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UK borrowing at lowest since financial crisis; pound resilient against rampant dollar as US rate rise draws closer

Tom Rees
Public sector borrowing is at its lowest in the financial year to date since the crisis - AFP

  • UK borrowing in the financial year to date at its lowest level since the financial crisis
  • Public sector net borrowing increased to £5.7bn, a large jump from July's surplus but ahead of economists' forecasts
  • Pound retreats against a rallying dollar, trading 0.7pc down at below $1.35; sterling holding up against other currencies, rising 0.3pc against the euro to €1.1349
  • US Federal Reserve announces that it will soon begin to wind down its huge balance sheet; more hawkish stance on interest rates propels the dollar
  • Gold dives and bond yields jump following the meeting
  • FTSE 100 makes another hesitant start to trading; building materials firm CRH jumps over 4pc after sealing $3.5bn deal for peer Ash Grove

UK public sector borrowing is at its lowest level since the financial crisis, the ONS revealed this morning, giving chancellor Philip Hammond more wiggle room to ease austerity measures in his November budget.

Public sector net borrowing in August was £5.7bn, far better than economists' more gloomy forecast of £7.1bn.

For the financial year to date, from April to August, borrowing was £200m lower than the year before, at £28.3bn. This was the lowest amount for the five-month period since 2007 and the Government is currently on course to undershoot the Office for Budget Responsibility's forecast on borrowing.

"All of this suggests that the chancellor should have room for some easing of austerity in his Budget in November," said PwC chief economist John Hawksworth.

"This could involve extra money for priorities such as the NHS, social care, housing and infrastructure investment as well as some further relaxation of the public sector pay cap."

4:58PM

Markets wrap: Resilient pound fights off dollar surging on hike hopes

Today's stronger-than-expected borrowing figures have revived hopes that chancellor Philip Hammond will loosen the purse strings in November's budget

The pound has fought off the advances of a dollar rampant on renewed interest rate hike hopes this afternoon after the US Federal Reserve put a December rate increase back on the table.

The dollar has surged on currency markets on expectations of tighter monetary policy in the US but a late afternoon rally by the pound buoyant from its own hike expectations has pulled the pair back up to flat territory for the day.

Elsewhere, ONS figures have shown that government borrowing is at its lowest level since the financial crisis, reviving hopes that chancellor Philip Hammond will use November's budget to loosen the purse strings and ease austerity measures.

While public sector net borrowing increased to £5.7bn in August following the previous month's surprise surplus, the figures show that the UK is on course to undershoot the Office for Budget Responsibility's forecast on government borrowing.

IG chief market analyst Chris Beauchamp commented that the banks mitigated the FTSE 100's small retreat today:

"The FTSE 100 would be lower today, were it not for the banks, which have risen steadily, along with their counterparts in Europe, in response to the Fed’s restated commitment to its tightening programme.

"The prospect of higher rates in the key US market, and indeed even the possibility of a modest rate rise in the UK, has prompted investors to buy up financial services stocks in hope of better margins and improved profits and dividends."

4:26PM

Pound's late rally sinks FTSE 100 already treading water

The FTSE 100 has sunk into the red late in the afternoon

As we approach the end of trading in London, let's have a quick final look at the big stock movers.

The banking heavyweights are today's big winners after the Federal Reserve put an interest rate hike before the end of the year back on the table with Barclays advancing 2.6pc and Lloyds jumping 2.5pc.

The pound's resilience against the resurgent dollar, only retreating 0.2pc compared to the euro's 0.6pc fall, has pulled the FTSE 100 down into the red late this afternoon while the CAC 40 in Paris and DAX in Frankfurt both push up.

CMC Markets analyst David Madden said on today's action:

"The British market is lagging its Continental equivalents as the latter managed to hold onto their gains and build on them. The bullish sentiment that sprung up on the back of the Federal Reserve’s announcement last night has triggered a broad spate of buying in Europe.

"The FTSE 100 had an upbeat start to today but it backed away from the 7300 mark. The price region was a significant support level throughout the summer, and if the level can’t be reclaimed, the bearish sentiment may persist."

3:47PM

Pensioners’ mortgage debts to double to £40bn by 2030 

Pensioners are increasingly likely to have mortgage debts

Britain’s pensioners are racking up ever-growing levels of debts as higher house prices mean families take longer to get on the property ladder, and people have to borrow more to cover care costs or help their children financially.

