the factors behind the moves, and will take necessary actions.”

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

Pressure is piling on Japan’s authorities to intervene in the foreign exchange markets, after the yen weakened to a 38-year low against the US dollar.

The yen, which has been ailing for some months, has weakened to as low as 160.8 to the dollar, for the first time since 1986.

That takes the yen below its low in April, when Tokyo was forced to intervene in the foreign exchange markets, burning through ¥9.8tn (£48bn) to prop up their currency.

The yen’s weakness is due to the interest rate differential between Japan and the rest of the world. While most central banks hiked rates aggressively over the last coule of years, the Bank of Japan (BoJ) only ended its negative interest rate policy this spring, and has pegged borrowing costs to a range of 0%-0.1%.

Yesterday, Japan’s top currency official, Masato Kanda, told reporters that the government was “seriously concerned and on high alert” about the yen’s decline and would respond to any “excessive” moves.

This week’s weakness has prompted speculation that fresh intervention may be required.

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, says:

The only thing that prevents the yen from a further fall is the direct intervention risk. But other than that, the yen deserves to lose more blood. One-year risk reversals, which show how traders feel about the yen over a longer time, hint that they’re still kind of excited about the yen compared to the dollar.

But that excitement is fading fast as the Bank of Japan (BoJ) keeps delaying its intervention plans meanwhile the Federal Reserve delays its rate cutting plans

Another option would be for the BoJ to raise interest rates, of course, and try to strengthen the yen organically that way.

This may not be too controversial, since the weak yen is hitting Japanese households hard, explains Kathleen Brooks, research director at XTB, adding:

They must deal with rising inflation, as import prices surge, which is also weighing on consumption. Wage growth is also below inflation, which is adding pressure to the Japanese authorities to act.

Some argue that the BOJ need to adjust monetary policy and narrow the interest differential with the US and the rest of the world, as that is the most effective way to boost the yen. However, it would also require a shift in priorities at the BOJ, moving away from keeping yields low and stable, to a normalization of monetary policy like that in the US and across Europe.

The agenda

• 8.30am BST: Swedish Riksbank interest rate decision 8.30am

• 10.30am BST: Bank of England Financial Stability Report

• 10am BST: Eurozone consumer and economic confidence statistics for June

• 1.30pm BST: US GDP Q1 (final estimate)