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As we – and everyone else – expected, the Bank of England held interest rates yesterday.
Beyond the current upheaval in the markets, there really was no good reason to do so. And the City still expects a further increase later this year.
In the meantime, one of the things that has comforted the Bank has been a lack of evidence of wage inflation, with wage settlements remaining fairly stable.
So news that the government is already caving in to the public sector, after promising to be tough on pay negotiations, won’t be welcome…
Health secretary Alan Johnson “yesterday tried to buy industrial peace in the NHS” said Nicholas Timmins in the FT this morning. He’s hiking wages for the lowest paid health workers. The move will take the rise in the wages bill for the NHS this year to 1.99%, just below the government’s 2% target.
Before this, the Department of Health had claimed it could only afford a 1.5% increase. Still, if it keeps the peace while Gordon Brown’s still on honeymoon, the party probably thinks it’s worth it.
Not that the unions have actually signed off on the deal yet. Unison said the offer “is the best we are likely to achieve through negotiation,” a somewhat double-edged comment, you have to admit.
We’re not surprised the unions aren’t too chuffed – NHS workers are having to accept what is actually a pay cut in real terms, if you adjust for retail price index inflation, which stands at around 4.4%. Of course, this comes after years of inflation-busting pay hikes, but once you start raising people’s expectations, it’s always hard to bring them back to reality.
In any case, it’s one more thing for the Bank to worry about. Another worry is emerging on the high street. Research group Verdict has suggested that the era of ever-cheaper clothing may be coming to an end. Although it won’t rise by much, the predicted near-5% increase in the price of women’s clothes between 2008 and 2012 would bring to an end a 12-year period of deflation.
Author Neil Saunders reckons the gains made by outsourcing have pretty much been made now. “Over the past five to 10 years retailers have squeezed the supply chain as hard as they can,” he tells the FT.
So higher wage bills and rising clothing prices on the horizon then. We’re wondering what the Bank’s inflation report could have contained that possibly justifies keeping rates on hold.
The European Central Bank meanwhile is still talking a far tougher game, even as Europe’s weaker economies, led by France, are muttering of rebellion. Although it kept rates on hold, the ECB spoke of the need for “strong vigilence” on inflation, which so far has proved to be a code meaning “we’re going to raise rates next month.”
Bank president Jean-Claude Trichet shrugged off recent upheaval in the credit markets as a process of “normalisation”. Meanwhile, ECB member and Bank of France governor Christian Noyer essentially warned French president Nicolas Sarkozy to back off from his recent whingeing about interest rates. In an introductory letter to the Bank of France’s annual report, Noyer warned that loose monetary policies in the past “have failed” and that the country needed to keep control of its public finances to maintain its credibility in Europe.
So it seems there’s no respite in sight for the Irish and Spanish housing markets.
In the meantime, the US subprime chaos is still in the process of “normalising” the credit markets. This week has seen the near-collapse of more US mortgage lenders, yet more hedge funds going to the wall or announcing sharp losses, and the state bailing out of a German bank, IKB.
Now, a few commentators, including our own Simon Nixon, have suggested that the downfall of IKB – a specialised lender which somehow managed to find itself exposed to US subprime to the tune of $17bn, way more than its market cap – is good news.
“How so?” you may well ask. Well, it shows that the derivatives market is working – risk has been spread far and wide, so rather than seeing a few big institutions go into meltdown, we’re more likely to see a series of smaller hits, in less concentrated sectors, rather than one devastating collapse.
But as Gillian Tett points out in the FT, “one downside of spreading risk around in this manner is that it is fiendishly difficult for regulators to see where it is going, or to anticipate where problems are building up.” And, she adds, this case also shows that subprime risk has ended up in the hands of those who are ill-equipped to deal with it. “IKB was one of those lacking appropriate risk management skills. But I doubt it was alone.”
So there you have it. Are you sitting more comfortably, now that you know that the fall-out from subprime toxic waste could be landing absolutely anywhere? Maybe even in your ‘safe as houses’ pension fund?
I thought not. Spreading risk is one thing – but spreading risk so liberally that no one knows where the next little land mine is going to blow up has got to be bad for investor sentiment in general. This lack of knowledge is the main reason the debt markets have seized up in the past month or so. If everyone knew where the real trouble lay, deal-making could continue in the unaffected sectors. As it is, nobody wants to take on any more risk – because for all they know, they might already be holding an armful of live grenades.
Just before we take a look at the markets – the latest issue of MoneyWeek is out today, but the ongoing postal action does mean that some of you might not receive your copies on time. Do remember that subscribers can log in and view the latest issue online – just click here to do so: Latest Issue.
Turning to the wider markets…
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In London, the blue-chip FTSE 100 index added 49 points to close at 6,300 yesterday. Telecoms stock Vodafone led the risers on news from BSkyB that UK and Ireland football fans will soon be able to watch live matches on their Vodafone mobiles. For a full market report, see: London market close.
Across the Channel, the Paris CAC-40 was 22 points lower at 5,682 and the Frankfurt DAX-30 was 60 points higher, at 7,534.
On Wall Street, US stocks extended Wednesday’s gains on the back of upbeat profits reports from the likes of Nokia, Starbucks and Walt Disney. The Dow Jones added 101 points to close at 13,463. The tech-heavy Nasdaq was 22 points higher, at 2,575. And the S&P 500 was 6 points higher, at 1,472.
In Asia, the Japanese Nikkei 225 was down 4 points to 16,979 today.
Crude oil was 12c higher at $76.98 this morning, whilst Brent spot was at $76.21 in London.
Spot gold had risen to $665.90 – up from $664.30 in New York late last night – and silver was at $12.97.
In the currency markets, the pound was trading at 2.0350 against the dollar and 1.4862 against the euro. The dollar was at 0.7301 against the euro and 119.12 against the Japanese yen.
And in London this morning, miner Anglo American announced record first-half profits of $3.38bn, up form $2.94bn the previous year. The gains have been attributed to the rising price of platinum, copper and nickel thanks to strong demand from China and India. CEO Cynthia Carroll also announced plans to invest $2.58bn in Brazilian iron ore and Alaskan copper mines. Shares in Anglo American were up by as much as 3.8% today.
And our two recommended articles for today…
Why this is an entirely new kind of credit crunch
– Banks have made fat profits in recent years from securitising and syndicating debt, but recent market turmoil has exposed the dangers of this process. And that means we’re now seeing an entirely new kind of credit crunch. To find out why laying hands on cheap money is going to get much harder, click here: Why this is an entirely new kind of credit crunch
The hidden cost of biofuels
– It has become obvious that the benefits of biofuels are not as clear-cut as was once assumed. But the effect that this new source of demand for agricultural commodities will have on global trade and income distribution has so far been little discussed. For more on the likely winners and losers of the biofuels boom, read: The hidden cost of biofuels