The mortgage debts of over-65s are set to double over the next 13 years from £20.1bn to £39.9bn by 2030, the Financial Conduct Authority believes.

Over the slightly longer time period from 2016 to 2036, the housing wealth of over-55s is set to grow from £1.5 trillion to £2.9 trillion.

Read Tim Wallace's full report here

3:32PM

Johnson Matthey shares soar on plan to charge into electric car battery market

Johnson Matthey aims to target the high-end electric car battery market

Johnson Matthey has revealed plans for a £200m investment in battery technology as it aims to become a key player in the coming electric car revolution - news that sent the shares surging.

The company generates 60pc of its £12bn in annual sales from making exhaust catalysts for vehicles, and industry observers have warned it could be particularly hurt by the rise of electric vehicles, which do not need catalytic converters.

The company's investment spree - designed to "future-proof" the business - will begin in 2018 and last two to three years. Money will be ploughed into enhancing the technology behind the cathodes it makes for batteries as well as into increasing production capacity.

Johnson Matthey aims to grab a chunk of a market that it estimates is worth $30bn (£22bn) a year when 10pc of cars are electric.

Read Alan Tovey's full report here

3:03PM

Flat start to Dow Jones; Apple sheds over 1pc on poor watch reviews

Poor Apple Watch reviews have sunk its shares this afternoon

A tug of war between financial stocks boosted by the Fed's hiking plans and tech giant Apple shedding 1.3pc after its new Apple Watch struggled to win over critical acclaim has resulted in a flat start for the Dow Jones over in the States.

Reviewers have noted that one of the watch's main USPs, that it can connect with users' phones to make calls, hasn't been working properly.

On another note, the markets largely turned a blind eye to Donald Trump's ranting and raving over North Korea at the UN earlier this week and they seem equally undeterred by his latest threat, the president saying this afternoon that the US "will be putting more sanctions on North Korea".

2:21PM

Ryanair chief Michael O'Leary fails to rule out more flight cancellations

Ryanair boss Michael O'Leary

Ryanair’s chief executive Michael O’Leary has failed to rule out more flight cancellations, as the Irish airline struggles to grapple with the fallout of a scandal that has disrupted journeys for more than 315,000 people.

Mr O'Leary told Ryanair's annual general meeting in Dublin that he "cannot guarantee there won't be further cancellations, but there won't be any further cancellations as a result of this rostering issue".

The airline was forced cancel around 2pc of its flights over the next six weeks because of what it says was a mistake with the way pilots' rotas were compiled. 

Mr O'Leary's attempts to quell anger over the debacle came as it emerged that pilots were this week offered a bonus of up to €12,000 (£10,500) to work 10 additional days to alleviate the shortage of plane crew.

Read Bradley Gerrard's full report here

2:01PM

US stocks expected to nudge down, snapping winning streak

The Dow Jones is on a nine-day winning streak

The Dow Jones extended its winning streak to nine days overnight and was largely undeterred by events at the Fed, nudging up 0.2pc to another record close.

However, US stocks are expected to shed a little bit of their weight after the opening bell in New York at the bottom of the hour, according to index futures.

On the economics front, the tight US labour market is continuing its strong run of form with initial jobless claims unexpectedly dropping to 259,000 last week.

The labour market could be in for a bumpy ride in the aftermath of hurricane season, however, according to managing director of UFX.com Dennis de Jong.

He commented: 

"Figures for the US jobs market may throw up some alarming numbers over the coming weeks, though. Hurricanes Harvey, Irma and Maria have severely disrupted some areas and payroll employment is likely to have been badly affected.  

"Overall, though, there’s a very solid participation rate in the labour market at the moment and, despite the short term impact of natural disasters, we could see that strengthen further heading into the back end of 2017."

1:32PM

Commodity prices under pressure from stronger dollar

Oil has held onto yesterday's gains but commodities are suffering

Commodities are under pressure from a stronger dollar in the aftermath of the Federal Reserve meeting with gold dropping to a four-week low.

As commodities are priced in dollars, a surge in the greenback will push prices down to a fairer value. Gold has slipped over 1.6pc today to below the psychological $1,300 barrier while copper has hit its lowest value in over a month, falling to $6,428.

LCG head of research Jasper Lawler believes tensions on the world stage might be gold's best chance of a rebound.

