Pound boosted by stronger-than-expected GDP figures lifting interest rate hike hopes

The UK economy put its foot on the gas in the third quarter of the year, making an interest rate hike at next week's Bank of England policy meeting all but a sealed deal.

The Monetary Policy Committee said that it would raise rates before the end of the year if the economy continued to perform as expected with next Thursday's rate decision mooted as the ideal opportunity for the central bank to pull the trigger. 

Buoyed by the stronger-than-expected 0.4pc expansion, the pound rallied on currency markets, advancing by 1pc against the dollar to above $1.3250.

Sterling's climb amplified the effect of global stocks stuttering on the FTSE 100, which retreated 1.1pc. Pharma giant GlaxoSmithKline was dumped by investors following its results, sinking 5.5pc, while softening metal prices pulled down London's mining stocks.

IG analyst Joshua Mahony explained this afternoon's slowdown on stock markets:

"The recent US stock market surge came to a halt today, as the positive earnings releases of days gone by were nowhere to be seen. With 70% of S&P 500 earnings beating estimates, it is no surprise that confidence has been sky high of late.

"However, given the underperformance of AT&T and Boeing earnings, it’s not a shock that the wider S&P 500, Dow and Nasdaq markets are all in the red as we realise that further earnings outperformance may not be a given."

The independent review demanded by the Prime Minister to reduce Britain’s rising energy costs has pointed the finger at Government for saddling homes and businesses with higher than necessary bills.

Professor Dieter Helm was tasked by ministers with undertaking a forensic probe into each element of the energy system after the Conservative Party vowed to tackle “rip-off” bills.

But the industry expert has laid the blame for “excessive” costs on the Government’s own policies, regulation and market design saying the energy system is not fit for purpose due to Government “tinkering”.

Instead “significant institutional reform” should be brought in to reduce Government’s role and allow the market to function efficiently.

Read Jillian Ambrose's full report here

Let's have a quick round-up on what happened after the opening bell in New York this afternoon.

The Dow Jones is taking a breather after hitting a record high yesterday, slipping 0.4pc back below the 23,400 mark.

General Electric's share price slide over doubts on its dividend is continuing with the conglomerate plunging 9.3pc in just three days. But aircraft manufacturing giant Boeing is the index's biggest laggard despite beating expectations in its earnings earlier today.

Spreadex analyst Connor Campbell said this on the action in the UK this afternoon:

"All this put the FTSE in a miserable mood, with the UK index dropping 50 points to fall to its lowest price in nearly 3 weeks.

"With the likelihood of a November rate hike from the BoE only increasing following the (slightly) better than forecast third quarter growth reading – leaving sterling in line for another boost – the UK index may struggle to muster the momentum required to climb back, and stay, above 7500 in the coming weeks.  "

Paying gig economy workers a premium level of the national minimum wage would risk confusing an already “too complicated” system by “over-egging the pudding”, MPs were told today.

Sir David Metcalf, the UK’s director of labour market enforcement, said that he did not agree with proposals to pay premium rates of minimum wage for casual workers - a key recommendation of the Taylor Review of modern working practices. 

Sir David, who advised the Government on setting minimum levels of pay for 10 years, told the select committee on Business, Energy and Industrial Strategy that the suggestions outlined in the Taylor review would involve doubling the number of minimum wage levels from five to 10," he said.

Read Anna Isaac's full report here

The pound has plateaued on currency markets but even a solid batch of US data couldn't knock it off today's high against the dollar.

Durable goods orders in the US beat expectations to rise by 0.7pc in September (when excluding the very volatile transportation data).

The figures "provide further reason to believe that the economy will continue to grow at a healthy pace in the fourth quarter as well", commented Capital Economics US economist Andrew Hunter.

Britain’s biggest drugmaker GSK expects to start incurring costs from preparing for Brexit as early as this year, with its chief executive Emma Walmsley calling for clarity on transition arrangements “as soon as possible”.

