Bank of England policymaker warns of rising economic risks and job losses - as it happened

Graeme Wearden

from on 2020-10-20 15:49 (#5992S)

Rolling coverage of the latest economic and financial news, as MPC member Gertjan Vlieghe says UK may need more stimulus to fight Covid-19 crisis

Latest: BoE's Gertjan Vlieghe sees downside risks rising
Vlieghe: Risk of large job losses as furlough scheme ends
Introduction: Can Pelosi and Mnuchin reach a deal today?
Wall Street fell last night as optimism faded
Reckitt Benckiser: strong demand for cleaning and health products...

4.49pm BST

Time for a quick recap.

A Bank of England policymaker has warned that UK interest rates may need to be cut below zero, as the economy reels from rising Covid-19 cases.

The fact that redundancies are rising sharply and the number of vacancies is only at around 60% of its level at the start of this year makes it difficult to see a scenario where all of the remaining furloughed workers are reintegrated seamlessly into the labour force.

There is huge uncertainty about the scale of job losses, in both directions, but in my view, the risks are skewed towards even larger losses, implying even more slack in the economy than in our central projection.

4.47pm BST

One of the less exciting days in the City has ended with the FTSE 100 broadly where it started.

The blue-chip index has closed just 4 points higher at 5889, up 0.08%.

4.14pm BST

More than 20 years after its titanic clash with Microsoft, America's Department of Justice has launched a massive new antitrust case - this time against Google.

Two decades ago, Google became the darling of Silicon Valley as a scrappy startup with an innovative way to search the emerging internet.

That Google is long gone. The Google of today is a monopoly gatekeeper for the internet, and one of the wealthiest companies on the planet, with a market value of $1 trillion and annual revenue exceeding $160 billion.

Google is now the unchallenged gateway to the internet for billions of users worldwide.

As a consequence, countless advertisers must pay a toll to Google's search advertising and general search text advertising monopolies; American consumers are forced to accept Google's policies, privacy practices, and use of personal data; and new companies with innovative business models cannot emerge from Google's long shadow.

1975: Microsoft founded

~22 years later~

1997: US v Microsoft filed

------------

1998: Google founded

~22 years later~

2020: US v Google filed

***************************
Apparently being sued for antitrust is like graduating from college for tech companies.

Today's lawsuit by the Department of Justice is deeply flawed. People use Google because they choose to -- not because they're forced to or because they can't find alternatives.

Google's response to its first US antitrust suit https://t.co/PkNFQM1oki

3.20pm BST

Wall Street is pushing higher...., even though there's no progress on the stimulus front yet.

Consumer goods group Procter & Gamble (+2.2%), credit card firm American Express (1.4%) and sportswear group Nike (+1.4%) are among the risers. That's lifted the Dow by 0.8% today, or 233 points to 28,428.

3.01pm BST

My colleague Phillip Inman has written up Gertjan Vlieghe's comments about the need to stimulate the UK's weak economy, as unemployment pushes sharply higher:

Negative interest rates in the UK edged closer on Monday after a Bank of England policymaker warned the central bank would need extra firepower to boost the economy following the surge in Covid-19 cases.

In a gloomy assessment of the next few months, Gertjan Vlieghe, who sits on the monetary policy committee, the bank's interest rate setting body, said the second wave of Covid-19 was holding back consumer spending and suppressing business investment, which would push unemployment higher.

2.43pm BST

Wall Street has opened a little higher, as traders cling to hopes of a US stimulus deal.

President Donald Trump has fanned the flames of optimism, telling Fox News that he wanted a big deal, and would get doubters on his own side online:

I want to do it even bigger than the Democrats.

Not every Republican agrees with me, but they will."

Fiscal stimulus in the US also in a bit of a game' of its own, and we'll see if the two sides come to some sort of conclusion today.

I am not sure that will do much to foreign exchange market pricing, maybe a bit US dollar negative as some commodity currencies and emerging market currencies rally but the markets are going to wait for the election result for now with expectations low that an actual fiscal deal will happen before then.

2.24pm BST

The latest Reuters polling of City economists shows that Gertjan Vlieghe is right to be worried about downside risks.

