UK’s bond sale sees strong demand in boost for Labour
Investors have rushed to take part in an auction of UK government debt today, in an sign that the new government has not upset the bond vigilantes in the City.
An auction of a new bond today has attracted a joint record of bids from investors.
The debt sale attracted over £110bn of orders, which Bloomberg reports matches a record set in June and is the biggest-ever demand compared to the size of the sale.
The Debt Management Office will raise £8bn from the bond, or gilt, which matures in January 2040 and has a 4.375% coupon (the interest payment which bondholders receive).
This could calm concerns that investors could be spooked by the new Labour government, which has said it discovered a £22bn “black hole” in the public finances.
The UK national debt is already at its highest since the early 1960s, at almost 100% of GDP, after Britain borrowed £3.1bn, more than expected, in July.
Bloomberg explains:
The latest deal looks like an endorsement for a new government under pressure to fill a gap in the budget, two years after a blowout in yields on concerns about the country’s deficit.
The bumper orders come as the UK’s bonds have rallied in recent months on the prospect of more interest-rate reductions from the Bank of England following a cut last month.
The popularity of today’s bond auction is the second piece of good news for the UK today, after Bank of America raised its growth forecasts (see earlier post).
That, though, was countered by the drop in M&A activity in June (see here).
Key events
The tech-focused Nasdaq composite index has now slumped by 2.35%; it’s down 416 points at 17,297 points.
Chip stocks are leading the selloff. Nvidia (-7.6%) are the top faller on the Nasdaq, followed by Intel (-6.9%) and semiconductor designer Arm Holdings (-6.7%).
Oil price hits lowest since December
The oil price has fallen to its lowest level since December, dogged by fears of weak demand and rising supply.
Brent crude is down 4.5% to $74 per barrel, its weakest level this year.
The fall began after Bloomberg reported that a Libyan central banker believes a deal appears imminent to resolve a dispute that has hit oil output.
Sadiq Al-Kabir, the governor whose attempted ousting by the nation’s western government prompted eastern authorities to cut crude production, said today there were “strong” indications political factions are nearing an agreement to overcome the current deadlock. More here.
The duo of US manufacturing reports from S&P Global and the ISM today are also bad for the oil price, as weakening factory activity will mean less demand for energy.
US manufacturing is “stuck in a rut”, says Capital Economics, having digested today’s PMI survey from the ISM (see earlier post).
They told clients:
The ISM manufacturing index was essentially unchanged in July, leaving it consistent with manufacturing output and GDP growth losing momentum in the third quarter, and a sharp drop in the new orders index reduces the likelihood of a turnaround in September.
The small gain in the ISM manufacturing index to 47.2, from 46.8, was arguably weaker than it first looked. Most of the increase was driven by the inventories index rising by 5.8-points to 50.3, from 44.5, while the employment index only partly rebounded to 46.0, from 43.4. The latter may somewhat soothe concerns that the labour market is rapidly deteriorating, but still points to looser labour market conditions.
The bigger concern might be the further fall in the new orders index to 44.6, from 47.4, although we are not yet at the sub-42 mark that has historically coincided with recessions.
U.S. MANUFACTURERS reported that business activity declined for the fifth month running in August. Weak readings for production and new orders indicate the sector is close to recession: pic.twitter.com/TRijN3kJDf
— John Kemp (@JKempEnergy) September 3, 2024
Markets drop after PMI disappointment
Stock markets on both sides of the Atlantic have dropped deeper into the red, following the weak surveys of US manufacturing released in the last few minutes.
On Wall Street the S&P 500 has now shed 1.3%, dropping 73 points to 5,574 points.
US tech stocks are among the big fallers, with Nvidia now down over 6% and Intel dropping by 5%.
In London, the FTSE 100 is on track for its biggest fall in nearly two weeks. It’s down 66 points at 8,297 points, a drop of 0.8%.
The pan-European Stoxx 600 is down around 1%.
