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Investors await signal on fresh ECB economic stimulus – business live ECB holds interest rates steady but signals future stimulus – business live
(about 4 hours later)
There are some punchy statements on a possible German recession coming through after the Ifo survey. The euro is just a whisker shy of two-year lows against the US dollar.
VP Bank analyst Thomas Gitzel, via Reuters, said: It traded as low as $1.1107 in the aftermath of the announcement. If it breaks below $1.1106 it will be the lowest level since May 2017 by my reckoning – tantalisingly close (if almost entirely of symbolic value).
The most important German economic indicator suggests that the German economy is heading towards a recession. The pound is now up by 0.3% against the euro for the day. It’s all ECB-driven: against the US dollar sterling is still flat.
More Reuters from Ifo president Clemens Fuest: the German economy is navigating troubled waters and companies are less satisfied with their current business situation. An important update:
The Ifo sub-index for the manufacturing sector posted its biggest drop since February 2009 – the height of the financial crisis. 'ZERO' reaction in #bitcoin on the #ECB statement. #notgold pic.twitter.com/COy1UwCBbQ
That echoes purchasing managers’ index data yesterday which also had economists talking of a recession risk. Thoughts at the press conference (due in about 20 minutes) will turn to what mix of stimulus measures Draghi et al. will consider necessary at the September meeting.
The euro just hit its lowest level since the end of May, with all the signs pointing towards monetary easing to come from the European Central Bank. “The ECB is loading its bazooka, but with what?” asks Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics.
Looser monetary policy generally correlates with a less valuable currency. With investors all but certain that the ECB has rate cuts in its sights, the main question is when and how fast the cuts will come. As we have persistently noted, the ECB never pre-commits. But this is as close at it gets.
Against the US dollar the euro is down by 0.1%, and it previously hit lows of $1.1120 last seen on 30 May. Further easing is on the way. But what kind? We are fairly certain that deposit rate cuts are coming, but today’s initial statement points towards a combination of rate cuts and QE. We are sure that Mr. Draghi will be quizzed intensely about this balance, and options, in the press conference.
It will be too late for the ECB’s interest rates decision, but the latest measure of German business confidence from the influential Ifo Institute shows that morale has sagged more than expected in July. Demand for UK government debt has increased, with the yield on the 10-year gilt falling to its lowest level since September 2016.
The closely followed measure fell to a reading of 95.7 – well below the consensus expectations of 97.1. The yield on the benchmark bond fell to a low of 0.65%. Yields move inversely to prices.
Given the barrage of economic data suggesting that the European economy is weakening, the Ifo survey was never going to be the tipping point, but it gives another reason for Mario Draghi to strike a dovish tone in the press conference later. Some reaction from economists is now coming through.
Boris Johnson is planning to set out his “priorities for government” in his first appearance as prime minister in the house of commons – at about 10:30am BST. Ana Andrade, analyst at the Economist intelligence Unit, said it has “laid the ground for a cut, but will wait for September to implement further stimulus – which will then be backed by hard data and fresh macroeconomic projections.”
Perhaps he can shed some more light on what will be happening by 31 October, the Brexit deadline. Weak economic momentum and rising deflation risk, as measured by the substantial de-anchoring of inflation expectations over the past few months, call for further action.
Following Business Qs, there will be one government oral statement in the @HouseofCommons today:The Prime Minister - Priorities for Government The press release reveals a much more dovish stance than expected. Up until now the re-start of QE remained a vague possibility. But the ECB’s decision to task the relevant Eurosystem Committees with examining options for further stimulus, and the formal reinforcement of the ECB’s commitment to the symmetry in its inflation aim leave no room for doubt about the ECB’s willingness to act. Whether by re-starting QE or by substantially cutting the deposit rate.
People in the UK are braced for the continued heatwave, but predicted temperatures of 39 degrees Celsius will be good news for one company: Unilever. There could be more quantitative easing on the way, with ECB economists in Frankfurt tasked with looking at options to “reinforce” its interest rates actions.
The consumer goods giant, which makes brands such as Ben & Jerry’s, Magnum and Popsicle ice creams, today reported that it was held back by the rain as it reported weaker than expected sales growth. It said: The ECB’s statement said:
Market growth in Europe and North America was held back by the impact of weather on ice cream sales. The Governing Council has tasked the relevant Eurosystem Committees with examining options, including ways to reinforce its forward guidance on policy rates, mitigating measures, such as the design of a tiered system for reserve remuneration, and options for the size and composition of potential new net asset purchases.
At the other end of the scale to Nissan, Volkswagen has bucked the recent trend of struggling carmakers with a 30% jump in operating profits in the second quarter. The euro briefly bounced higher, but has now hit another two-month low of $1.1118 against the US dollar.