Expectations for growth (or lack thereof) this year have hit their lowest point, with the economy expected to shrink by just over 10%.

UK 2020 GDP expectations fall to new low in latest Reuters poll of economists (-10.1%) pic.twitter.com/cIxgTvDSZs

Median forecast for 2021 steady at +6.1% pic.twitter.com/lnl9Zng1q7

2.07pm BST

The EU launched its first new coronavirus-related bonds today, triggering a frenzy of interest from investors.

The Financial Times reports that the sale was 14-times oversubscribed, as bidders battled to get a piece of the action. The bonds will fund Europe's Covid-19 recovery efforts, and are attractively priced compared to German and French government debt.

The deal forms the start of a borrowing binge that will make Brussels one of the region's biggest debt issuers. Investors placed bids for more than 230bn, far exceeding the 17bn of bonds on offer, according to one of the banks arranging the deal.

Buyers were drawn by the relatively high yields on the bonds, which came with 10-year and 20-year maturities, and offered more income for investors than the eurozone's safest government debt.

EU enjoys outrageous demand' for first Covid-related bond https://t.co/sz2JbQKTEt via @financialtimes

1.39pm BST

In the US, the number of new building permits jumped 5% in September, as the market recovered from its spring lockdown.

The Commerce Departments reports that the number of new privately-owned housing units authorized jumped to an annual rate of 1,553,000m up from August's 1,476,000. That's also 8.1% above the September 2019 rate of 1,437,000.

Sept #housing starts +1.9% at 1.415 mln vs 1.457 mln est #economy #markets #stocks #trading pic.twitter.com/sYSiAGPuZM

September 2020 seasonally adjusted U.S. total #housing_starts were 1,415K (annualized). #Census pic.twitter.com/zNHEHkSZ96

Housing Starts at 1.415 Million Annual Rate in September https://t.co/FJbB4R3j6l Below expectations, and previous months revised down - due to weakness in multi-family pic.twitter.com/m5ZOZNHJCy

1.04pm BST

Some early reaction to Gertjan Vlieghe's speech:

#Vlieghe looks set to vote for more asset purchases at #BankofEngland #MPC meeting on 4 November (decision announced on 5 Nov) & odds look in favour of more stimulus then. #BOE still reviewing case for & practicalities of negative interest rates https://t.co/8prwp8rkOG

Another K-shaped recovery chart by Gertjan Vlieghe from Bank of England pic.twitter.com/pxfrTUk8JE

Really interesting and thoughtful speech here from the @bankofengland external MPC member Gertjan Vlieghe. Sets out very clearly why it is wrong to fixate on the short-term tradeoff between social distancing restrictions and economic outcomes. https://t.co/jM79uyBOF0

The deterioration in the outlook suggests a strong case for more policy. The problem is that QE is not likely to be particularly effective right now and @bankofengland is not ready to deploy negative rates. Raises the question of what next for the BoE?

12.37pm BST

Gertjan Vlieghe's speech also includes this striking graph, which shows how the size of different sectors of the UK economy has changed, quarter-by-quarter.

We are really not all in this together. It is far, far worse for some than for others.

People might have persistently lower appetite for business travel, with all the related airline, hotel, restaurant, conference facility spending that this is normally associated with.

People might have persistently lower appetite for spending five days per week in the office, with a related reduction in spending on office space, on commuter travel, on food and drink consumed near the workplace. And on-line shopping, which in any case was already growing more rapidly than bricks-and-mortar retail, is likely to become even more prevalent in the future.

12.05pm BST

Back in the markets, Wall Street is expected to claw back around half of Monday's losses when trading begins in a couple of hours.

pic.twitter.com/174RSEtY0j

Finally, they have come to the table and we're going to try to get something done,.

11.43am BST

Here's a timely example of the rising downside economic risks worrying the BoE:

Bank of America's UK consumer confidence indicator strikes a new record low on a 28-day moving average.

Unfortunately all of its metrics are in decline pic.twitter.com/sHfOhHbW6n

11.35am BST

Vlieghe also expresses some support for the idea of cutting UK interest rates below zero (from their current record low of 0.1%).

