Debt interest payments by the Government soared in May as inflation’s surge hit the public finances.
The overall debt interest cost of £7.6 billion was the third highest in any single month and the highest ever for May as an RPI uplift on index-linked gilts contributed £5 billion.
The Office for National Statistics said public sector borrowing stood at £14 billion, the third-highest May borrowing since monthly records began in 1993. This compared with City forecasts of £12 billion.
FTSE 100 Live Thursday
Public finances squeezed by rising interest bill
Federal Reserve boss issues recession warning
Weaker mining stocks hit FTSE 100
Nat Rothschild’s Vole x sees profits jump
12:57 , Jonathan Prynn
VOLEX, the electronics part maker where Nat Rothschild is chairman, saw earnings jump thanks to a flurry of takeover deals.
More could be in the pipelines as the boom in electric cars plays to the company’s strengths.
Sales for the year rose 39% to $614 million (£503 million), with profits up 23% to $51 million.
Economy fears weaken FTSE 100, JD Sports upturn continues
10:20 , Graeme Evans
A recession warning from Federal Reserve boss Jerome Powell put markets under fresh strain today as traders also digested weak figures from Europe’s economy.
Powell made it clear at a Senate hearing yesterday that interest rates will continue to rise, and at an accelerated pace, until compelling evidence that inflation is beginning to wane.
Admitting that a recession was a “possibility“, Powell warned that avoiding a hard landing for the US economy also depended on factors outside the Fed’s control.
Hargreaves Lansdown analyst Susannah Streeter said: “Powell’s comments that a big chunk of the inflationary pressures were outside the bank’s control underlines just how difficult it’s going to be to calm prices without setting off a storm in the economy.”
Powell’s testimony put markets on the back foot from the outset today, with sentiment further dented by the latest PMI figures from the eurozone.
The manufacturing and services sector releases from countries including France and Germany point to weaker economic activity in June, with factory output in the eurozone down for the first time in two years.
Stock markets in Paris and Frankfurt fell by more than 1% and the FTSE 100 index declined by 0.6% or 39.94 points to 7049.28.
The fallers board included Anglo American, Glencore and copper miner Antofagasta as the uncertain demand outlook put further downward pressure on metals prices, while Brent crude also dipped below $110 a barrel.
Among the handful of blue-chip stocks in positive territory, Rentokil Initial rose 4.8p to 464.8p after Deutsche Bank raised the pest control firm to a “buy” recommendation with a price target of 550p.
The recovery for JD Sports Fashion shares also continued after yesterday’s results, with the stock up another 1.15p at 115p following last night’s 7% improvement. Analysts at Liberum said there was also a positive read-across from JD’s figures for Sports Direct owner Frasers Group, which it rates at 900p.
Shares in Frasers lifted 2p to 631p, but elsewhere in the FTSE 250 index the mood was downbeat as the UK-focused benchmark dropped 118.25 points to 18,772.97. Big fallers included electricals chain Currys and Aston Martin Lagonda, with both down 4%.
Pressure on Chancellor as borrowing surges
08:29 , Graeme Evans
The overshoot in May’s public finances reflected lower than expected tax receipts and spending of £74 billion being higher than the £71.4 billion forecast.
With two months of the 2022/23 financial year gone, borrowing is already £6.4 billion higher than the Office for Budget Responsibility (OBR) expected at this stage.
The figures exclude last month’s £10.3 billion handout by Chancellor Rishi Sunak to help households cope with the cost of living crisis.
Paul Dales, chief UK economist at Capital Economics, thinks borrowing this year will come in closer to £110 billion than the £99 billion forecast by the OBR, reflecting the upward impact from higher interest rates and inflation and weaker GDP growth.
Dales believes this will limit Sunak’s ability to provide more relief when a further rise in CPI inflation to 10-11% in October worsens the cost of living crisis.
Fed’s recession warning hits confidence
08:13 , Graeme Evans
European markets remain on the back foot after a recession warning from Federal Reserve chairman Jerome Powell did little for confidence.
Powell made it clear that interest rates will continue to rise, and at an accelerated pace, until there is “compelling evidence” that inflation is beginning to wane. This in turn decreases the likelihood of a soft landing for the economy.
Richard Hunter, head of markets at Interactive Investor, said: “Of course, the central bank is not attempting to induce a recession, but the outcome of its current stance is increasingly likely to provide one.
“Indeed, some economists are already calculating the risk of a recession as having recently risen to around 50%, and the blunt tool of interest rate hikes may not of itself be sufficient.
“This round of inflation is not the result of overheating demand, but rather the lack of supply and low production capacity after the pandemic restart stalled. With supply chains in general still feeling the strain, the odds are stacked against a smooth glide path to recovery.”
The main US indices remain in or around bear market territory, with the Dow Jones currently down by 16% in the year to date, the S&P 500 by 21% and the Nasdaq by 29%.
The FTSE 100 index today stood at 7046 after a decline of 0.6% or 45.18 points.
FTSE 100 set to weaken, Brent crude below $110
07:53 , Graeme Evans
Downward pressure on oil prices continued in Asian markets today as Brent crude dipped by more than 1% to less than $110 a barrel.
Fears over the impact of rising interest rates on global demand have pushed the price lower from the $123 seen earlier this month.
The latest move came as Federal Reserve chairman Jerome Powell told a Senate hearing that the central bank’s “overarching focus” was on bringing inflation back towards its 2% target. In doing so, he added there was a risk that this may cause a recession in the US.
The Fed recently hiked its funds rate by a bigger-than-expected 75 basis points, with Wall Street not ruling out a similar move at next month’s meeting.
The recession uncertainty has been reflected in this week’s choppy stock market trading, with the FTSE 100 1% lower by last night’s close after rising earlier in the week. London’s top flight had been down 1.7% at one point.
CMC Markets expects the FTSE 100 to open 17 points lower at 7,072.