Speaking after a solid third quarter update, Ms Walmsley warned GSK was “moving forward with contingency planning right now” and would start spending within weeks on drawing up plans for duplicate medicine testing centres in the EU and preparing for separate drug licensing regimes - both of which would be needed in the event of a so-called "hard Brexit".

Ms Walmsley's warning came as MPs argued over when the outline of a transition deal could feasibly be agreed with Brussels, with Brexit secretary David Davis saying he expected broad agreement this year, although critics expect it to be later next year.

Read Iain Withers' full report here

Today's pick-up in GDP growth looks to have sealed the deal on a rate hike next week so naturally traders will begin to look for the next catalyst for the currency's movements.

ETX Capital analyst Neil Wilson believes the pound could soar higher if "if the Bank signals that there may be more hikes to come and this is the beginning of a mini-hiking cycle".

Mr Wilson added:

"Countering that is the downside risks from Brexit negotiations that continue to disappoint. There remains a high degree of jeopardy, however. In contrast to counterparts at the ECB and Fed, which have carefully marshalled expectations well in advance, the Bank has shied away from effectively pre-announcing a hike.

"If the Bank fails to hike next week sterling will get whacked until there is any progress on Brexit."

Brexit uncertainty is hitting car sales in the UK and dragging down the industry’s performance across Europe, new data from analysts JATO show.

Registrations of new cars in September in Europe totalled 1.46m, down 2.2pc on the same month a year ago, ending what JATO called an “unprecedented” strong run.

However, the analysts said the UK continued to splutter, suffering a much bigger decline, down 9.3pc to 426,170.

On a year to date basis, new car sales in Europe were 2.3pc higher at 8.7m, but the UK was 3.9pc lower at 2.06m.

“As anticipated, European registrations are starting to slow down following their unprecedented run of strong results,” said Felipe Munoz, JATO global automotive analyst. “A drop after such high levels of growth is not unusual, but it is clear that the recent performance of the UK car market - one of Europe's most significant - is having a substantial impact on the European car market as a whole.

Read Alan Tovey's full report here

The pick-up in UK GDP growth is a "welcome sign of business resilience but no reason for complacency", the Institute of Directors has warned.

Its senior economist Tej Parikh said:

"We would like to see more broad-based growth, and are concerned, for example, that the construction sector is now in recession. This means there is no reason for complacency.

"It seems unlikely that the consumer-driven economy can sustain itself with inflation outpacing wage growth, and, as such, maintaining the low interest rate environment remains important."

He also called on the Government to use next month's budget to ramp up investment to support businesses and provide "much-needed clarity over the Brexit process".

I wouldn't hold your breath on either Tej.

While last week's borrowing figures showed that public sector net borrowing is at its lowest in a decade, analysts believe that the Chancellor is unlikely to loosen the purse strings with the bulk of the damage on borrowing expected to occur in the second half of the financial year and some leeway needed for a rainy day ahead of Brexit.

Retailers are moving away from some of London’s most famous shopping streets amid spiralling costs, putting property values at risk, Deutsche Bank’s asset management division has warned.

Affordability for retailers in the capital is “increasingly stretched”, with brands, particularly those at the luxury end, “reassessing the value of a high-end store”, Deutsche Asset Management said on Wednesday.

This is likely to hit rents for the shops, potentially forcing down values as the wider property sector weakens. "Prime high street retail rents in central London are at considerable risk of decline," it said.

Simon Wallace, Deutsche Asset Management’s head of research for Europe, said retailers were increasingly looking away from traditional shopping areas such as Bond Street and towards more affordable options in areas such as Seven Dials, near Covent Garden.

Read Rhiannon Bury's full report here

Mark Carney and the Bank of England's policymakers will be breathing a sigh of relief this morning after ONS figures showed that the UK economy picked up the pace in the third quarter of the year, paving the way for the first interest rate hike in a decade.

The Monetary Policy Committee indicated in September that a hike was on its way before the end of the year if the economy continued to perform as expected but patchy economics data and two policymakers speaking out against a rate rise to 0.5pc had planted a seed of doubt on the markets.