In today's speech, he cites growing empirical literature" which suggests negative interest rates have not been counterproductive to the aims of monetary policy in other countries, adding:

My own view is that the risk that negative rates end up being counterproductive to the aims of monetary policy is low. Since it has not been tried in the UK, there is uncertainty about this judgement, and the MPC is not at a point yet when it can reach a conclusion on this issue.

But given how low short term and long term interest rates already are, headroom for monetary policy is limited, and we must consider ways to extend that headroom.

11.07am BST

Gertjan Vlieghe goes on to warm that the recent increase in Covid-19 cases is likely to undermine the UK's recovery from its Covid-19 slump:

Let me start with a bit of simple arithmetic to illustrate what is happening to the UK economy.

If something drops by a quarter and then increases by a quarter, it ends up a little more than 6% short of where it started.

While the economy so far has grown quickly, we must not lose track of where we are. There is a tremendous challenge ahead. GDP and labour market indicators stand at levels that are below what has historically been the trough of a recession.

Given that virus prevalence has been increasing again recently, it is likely to weigh more heavily on economic activity. Indeed, it appears that the downside risks to the economic outlook are starting to materialise. In my view, the outlook for monetary policy is skewed towards adding further stimulus.

10.58am BST

Newsflash: One of the Bank of England's top policymakers has warned that unemployment will rise sharply this autumn and winter as the government's furlough scheme ends.

Gertjan Vlieghe, a member of the Monetary Policy Committee which sets interest rates, fears that joblessness could surge over the BoE's current forecast of 7.5% unemployment at the end of 2020.

To be clear, we do not expect the 9% of private sector workers who are currently on furlough to lose their jobs. We expect many of them to either be re-employed by their current employer, or to find new work relatively quickly.

But, our August central forecast was for unemployment to reach a peak of 7%, implying aggregate net job losses on the same scale as in the global financial crisis. The fact that redundancies are rising sharply and the number of vacancies is only at around 60% of its level at the start of this year makes it difficult to see a scenario where all of the remaining furloughed workers are reintegrated seamlessly into the labour force.

Gertjan Vlieghe examines the impact of the Covid-19 pandemic on the UK economy so far. And he looks at what the recent rise in infections means for the economic recovery. https://t.co/WJwUrphHdn #Covid19 pic.twitter.com/KlP33jzdUW

10.28am BST

Heathrow's new fast Covid-19 Covid tests may not prevent heavy job cuts at Hong Kong's Cathay Pacific.

The South China Morning Post are reporting that the airline is planning to lose 6,000 workers -- a grim total, but also less than first feared.

Cathay Pacific Airways has agreed to scale back planned job cuts by 25 per cent to around 6,000 globally, and will axe its Cathay Dragon sister airline brand, according to multiple sources.

Hong Kong's flagship carrier was eyeing global lay-offs of up to 8,000, but has now reduced them to about 18 per cent of its total workforce, including around 5,000 in the city, after government intervention.

SCOOP: CATHAY PACIFIC TO CUT APPROX 18% OF WORKFORCE, MANAGEMENT WANTED 25% STAFF CUTS: SOURCES
- 5,000 JOBS TO GO IN HONG KONG (TOTAL 6,000 WORLDWIDE)
- CATHAY DRAGON TO CLOSE https://t.co/JY4WAWLRrh via @scmpnews

9.41am BST

News of Heathrow's speedy Covid-19 tests for passengers to Hong Kong and Italy has also lifted shares in jet engine maker Rolls-Royce (+4%).

Hopes of a pick-up in travel has also boosted engineering firm Melrose (+2.9%), which has an aerospace division.

9.03am BST

Passengers flying from London Heathrow to Hong Kong and Italy will be able to have a rapid Covid-19 test at the airport before checking in from Tuesday.

8.58am BST

UK housebuilder Bellway has reminded us of the economic damage caused by the pandemic, with its latest financial results.