He said: 

"Gold failed to stay above he big 1300 level that many saw as a line in the sand to higher prices. If the Fed’s plan for QT has kicked off a rebound in the US dollar, it might be only geopolitics that can save the yellow metal."

As for the black stuff, Brent crude prices have held up reasonably well following the meeting. Prices remain around yesterday's highs, trading just below $56 per barrel despite the EIA reporting yesterday that US oil stocks have risen for a third consecutive week.

1:03PM

Outsourcer Capita fails to reassure market with lacklustre results

Capita has failed to reassure the market over its plan to turn around the businesses after profits dipped in a weak first half to the year.

The firm’s pre-tax profits fell 26pc in the six months to June 30, from £37m a year previously to £28m, while revenues were down 1pc to just under £2.13bn.

Shares in the firm plunged as much as 14.36pc to 551.5p on Thursday morning as investors reacted to the latest figures.

Capita, which provides IT management services to businesses including retailers and banks, as well as local authorities, has suffered a string of profit warnings in the last couple of years. In June said that it was seeing improvements in a number of its European divisions.

Read Rhiannon Bury's full report here

12:22PM

Lunchtime update: Pound unmoved by borrowing figures; banks prop up FTSE 100

The FTSE 100 is stagnant despite the efforts of rising banking stocks

Public sector borrowing is at its lowest level since the financial crisis, the ONS revealed this morning, boosting hopes that chancellor Philip Hammond will loosen the purse strings in November's budget.

Preoccupied with the latest shift in rhetoric in the central banking world, the pound hasn't budged an inch, however, despite the £5.7bn deficit in August being well ahead of economists' expectations.

Elsewhere, the FTSE 100 is struggling to make ground for a second day running with banking stocks propping up the index after gaining on renewed hopes of an interest rate hike before the end of the year in the US.

Blue-chip chemical specialist Johnson Matthey has soared over 9pc after laying out its strategy this morning while on the mid-cap FTSE 250 index, Capita is having another torrid day at the office.

The outsourcer has been ruthlessly punished by the City after pre-tax profit and revenue suffered under the company's turnaround plans.

Stock markets have largely taken the Fed's meeting in their stride, according to Accendo Markets analyst Mike Van Dulken.

He said:

"Equities are taking the Fed's latest policy tightening move in their stride. Probably because it was one of the most telegraphed moves ever, balanced up with the door being left ajar for another December hike but with a nod to data remaining choppy and inflation/wages still unconvincing. "

11:55AM

Banks boosted by Fed hike hopes stop the FTSE 100 from drifting into the red

HSBC and Barclays are keeping the FTSE 100 in positive territory

Now we've waded through the meatier parts of the Fed's meeting last night and the public sector borrowing figures, let's have a look at the big movers in London today.

The FTSE 100 is having a second consecutive stagnant day with US-exposed banks enjoying a strong session of trading on the back of boosted hopes of an interest rate hike before the end of the year following the Fed's meeting.

Barclays has jumped just under 3pc while HSBC's heavy weighting is stopping the index drifting into the red.

Elsewhere, chemical specialist Johnson Matthey has been propelled to the top of the blue-chip index, advancing nearly 8pc, as it lays out its strategy at its Capital Markets Day while building materials firm CRH has advanced nearly 3pc after sealing a deal to buy US peer Ash Grove for $3.5bn.

11:15AM

Public sector borrowing reaction: slow economy and higher debt payments will weigh on future public finances

The prospect of chancellor Philip Hammond opening the tap a little on public finances hasn't been enough to spur on the pound this morning, which is far more preoccupied with the major policy shifts among the central banking elite from the last week or so.

Sterling is still stuck at its post-Fed meeting lows against the dollar, $1.3495, and its momentum against the euro has reversed, the pound heading towards flat territory.

Back to the borrowing figures, EY ITEM Club chief economic advisor Howard Archer warned that "a still slow economy and higher interest debt payments look likely to weigh down on the public finances over the coming months".

He added:

"Nevertheless, it looks increasingly like the Chancellor will have some wiggle room in November’s Budget.  

"Any room for manoeuvre will be welcome given that increased public dissatisfaction with austerity and the public sector pay cap has increased the pressure for a recalibration of fiscal policy.  

"Apart from modestly higher public pay increases, the strong suspicion remains that the Chancellor is minded to make limited tweaks to the fiscal approach in November’s Budget rather than radical policy changes."

Crikey, Andrew Neil has high expectations.

