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We’re moving ever closer to the $2 pound…and closer still to a 5.5% UK base rate.
Sterling hit its highest level against the dollar in 14 years, heading above $1.99 due to a quarterly report from the Confederation of British Industry (CBI). The survey showed that the number of businesses reporting that they had hiked prices in the past three months had hit its highest level since 1995.
The stronger-than-expected data may have been good news for anyone getting their holiday money for a trip to the States – but it’s not so great for anyone who’d hoped that interest rates had peaked this month…
The Bank of England is clearly worried about a wage-price spiral driving inflation higher. We don’t know about wages yet – but if prices are anything to go by, the Bank is right to be nervous.
Ian McCafferty, the CBI’s chief economist, said: ‘Having seen margins consistently squeezed by rising input costs and an inability to increase selling prices in a tough marketplace, manufacturers found room to correct this over the last three months.’
The survey echoes similar findings from the Birtish Chambers of Commerce, which last week reported that the number of firms planning to raise prices was at its highest since 1997.
The odds on a follow-up February interest rate hike are growing ever shorter – though Mervyn King did his usual attempt at keeping the City on its toes at a speech he gave in Birmingham last night, saying that the Monetary Policy Committee still believes ‘inflation is likely to fall back in the second half of the year, possibly quite sharply.’
However, anyone hoping that 5.25% is the peak shouldn’t hold their breath. The BoE governor also said that the January rate hike was, reports The Telegraph, the result of ‘rapid money and credit growth, rising inflation expectations and the increasing tendency for companies to raise prices to sustain profit margins.’ None of these things looks likely to go away any time soon – certainly not without further intervention from the MPC.
Rising rates are bad news for indebted consumers, and not great for the housing market either. Credit Suisse has turned cautious on buy-to-let lenders Bradford & Bingley and Paragon, reports The Telegraph’s Philip Aldrick. Part of the reason is the overcrowding in the marketplace – as Aldrick says, because banks are ‘barely making any profits from ‘plain vanilla mortgages” they are all rushing into ‘specialised lending, such as buy-to-let and self-certified mortgages, to turn the profits shareholders expect’.
The trouble is that all that competition for business drives banks to offer ever-cheaper loans to ever-riskier customers – just as they did with credit cards and personal loans a few years ago. They are now feeling the pain from that mistake in the form of steadily rising bad debts – and as Nick Sandall from Deloitte tells Aldrick: ‘With another couple of rate rises possible and no sign of change in consumer attitudes, it’s likely overall arrears will get worse before they get better.’
The banks are surviving the fall-out of their earlier mistakes with credit cards, partly due to the housing boom, and partly because business banking is doing so well. But both of these are founded on debt – with consumers taking out mortgages, and businesses taking on debt to buy other companies.
But these things always reach a turning point in the end – just as the credit card bubble burst, forcing banks to tighten up on their lending criteria, so the buy-to-let bubble will pop as investors realise that they simply aren’t generating the returns needed to justify the risks. And with a lot more money at stake, that explosion will rattle the banks and the markets far more seriously than the current boom in bankruptcies has.
Turning to the stock markets…
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In London, the blue-chip FTSE 100 index clawed back earlier losses to end the day 9 points higher, at 6,227. Miners made the biggest gains of the day, with Rio Tinto, Vedanta and BHP Billiton all performing well. However, sugar producer Tate & Lyle tumbled over 15% after announcing that full-year pre-tax profits would come in below market expectations. For a full market report, see: London market close
Across the Atlantic, the Paris CAC-40 closed 4 points lower, at 5,575, as tech stocks weighed. In Frankfurt, the Dax-30 fell 8 points to end the day at 6,678.
On Wall Street, stocks recovered from yesterday’s losses as good results from software company Texas Instruments allayed investor fears over the tech sector. The Dow Jones ended the day 56 points lower, at 12,533. The S&P 500 closed at 1,427, a 5-point gain. And the Nasdaq was flat at 2,431.
In Asia, stocks tracked Wall Street higher overnight with the Nikkei closing at 17,507 today, a 98-point gain.
Crude oil last traded at $54.24, whilst Brent spot was at $54.43 in London.
Spot gold was trading at $644.60 this morning. Silver hit its highest level in over a month overnight, but had eased to $13.17 this morning.
And in London today, pub chains JD Wetherspoon and Punch Taverns both reported good trading over the Christmas period. In news which bodes well for the coming smoking ban, Wetherspoon announced that pubs in which it has already introduced the ban have continued to improve sales, whilst Punch has benefited from a trend for Britons to eat out more.
And our two recommended articles for today…
The twelve key investment trends of 2007
– From a commodity price fall to to a dollar rally, Forbes regular Gary Shillings predicts the key economic trends of the year – and advises how they will affect your investments. To find out whether he thinks weakness in the US housing market is likely to spread, read: The twelve key investment trends of 2007
How resilient is global economic growth?
– Economist Stephen Roach wonders whether the global economy is more teflon-like than he thought. And as yet another asset bubble reaches bursting point, the moment of truth is at hand. For more on whether a China slowdown or another oil shock could put the brakes on global economic growth, see: How resilient is global economic growth?