GDP growth accelerated to 0.4pc in the three months to September, a stronger-than-expected reading which has sent the pound soaring on currency markets and is thought to have effectively sealed the deal on a base rate increase at next week's MPC meeting.

The pound's 0.9pc advance against the dollar to above $1.32 has sent the FTSE 100 sliding with miners Antofagasta and Fresnillo falling most on their disappointing production updates and dipping metal prices.

Banking giant Lloyds has recovered from a poor start to nudge up into positive territory after reporting a 58pc rise in pre-tax profit with the lender not setting aside any further provisions for PPI claims.

Britain’s economy is doing better than thought, with growth accelerating to 0.4pc in the third quarter of the year, adding to expectations of an imminent interest rate hike.

Economists thought the recent slowdown would leave GDP growth stuck at 0.3pc for the third consecutive quarter, but strong manufacturing growth and a steady expansion in the services industry pushed the economy upwards.

The improvement provides Mark Carney and his colleagues at the Bank of England with another reason to vote for an interest rate rise when they meet next week.

Read Tim Wallace's full report here

With a valuation of £114bn, British American Tobacco is an absolute juggernaut on the London stock market and its shares are as sprightly as a cruise ship so its 2.6pc jump today is worth noting.

Its shares popped after it unveiled its plan to generate £5bn in revenue from its "next generation" products, such as e-cigarettes, by 2022.

In other tobacco related news, a stat that jumped out in today's GDP release was the 84.8pc plunge in tobacco manufacturing in the third quarter. 

That can be explained by the last pack of British cigarettes rolling off the production line at the JTI plant in Northern Ireland yesterday.

Lloyds Banking Group chief executive António Horta-Osório has insisted the near-term outlook for the UK economy is “positive” despite concerns over a potential consumer credit bubble and a disorderly Brexit.

Britain’s largest mortgage lender posted a leap in pre-tax profits to £1.95bn for the three months to September, up from £811m the previous year, but a spike in loan impairments, a rise in PPI claims and a warning over pressure on capital requirements concerned investors.

Lloyds’ share price fell as much as 2pc in early trading before paring back some of its losses and was down around 0.2pc at 67.27p by mid-morning.

Speaking ahead of this morning’s third quarter GDP update - which showed better than expected growth for the UK of 0.4pc - Mr Horta-Osório said the economy “remains resilient” and he expected “slow growth in line with previous quarters” well into next year.

Read Iain Withers' full report here

The FTSE 100's performance this week has been flatter than a pancake but it appears that the pound's climb following those better-than-expected GDP figures has broken the deadlock.

Unfortunately it's moving in the wrong direction, retreating 0.4pc as the stronger pound pulls down the value of the big exporters' earnings, but it's movement nonetheless.

Lloyds has reversed its early losses and, due to how dependent it is on the UK economy, risen on the strong GDP growth reading.

Elsewhere, dipping metal prices and production updates have knocked shares in miners Antofagasta and Fresnillo while British American Tobacco has jumped 2.5pc on its plan to build its vaping business.

British Chambers of Commerece has a slightly more bearish take on today's pick-up in growth and has urged the Bank of England's Monetary Policy Committee to tread with caution on tightening monetary policy.

Its head of economist Suren Thiru said:

"Crucially, the focus of next month’s budget must be on supporting business growth, including addressing the escalating burden of up-front business costs."

Today's growth reading is "strong enough for a rate hike next week", according to Pantheon Macro UK economist Samuel Tombs.

However, he added that the economy is "liable to slow again over the next couple of quarters".

Mr Tombs said:

"Real household disposable incomes still have further to fall in the near-term as retailers push through further sterling-related price rises. The lack of substantial progress in Brexit negotiations means that more firms will start to activate contingency plans and delay investment.

"The economy also will be hit next year by a re-intensification of the fiscal squeeze and a sharp rise in borrowing costs when the Term Funding Scheme is wound-up in February. As a result, we think it could be another 12 months from November before the economy is strong enough for the MPC to raise interest rates a second time."

