Factory slump drags UK near stagnation; US private sector shrinks; eurozone heads into recession as it happened | Business

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A late PS: Sales of new US homes fell in July for the sixth time this year, to the slowest pace since early 2016. Another sign of slowing growth

Afternoon summary

Time to wrap up, after a day of disappointing economic data, and warnings that the UK and Europe faces a grim winter as the energy crisis.

The slump in UK factory activity shows that Britains economy remains weak, while there were outright contractions this month in the US, the eurozone, and in Australia and Japan.

Recession fears are on the rise on both sides of the Atlantic, a day after European gas prices closed at record highs, pushing the euro below parity with the US dollar.

And with global trade stagnating, JP Morgan predicting the pound could sink to $1.14, and pubs and brewers pleading for help with energy bills, theres plenty to worry about.

Heres todays main stories:

Richard Partington

The Bank of England could be forced to raise interest rates to 4% from as early as next year to combat soaring inflation, despite the growing risk of recession amid the cost of living crisis.

City traders are betting the central bank will more than double the cost of borrowing from 1.75% in response to inflation at the highest levels for more than 40 years.

In a development that will heap renewed pressure on mortgage holders, the Banks key base rate is expected to reach 4% by May 2023, according to the path implied by financial markets.

Heres the full story:

A key mortgage rate has already hit 4% for the first time in nine years, as we reported yesterday.

The financial data provider Moneyfacts said the average new two-year fixed rate had increased by 0.14% since the start of this month, and now stood at 4.09%.

Global trade growth is stagnating too, according to the latest data from the World Trade Organization.

Its global goods barameter has come in at 100.0 points, showing merchandise trade is steady.

The WTO says the reading suggests that:

global goods trade continued to grow in the second quarter of 2022 but that the pace of growth was slower than in Q1 and is likely to remain weak in the second half of the year.

WTO global trade indicator Photograph: WTO

Uh oh. US PMI composite output index signals falling output and falls to a 27 month low. Reduction in output was broad based, with output falling in both manufacturing and Services. Much worse than expected. pic.twitter.com/vy4m1vNMRW

— Mark Magill (@MarkMagill1982) August 23, 2022

The US dollar has been hit by the surprise slump in US business activity this month:

This has lifted the euro back towards parity with the dollar, and the pound has gained 0.8 of a cent to $1.184.

Todays US Service sector PMI report is weaker than expected:

The slump in the S&P Global composite PMI for the US to 45.0 in August, from 47.7, leaves it at a level consistent with a deep recession.

So says Paul Ashworth, chief US economist at Capital Economics, who explains:

Based on the historical relationship, it suggests GDP should be contracting at a 3% annualized pace.

Ashworth also sees signs that disinflationary pressure is building:

The supplier delivery times and stocks of finished goods indices both hit 21-month highs, while the input prices index hit a 19-month low.

US private sector output falls at fastest rate since 2020

Ouch. US private sector output has fallen at a faster rate this month, as American services companies are hit by weak client demand.

Output across US companies fell at the fastest rate since May 2020 in August, according to S&P Globals flash survey of purchasing managers.

The reduction in output was broadbased, with manufacturers and service providers registering lower activity. Service sector firms recorded the steeper rate of decline, as activity fell sharply, while goods producers saw a modest drop in output.

Firms were hit by a range of problems from material shortages and delivery delays to the recent hikes in US interest rates and strong inflationary pressures which hit customer demand.

This pulled the headline Flash US PMI Composite Output Index down to just 45.0 in August, down from 47.7 in July.

That shows the second successive monthly decrease in total business activity.

The service sector was noticeably weak, with its PMI sinking to just 44.1 (50 would show stagnation).

Whoa….S&P Services PMI – collapses…..to 44.1 – deep into contractionary territory- And that is an issue why? B/c – the US economy is 75% SERVICES. Capisce?

— Kenny Polcari (@KennyPolcari) August 23, 2022

The PMI report shows further disconcerting signs for the health of the US private sector, says Sin Jones, Senior Economist at S&P Global Market Intelligence:

Demand conditions were dampened again, sparked by the impact of interest rate hikes and strong inflationary pressures on customer spending, which weighed on activity.

Gathering clouds spread across the private sector as services new orders returned to contractionary territory, mirroring the subdued demand conditions seen at their manufacturing counterparts.

Excluding the period between March and May 2020, the fall in total output was the steepest seen since the series began nearly 13 years ago.

Lower new order inflows and continued efforts to rein in spending led to the slowest uptick in employment for almost a year. Reports of challenges finding suitable candidates started to be countered by those companies noting that voluntary leavers would not be replaced with any immediacy due to uncertainty regarding demand over the coming months.

Updated at 15.23BST

The euro vs the US dollar since 2000UK energy crisis could knock pound to $1.14, JPMorgan warns

The UKs energy crisis could push the pound towards the 35-year lows seen early in the Covid-19 pandemic, analysts fear.

JPMorgan Private Bank has predicted that sterling could drop as low as $1.14, a level briefly seen as the UK headed into its first lockdown.

Bloomberg has the story:

Already down 13% against the greenback so far this year, the UK currency is starting to reflect concerns that higher gas prices will fan inflation as economic growth contracts, said Sam Zief, head of global FX strategy at JPMorgan Private Bank.

A pound at $1.14 is absolutely within reach if gas prices continue to do what they are doing, Zief said in an interview.

The surge in inflation, already over 10%, will hit UK household finances, while the threat of shortages could slow economic activity, with factories already struggling this month.

Sterling hit its lowest level since March 2020 this morning, below $1.18 against the US dollar.

Back on 20th March 2020 it dropped to just above $1.14, as the pandemic fueled a rush into US dollars. That was the lowest level since the mid-1980s.

The pound vs the US dollar since the 1980s Photograph: Refinitiv

Wall Street has opened cautiously, with the main indices pretty flat.

DOW JONES DOWN 30.41 POINTS, OR 0.09 PERCENT, AT 33,033.20 AFTER MARKET OPEN

S&P 500 DOWN 0.19 POINTS, OR -0.00 PERCENT, AT 4,137.80 AFTER MARKET OPEN

NASDAQ UP 12.76 POINTS, OR 0.10 PERCENT, AT 12,394.33 AFTER MARKET OPEN

— OBR Investing (@obrinvesting) August 23, 2022

Investors are awaiting to hear from Federal Reserve chair Jerome Powell on Friday, at the Jackson Hole economic symposium. Powell could take a hawkish line on inflation, and reiterate the Feds determination to keep raising interest rate to cool prices.

Stocks are down in London today, with the blue-chip FTSE 100 off 46 points or 0.6% at 7487.

A Macy’s department store in Doral, Florida. Photograph: Wilfredo Lee/AP

US department store chain Macys has cut its outlook for the year as it braces for consumers to cut back, leaving it with a glut of unsold stock.

Macys beat Wall Street forecasts for revenues and profits in the last quarter, but also lowered its full-year forecast.

The company fears that consumer spending on discretionary items like apparel will weaken, as high inflation hits household budgets.

The consumer is not as healthy as they were in prior quarters, chief financial officer Adrian Mitchell told analysts on a conference call.

We have seen declining retail traffic in areas of weakening apparel sales over the quarter as the consumer faces higher costs on essential goods, particularly grocery.

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