While sales fell, the German carmaker managed to increase its market share as it focused on SUVs, the increasingly popular vehicles which also happen to have higher profit margins. Read the ECB’s full statement here.
Operating profit came in at €5.13bn (£4.6bn) for the quarter, up from €3.94bn in the same period last year. There is some strong guidance on the future path of interest rates, however.
In the first six months of the current financial year, the sales revenues of the Volkswagen Group grew by 4.9% to €125.2bn compared with the first half of 2018. Policy will remain “highly accommodative” for “a prolonged period of time”.
VW has gone through the wringer in recent years after its “dieselgate” scandal, in which it cheated in emissions tests. However, it has recently performed better than expected in a tough environment. The Governing Council also underlined the need for a highly accommodative stance of monetary policy for a prolonged period of time, as inflation rates, both realised and projected, have been persistently below levels that are in line with its aim. Accordingly, if the medium-term inflation outlook continues to fall short of its aim, the Governing Council is determined to act, in line with its commitment to symmetry in the inflation aim. It therefore stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner.
Frank Witter, the VW board member responsible for finance, said: The ECB’s governing council has voted to leave interest rates unchanged.
In the first half of the year, the Volkswagen Group performed very well in a generally weaker overall market. The development of sales revenue and profit in the first six months is gratifying. We also confirm our outlook for the Volkswagen Group for the year as a whole. From its statement:
Meanwhile, Metro Bank’s shares are down by 16% after hitting a record low this morning following the resignation of founder Vernon Hill as chairman last night. At today’s meeting the Governing Council of the European Central Bank (ECB) decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council expects the key ECB interest rates to remain at their present or lower levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to its aim over the medium term.
Metro Bank has been under the cosh in recent months after a mischaracterisation of loans was found by the Bank of England. That error was compounded by a response that raised questions over the governance of the lender. A reminder: the 12:45pm BST announcement will be followed by the press conference led by ECB president Mario Draghi at 1:30pm BST.
Hill will still hold a non-executive director role at the company he founded in 2010. You will be able to watch the ECB’s webcast of the press conference at this link.
Metro Bank to replace founder Vernon Hill as chairman So a quick round-up as we prepare for the announcement: the euro is now flat for the day against the US dollar.
Cobham shares have surged by 35% after the bid from private equity firm Advent. Sterling is up by about 0.14% against the euro and the dollar.
Japanese carmaker Nissan has announced 12,500 job cuts worldwide – more than the 10,000 previously reported – as profits plunged by 98.5% in the first quarter of its 2019 financial year. Borrowing costs have been driven lower in expectation of more stimulus. The yield on the German 10-year hit a new all-time low of -0.443% this morning, as investor demand for bonds increased in the expectation of looser monetary policy. Yields move inversely to prices.
Operating profit fell to only 1.6bn Japanese yen (£11.8m), from 109bn yen the previous year, Nissan said. With barely 10 minutes left until the ECB’s announcement, perhaps they will take a leaf from Turkey’s book?
Revenue dropped by 12.7% in its first financial quarter to 2.4bn Japanese yen. Its central bank has slashed the key interest deeply, by 4.25 percentage points, in a first monetary policy meeting under its new governor. The interest rate was cut on Thursday to 19.75% from 24%, the Associated Press reports.
In its statement Nissan did not say whether its Sunderland plant would be affected by the job cuts, although the BBC reported yesterday that this was not thought likely by union sources. President Recep Tayyip Erdogan dismissed the previous governor, Murat Cetinkaya, on July 6 over disagreements on interest rate cuts and reiterated his belief that interest rates are “the mother of all evil.”
Nissan will reduce its global production capacity by 10% by the end of the 2022 fiscal year. Cetinkaya was replaced by Murat Uysal, the deputy governor.
In line with production optimizations, the company will reduce headcount by roughly 12,500. Furthermore, the company will reduce the size of its product lineup by at least 10% by the end of fiscal year 2022 in order to improve product competitiveness by focusing investment on global core models and strategic regional models. The largest carmaker in Britain, Jaguar Land Rover, lost £395m in the second quarter of the year after a sales slump.
The FTSE 100 has risen by 0.2% at the opening bell. Top risers include ITV for a second day and miner Anglo American – although neither has gained more than 2% in early trading. Global sales fell by 11.6% year-on-year in the three months to 30 June, JLR said. Revenues for the quarter were £5.1bn, a 2.8% year-on-year decline.
Across Europe, the Euro Stoxx 600 is up by 0.6%, led by France’s Cac 40, up 0.7%, and Italy’s FTSE MIB, up by 0.35%. Germany’s Dax gained 0.4%. JLR, which is owned by India’s Tata Motors, blamed “weaker market conditions” as well as the Brexit-related shutdown of factories in April. Brexit also delayed its emissions certifications, it added.