The lowest public sector borrowing in the year-to-date since before the financial crisis and the lowest August net borrowing since 2007 weren't good enough apparently.

10:50AM

Borrowing will undershoot OBR estimates

We now have the Office for Budget Responsibility's reaction to today's stronger-than-expected borrowing figures.

The OBR said that the improvement was "driven by a £2.5 billion increase in central government receipts only partly offset by a £2.2 billion rise in central government spending".

With borrowing at its lowest level since before the financial crisis, the Government is on course to undershoot the OBR's own estimates on borrowing for the current financial year.

The OBR added that forecasts can be revised:

"The initial estimate of public sector net borrowing for a full financial year can be revised significantly over subsequent months as more robust data become available for different components of spending and receipts. The revisions to 2016-17 are already quite striking, reducing the initial outturn estimate of £52.0 billion published in April by 13.2 per cent to £45.1 billion this month.

"This reflects a number of factors, so it is not clear how far they would have led us to publish a lower forecast for this and subsequent years in March had we known of them at the time and to what extent they will affect our next forecast."

Labour's shadow chancellor John McDonnell has unsurprisingly found fault in the figures.

He said:

"After one year in the job Philip Hammond has continued the record of failure of his predecessor. The deficit has still not been eliminated, the national debt continues to rise, yet the Chancellor is carrying on with austerity cuts that are weakening our economy further, and hitting the incomes of working families."

10:28AM

Mitchells & Butlers shares go flat as trading proves tough

All Bar One owner Mitchells & Butlers has confirmed margins will be down on the prior year

Shares in pub group Mitchells & Butlers fell in early trading after the owner of All Bar One and Nicholson's warned its margins were being squeezed in "challenging" trading. 

The FTSE 250 company said business had been more difficult in recent weeks after a strong summer and that margins for its full financial year would be below the prior year due to cost pressures such as rising wages and business rates.

Spooked investors sent the shares down 5.6pc to 233p in spite of having been warned previously that margins could be weaker.

M&B reported that like-for-like sales in the 51 weeks to September 16 rose 1.6pc - a marked improvement on the 0.8pc decline in the prior year and ahead of the broader market.

Read Bradley Gerrard's full report here

10:15AM

Public sector borrowing reaction: Improvement reflects spending cuts not surging economy

Public borrowing will undershoot the OBR's forecast this year

Today's stronger-than-expected borrowing figures reflect "spending cuts not a surging economy", according to Pantheon Macro.

Its UK economist Samuel Tombs points out that central government receipts fell by 0.1pc compared to last August.

He added that the chancellor will probably not use the improvement to loosen policy:

"Borrowing now appears to be on track to come in at about £50B, clearly below the OBR’s March forecast. We doubt, however, that the Chancellor will ease the fiscal consolidation significantly in the Budget on November 22.

"The OBR likely will revise down its optimistic forecast for wage growth and revise up its forecast for debt interest payments in response to the recent jump in gilt yields. In addition, the Chancellor likely will retain scope to ease the fiscal consolidation in the event of a damaging hard Brexit, rather than ease policy now."

10:04AM

Public sector borrowing figures give chancellor more wiggle room in November budget

Today's public finance figures showing borrowing at its lowest since the financial crisis will give chancellor Philip Hammond a little more wiggle room to ease public spending restrictions in his budget due in November.

Borrowing is on course to beat the OBR's estimates but Capital Economics' UK economist Paul Hollingsworth points out that the OBR expects public finances to deteriorate towards the end of the year.

He added:

"Nonetheless, if the trend in the public finances seen so far this fiscal year continues, then borrowing would undershoot the OBR’s forecast by £13bn. Even if that figure shrinks a little, the Chancellor is still likely to have some extra money to play with – on top of the scope already contained within the fiscal rules.

"As a result, some easing back on austerity, to help households struggling in the face of the squeeze on real incomes, looks likely."

9:52AM

Public sector borrowing key takeaways

  1. Public sector net borrowing increased to £5.7bn in August, a large jump from July's surplus but well ahead of economists' forecasts.
  2. Borrowing for the financial year to date decreased by £0.2bn to £28.3bn compared to the same period in 2016.
  3. Borrowing so far this year is at its lowest since 2007 before the financial crisis.
  4. The OBR believes public sector borrowing will be £58.3bn for the financial year ending March 2018.