⚠️The latest ISM Manufacturing PMI for August 2024 came in at 47.2, marking the fifth consecutive month of contraction. While the rate of decline has slowed slightly, with a 0.4 point increase from July, key subindices like New Orders and Production continue to drop, signaling… pic.twitter.com/V2EAOaBGun
— Ben @ MarketMaxim (@MarketMaxim_) September 3, 2024
ISM: economic activity in the US manufacturing sector contracts again
A rival PMI survey from the Institute of Supply Management confirms that US factories struggled last month.
The ISM reports that economic activity in the US manufacturing sector contracted in August for the fifth consecutive month and the 21st time in the last 22 months.
ISM’s Manufacturing PMI has come in at 47.2 percent for August, up from the 46.8 percent recorded in July, but still below 50 points – indicating a contraction.
In August 2024, the ISM Manufacturing PMI slightly increased to 47.2 from the prior month’s low of 46.8 in November 2023. This fell short of market forecasts of 47.5, marking the 21st decline in US factory activity out of the last 22 months. 📈🏭 pic.twitter.com/jjwcEYwR6M
— Economy Data Service (@XTradingHub) September 3, 2024
Manufacturers reported a drop in new orders, and a contraction in both production and employment levels.
Timothy Fiore, chair of the ISM’s Manufacturing Business Survey Committee, says:
Demand remains subdued, as companies show an unwillingness to invest in capital and inventory due to current federal monetary policy and election uncertainty.
Production execution was down compared to July, putting additional pressure on profitability. Suppliers continue to have capacity, with lead times improving and shortages not as severe. Sixty-five percent of manufacturing gross domestic product (GDP) contracted in August, down from 86 percent in July.
S&P and ISM Manufacturing PMI data gives us a sense that demand is slowing and we’re seeing the first industry-wide staffing cuts of 2024.
This is more data that adds to the narrative that the labor market is (and has been) weakening.
But was it ever that strong to begin with? pic.twitter.com/jXJu7Tg9nU
— Markets & Mayhem (@Mayhem4Markets) September 3, 2024
S&P Global: US manufacturing production slips
US manufacturing production decreased for the first time in seven months during August, a new survey of purchasing managers from S&P Global shows.
The S&P Global US Manufacturing Purchasing Managers’ Index, which tracks activity in the sector, has dropped to 47.9 in August, down from 49.6 in July. That’s the second month running that the PMI has come in below the 50-point mark showing stagnation.
The survey found that firms scaled back production in response to falling sales as demand across the sector waned, with new export orders falling for the third month running.
This led to a drop in staffing levels for the first time this year.
US S&P Global Manufacturing #PMI Aug F: 47.9 (est 48.1; prev 48.0)
US Production Falls For First Time In Seven Months
– Decline In Demand Leads Firms To Scale Back Output
– Renewed Reduction In Employment
– Inflationary Pressures Strengthen#Bourseacademy pic.twitter.com/ruKihQbePU— Bourse Academy (@bourse_academy) September 3, 2024
Chris Williamson, chief business economist at S&P Global Market Intelligence, says:
“A further downward lurch in the PMI points to the manufacturing sector acting as an increased drag on the economy midway through the third quarter. Forwardlooking indicators suggest this drag could intensify in the coming months.
Slower than expected sales are causing warehouses to fill with unsold stock, and a dearth of new orders has prompted factories to cut production for the first time since January. Producers are also reducing payroll numbers for the first time this year and buying fewer inputs amid concerns about excess capacity.
The combination of falling orders and rising inventory sends the gloomiest forward-indication of production trends seen for one and a half years, and one of the most worrying signals witnessed since the global financial crisis.
Jasper Jolly
Back in the airline sector, Singapore Airlines has said that it is inspecting the engines of its Airbus A350 aircraft, after a Cathay Pacific flight suffered an engine failure in a flight from Hong Kong.
A spokesperson for Singapore Airlines said that it was inspecting the Rolls-Royce Trent XWB-84 engines that power its Airbus A350-900 fleet “as a precautionary measure”. It is also in contact with Rolls-Royce and Airbus.
Cathay Pacific has said that it has identified 15 aircraft that need component replacements after the part failure, forcing it to cancel some flights. However, Singapore Airlines said there has not been any impact so far on its schedule.