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business. Ralf Speth, Jaguar Land Rover chief executive, said:
Boris Johnson has started his reign as prime minister with a brutal cabinet cull. He promised on Tuesday to steal leadership rival Jeremy Hunt’s ideas, but he did not want him in his cabinet. In the top jobs are chancellor Sajid Javid, home secretary Priti Patel and foreign secretary Dominic Raab. Keen Brexiteer Andrea Leadsom is head of the business department, and will likely strike a somewhat different tone to predecessor Greg Clark. Jaguar Land Rover is in a period of major transformation. We are simplifying our business, delivering on our product strategy and adapting to the tough market environment. We will build on our strong foundations and increased operating efficiency to return to profit this fiscal year.
“Revenge” is the word on our main story this morning. You can read about it in all its gory detail here, as Britain prepares for what could be the hottest day ever. Jacob Rees-Mogg, newly appointed leader of the house of commons, has resigned from his role at a London-headquartered hedge fund, according to the London Evening Standard.
Barring any early interventions on Brexit from Johnson (and it’s tricky to see at this point how he could take a harder line on a no-deal Brexit than he already has) the major economic news for the day will almost certainly be the European Central Bank’s latest monetary policy announcement. Rees-Mogg is a co-founder at Somerset Capital Management, and has earned hundreds of thousands of pounds as a partner at the firm. He was paid about £15,000 per month for 30 hours’ work every month for the past year, according to the latest register of members’ interests.
And, oh, how times change. A year ago most economists believed that ECB president Mario Draghi would preside over at least one interest rate hike during his time in the chair. Now those same economists are weighing whether the ECB’s rate-setting governing council will today signal an intention to cut interest rates at its next meeting in September – or whether it could take the plunge today with a new round of economic stimulus. The firm last year gained notoriety after it set up an investment fund in Ireland and warned prospective clients about the financial dangers of a hard Brexit.
“The case for further ECB easing was reinforced yesterday by the release of weaker than expected eurozone PMI surveys for July,” said Lee Hardman, a currency analyst at MUFG Bank. BREAKING: Jacob Rees-Mogg steps down from his role at Somerset Capital Management
It is another disappointing signal for the ECB whohad previously hoped that growth would begin to pick up in the second half of this year. They are now becoming increasingly resigned to a more protracted economic slowdown. Boris Johnson has promised to make the UK the “greatest place on earth” in his first statement to the house of commons. Quite the echo of another blond world leader (and no mention of extraterrestrial ambitions from earlier in the week).
The ECB response could involve a smaller rate cut than usual, and even a reacceleration of quantitative easing, the bond purchases which have been such a big feature of monetary policy in the last decade. Michael Gove is in charge of no-deal planning – what the Brexit department will be doing is unclear.
Chances of a rate cut today have risen substantially after this week's PMIs and BLS. But the bigger question is about QE - watch out for Draghi's comments about (SPF) inflation expectations. https://t.co/Rna7GM07Qf A lot of spending plans: more money for the National Health Service; 20,000 new police officers; more funding for schools.
Draghi leaves the ECB on 31 October, meaning he will probably have gone through eight years in which the central bank has provided constant stimulus to the eurozone economy. And tax cuts as well, although sparse on the detail so far.
Back in the UK, there is some big corporate news in the defence sector, as Cobham – the Dorset-based maker of military and civilian aerospace systems – is snapped up by US private equity group Advent International for £4bn. The 165p per share offer represents a 50.3% premium to the average share price for the last three months. On migration, he points to an Australian points-based system, but says EU nationals will have a right to remain in the UK.
The agenda You can follow in a lot more detail with the Guardian’s Andrew Sparrow on the politics live blog:
9am BST: Germany Ifo business confidence (July) Boris Johnson chairs first cabinet as critics say party now 'fully taken over by hard right' – live news
11am BST: UK CBI distributive trades (retail) survey (July) With the ECB and the US Federal Reserve both looking to cut interest rates, what is the Bank of England up to? Not much, for the moment, appears to be the answer.
12:45pm BST: European Central Bank (ECB) interest rate decision The Bank’s rate-setting monetary policy committee meets next week (ahead of Thursday’s announcement) but will stick to its “solitary policy path”, according to Martin Beck at Oxford Economics, a consultancy.
1:30pm BST: ECB press conference with Mario Draghi A 9-0 vote to hold rates steady is on the cards he says – with no change to its guidance that it will raise interest rates where other central bankers are reacting to a slowing global economy.
1:30pm BST: US durable goods orders (June) A new PM, a likely shift in fiscal policy and continued Brexit uncertainty give the MPC good cause to continue a wait-and-see approach and leave the possibility of tighter policy until well into 2020.
Amid further signs of dovishness from the US Fed and the European Central Bank, the monetary policy committee is likely to leave the BoE the odd one out among major central banks