A 3 point thread on some points from house builder Bellway's results to year ended 31 July 2020 compared with a year ago.
- Revenue -30.7%
- Profit -46.6%
- Margin per home was 19.0% this year compared with 24.6% a year earlier.#ukhousing #ukconstruction https://t.co/KLzaxcNus9 pic.twitter.com/zca3mrkfD7

- House building completions -30.9%
- Additional 18.9 million costs from Covid-19 due to site delays & safety measures
- 46.8 million set aside to deal with fire safety improvements on previously built flats#ukhousing #ukconstruction pic.twitter.com/H5x2llDCiT

- Reservations +30.6% (but few/no house builders have been quoting starts figures)
- Productivity on their house building sites remain 10-15% lower than one year earlier (which is in line with other construction firms that I have been speaking to)#ukhousing #ukconstruction pic.twitter.com/SyVm6SSzST

8.20am BST

Consumer goods giant Reckitt Benckiser has lifted its revenue guidance after seeing strong growth for hygiene and health products.

Stay at home' dynamics and social distancing have had significant effects on some of our brands. For example, Finish and Air Wick have benefited from consumers spending more time at home.

In contrast, restrictions on movement have impacted cross-border sales, for example, for infant formula between Hong Kong and China and some VMS demand into Asia from the US.

There is also evidence that birth rates will be further lowered in coming quarters as a result of behaviour changes related to the pandemic. This is expected to have an impact on market growth for our infant nutrition business in 2021.

Following a more challenging first half of the year, relaxations of social distancing regulations resulted in improved demand for our sexual well-being products, including Durex, which saw double digit growth in revenue.

This has been particularly pronounced in markets where the rate of pandemic infection has materially improved.

8.08am BST

The Europe-wide Stoxx 600 has opened 0.2% lower, with Germany's DAX losing 0.3%.

Trading is muted in London too, with the FTSE 100 down 3 points at 5880.

8.02am BST

Asia-Pacific markets had an edgy day, with Australia's S&P/ASX 200 down 0.7% and Japan's Nikkei losing 0.44% - although China's CSI 300 gained 0.6%.

Fiona Cincotta of City Index explains that anxiety from Wall Street spilled across the markets:

Wall Street ended lower as the stimulus clock ticked. News that there was still no agreement on fiscal stimulus unnerved investors. The negativity spilled over into Asia overnight and Europe is also set to start in the red.

The Tuesday deadline for a fiscal stimulus agreement between the Democrats and Republicans looks as if it could come and go without an agreement being reached. Whilst the two sides are narrowing their differences, differences still remain and the deadline is later today. The likelihood of a deal being achieved before the November 3^rd election is slipping lower.

7.37am BST

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

The Speaker and Secretary Mnuchin spoke at 3:00 p.m. today for approximately 53 minutes. In this call, they continued to narrow their differences. The Speaker has tasked committee chairs to reconcile differences with their GOP counterparts on key areas. (1/2)

The Speaker continues to hope that, by the end of the day Tuesday, we will have clarity on whether we will be able to pass a bill before the election. The two principals will speak again tomorrow and staff work will continue around the clock. (2/2)

Dow closes >400 points lower w/one day left until Pelosi's stimulus deadline. Fear Index VIX jumps >29. https://t.co/whSerdm2dQ pic.twitter.com/z66hpl1toU

The two sides remain talking ahead of today's deadline. While the Republican-led Senate has been reluctant to pass a stimulus bill above the $500 billion level that Majority leader McConnell has supported, President Trump has indicated that he is willing to go up to the $2.2 trillion range that Democrats have demanded. Mr Trump said yesterday that if an agreement with Democrats is reached, he would lean" on Republican Senators to come along."

Regardless, the confirmation that the two sides remain significantly apart saw the S&P 500 fall over 1.1% in the last 90 minutes of trading, though the index had been dripping lower throughout the day as risk sentiment soured after a healthy start.

Markets pulling back again late in Asian session after early recovery.

European Opening Calls:#FTSE 5858 -0.45%#DAX 12760 -0.74%#CAC 4919 -0.20%#AEX 563 -0.41%#MIB 19243 -0.68%#IBEX 6810 -0.73%#OMX 1829 -0.66%#STOXX 3217 -0.80%#IGOpeningCall

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