9:36AM

Public sector net borrowing jumps in August

Public sector net borrowing jumped back to a deficit in August

Public sector borrowing sunk back to deficit in August, according to the ONS, but the £5.7bn increase in borrowing was well ahead of economists' more gloomy forecast of a £7.1bn jump.

9:18AM

Public sector borrowing preview

The deficit is expected to widen in August after surprising economists with a surplus the previous month

We have public sector net  borrowing figures at the bottom of the hour and the deficit is expected to begin widening once again in this morning's figures from the ONS.

Economists are expecting a £7.1bn deficit in August, a marked increase from the surprise £0.2bn surplus recorded in July.

Investec economist Philip Shaw said this ahead of today's figures:

"Last month’s figures do not change the fact that the deficit for the financial year so far is wider than at the same stage in 2016/17. The cumulative overshoot though is modest, at £1.9bn, or around £0.5bn per month. 

"Our view is that borrowing in August will exceed the £6.8bn recorded in the same month last year. A key reason is an otherwise trivial difference in the timing of income tax receipts." 

9:02AM

Dollar and bond yields jump following Fed decision; gold retreats

The dollar is lit up in bright green on traders' computer screens this morning following the US Federal Reserve's meeting when a more hawkish Federal Open Market Committee put the option of an interest rate hike before the end of the year back on the table. Hopes of a hike were dwindling with inflation still sluggish and the economic impact from Hurricane Harvey and Irma still largely unaccounted for.

But a more optimistic Fed pushed the Bloomberg dollar index, which tracks the greenback's performance against a basket of the leading currencies, up 0.9pc higher following the meeting.

The Fed's decision is also making waves elsewhere on the markets. A more hawkish than expected FOMC saw bond yields spike with the benchmark 10-year Treasury yield jumping from below 2.24pc up to 2.27pc. 

The decision tempting investors out of non-yielding assets and a stronger dollar has sunk precious metal prices with gold retreating 1.4pc back below $1300 to its lowest level since the end of August.

Accendo Markets head of research Mike Van Dulken said this on the dollar's performance since the decision last night:

"The USD has thus strengthened accordingly (but yet to overcome April falling highs) as this would make it three hikes for 2017 - its original forecast. This in spite of choppy data, especially absent inflation, that could yet see it hold off into 2018.

"More significantly, however, is the US central banks starting to unwind its QE ballooned balance sheet. This is the next very well-flagged step on its path to normalisation of extraordinary policy measures, after QE bond buying was tapered to zero and rate rises began in late 2015."

8:32AM

Agenda: Pound under pressure from rejuvenated dollar following Fed meeting

The pound is under pressure from a rejuvenated dollar this morning after the US Federal Reserve left the door open to an interest rate hike before the end of year.

The central bank also announced as expected last night that it will begin rolling off its huge $4.5tn balance sheet from next month at an incremental rate of $10bn a month while laying the groundwork for a third rate hike in the cycle in December.

The Fed signalled that a further three interest rate rises could occur in 2018 but its downgraded inflation forecasts for this year and the next will cast some doubt on the predictions.

This morning, public sector borrowing figures are the focal point for investors with a large increase of £6.4bn expected after July's surprise surplus. Ahead of the figures sterling has fallen 0.7pc against the dollar, back below $1.35, but is holding its own elsewhere, advancing 0.3pc to €1.1349 against the euro.

The FTSE 100 is hesitant for a second consecutive day, inching up 0.1pc early on. Building materials firm CRH has jumped to the top of the blue-chip index early on after sealing a deal for US rival Ash Grove for $3.5bn. Gold reeling from the prospect of tightening policy at the Fed and a stronger dollar has sunk Randgold Resources and Fresnillo to the bottom of the index.

Interim results: Scisys, Elektron Technology, Safestyle UK, Cambridge Cognition Holdings, Venture Life Group

Full-year results: Kier Group, Pan African Resources

Trading statement: NCC Group

AGM: WYG, VietNam, Cambium Global Timberland, Gloo Networks, Ryanair, F&C Managed Portfolio Trust Income Shares, NCC Group, Auto Trader Group, Park Group, First Property Group, Accsys Technologies, Begbies Traynor Group, IG Group, Twentyfour Income Fund

Economics: Public Sector Net Borrowing (UK) Unemployment Claims (US), HPI m/m (US), CB Leading Index m/m (US), ECB Economic Bulletin (EU), Consumer Confidence (EU)