The Singapore Airlines spokesperson said:
As a precautionary measure, SIA is inspecting the Rolls-Royce Trent XWB-84 engines that power our Airbus A350-900 fleet.
There is currently no impact on SIA flights operated with our Airbus A350-900 aircraft.
The safety of our customers and staff is always our top priority.
As expected, Wall Street has opened in the red, with the S&P 500 index down around 0.6%.
⚪️ #Markets_Now
DOW JONES DOWN 182.99 POINTS, OR 0.44 PERCENT, AT 41,380.09 AFTER MARKET OPEN
S&P 500 DOWN 33.35 POINTS, OR 0.59 PERCENT, AT 5,615.05 AFTER MARKET OPEN
NASDAQ DOWN 139.37 POINTS, OR 0.79 PERCENT, AT 17,574.25 AFTER MARKET OPEN
— ZXCM (@zxcm_fx) September 3, 2024
Chipmaker Nvidia has made a bad start to trading, with its shares down around 5%.
Traders continue to digest last week’s results which showed a surge in revenues, but also delays to deliveries of its Blackwell chips.
The eagerness of international investors to bid for UK debt raises new questions over the wisdom of cutting winter fuel allowance payments for some pensioners.
Chancellor Rachel Reeves defended her controversial decision today, telling MPs that the cut should be offset by increases to pensions and lower energy prices this winter compared with last year.
Reeves told the House of Commmons:
“We inherited a £22 billion blackhole from the previous government who made unfunded spending commitments with no idea how to pay them.
“When I became Chancellor I took an immediate audit of the spending situation to understand the scale of that challenge, and I made difficult decisions to put the public finances on a sustainable footing. They were tough decisions, but they were the right decisions.
“This includes the decision to make the winter fuel payment better targeted so pensioners who need it most, will get it alongside pension credits.”
But, the decision was criticised by some MPs, with Conservative MP Dame Harriett Baldwin saying cutting winter fuel payments was a “chilling political choice” by the Chancellor.
In the energy sector, experts have been reacting to the latest renewable energy auction.
Results announced this morning show that the auction has secured enough new clean electricity projects to power 11m UK homes.
The £1.5bn auction will support 131 new projects including windfarms, solar farms and tidal power projects after ministers increased the amount of funding available to seven times the sums offered last year.
Consultancy Cornwall Insight point out that this year’s auction will deliver 9.6GW of renewable capacity, which is “a substantial increase” on the 3.7GW secured at last year’s auction.
Cornwall adds:
The greatest success came from solar PV and offshore wind, which saw 3.3GW and 4.9GW secured respectively.
But there is disappointment that the auction secured only half the offshore wind capacity needed every year for the rest of this decade if the government hopes to meet its green energy targets. That’s because almost two-thirds of the new offshore wind capacity that was eligible to bid in the auction failed to bid low enough to secure a contract.
Greenpeace UK’s political campaigner, Ami McCarthy, says:
“The government clearly needs to take a hard look at how this system is working. 5GW of offshore wind is of course welcome, but it is only about half of what is required each year to meet the government’s 2030 target.
The Unite union is disappointed that many of the offshore wind farms were awarded to the Danish multinational Orsted, rather than helping to create UK jobs.
Unite general secretary Sharon Graham says:
“Creating sustainable green jobs must be at the heart of the UK’s renewable energy strategy.
The government will continue to fall at the first hurdle in providing a just transition for oil and gas workers, unless we ensure that the towers, blades and nacelles needed for new wind farms are manufactured in the UK.
Not only has the government got to play catch up to meet its renewable energy targets, but it must also develop a UK wind manufacturing industry, or it is simply exporting green jobs abroad.”
The strong demand for UK government debt today adds to signs of strong demand for British bonds from investors attracted by their higher yields compared with global peers.
Reuters says this is driven in part by expectations that the Bank of England will cut interest rates by less than the U.S. Federal eserve or European Central Bank over the next year.
Regular weekly gilt auctions have also shown no shortage of bidders, they add.