The snap reaction to today's GDP figures is flooding in so let's have look at what the economists are saying.

It appears that, "with inflation likely to fall in 2018, the worst of the real pay squeeze should soon be behind us", according to Capital Economics UK economist Ruth Gregory.

She added that growth should strengthen next year:

"And sterling’s decline, along with robust global growth, should boost net trade over the coming quarters. As such, we continue to think that growth will be a reasonable (above-consensus) 2% or so in 2018."

Is that a done deal then on interest rates at next week's Bank of England monetary policy decision?

One would think so. Let's have a look at the key takeaways from today's GDP growth release.

1. The UK economy accelerated in the three months to September, growing at a rate of 0.4pc. On a year-on-year basis, GDP growth remained steady at 1.5pc.
2. Sterling climbs on currency markets as the stronger-than-expected reading boosts the chance of an interest rate hike at the Bank of England next week. The pound is 0.3pc higher against the dollar at £1.3170.
3. The services sector continued to grow at 0.4pc with computer programming, motor trades and retail trade excelling most.
4. Manufacturing grew by 1pc after a weak second quarter but construction contracted for a second consecutive quarter.

The UK economy grew by 0.4pc in the third quarter of the year ahead of expectations, according to preliminary estimates from the ONS.

The pound is climbing on currency markets in reaction to the figures with the stronger-than-expected reading boosting hopes that the Bank of England will hike increase rates for the first time in a decade next week. More to follow...

Crucial UK GDP growth figures are due at the bottom of the hour so let's have a look at what we're expecting and why it's so important.

• Today's preliminary estimate is expected to show that the UK economy grew by 0.3pc in the three months to September, the third quarter in a row of modest growth.
• The reading will be crucial ahead of next week's Bank of England decision on interest rates. A weaker-than-expected reading will dampen hawkish hopes of a base rate hike but an acceleration will dispel doubts that the economy is too fragile to handle an increase.
• The markets are still pricing in a 83.9pc probability of a rate hike despite two BoE policymakers coming out in recent weeks to voice their opposition to the Monetary Policy Committee's plan to raise rates before the end of the year if the economy continues to perform as expected. 

CMC Markets analyst Michael Hewson weighed up what's at stake at the Bank of England:

"This is becoming dangerous ground for the Bank of England, having misled markets consistently over the last few years with respect to their confused guidance, the bank runs the risk of eroding its credibility further with the mixed messages currently emanating from its various policymakers.  

"When external MPC member Gertjan Vlieghe recently joined the ranks suggesting a modest move on rates might be sensible in light of recent inflationary pressures, there appeared to be an acknowledgement that with other central banks looking to retreat modestly from their own loose policies, that a similar move by the Bank of England might be prudent, if only to keep a lid on the current rise being seen in the inflation outlook."

Lloyds Banking Group is among the laggards on the FTSE 100 this morning despite reporting a 58pc rise in pre-tax profit and not setting aside any further provisions for PPI claims.

The share price "is still being held back by a consensus of angst over Brexit" but the lack of PPI provision "suggests the bank thinks the spike in claims may be short-lived", commented Hargreaves Lansdown Laith Khalaf.

He added:

"The bank is heavily plugged into the domestic economy, and so could sustain collateral damage if Brexit negotiations prompt a slump in UK growth.  

" Overall the bank continues to make steady progress, and has also shown it’s willing to make acquisitions where it sees opportunities, having taken on MBNA and more recently Zurich’s UK workplace pension business. Lloyds is more of a Mondeo than a Maserati, it’s not going to go anywhere particularly fast, but that does mean there’s less chance of a crash along the way."

The pound is slipping ahead of crucial third quarter GDP growth figures, one of the final economic health checkers before the Bank of England's policymakers decide whether to hike interest rates.

Preliminary estimates are expected to show that the UK economy is still growing at a modest 0.3pc rate in the third quarter. A stronger-than-expected reading will breathe life into quietening monetary policy hawks and put the BoE on course for its first rate hike in a decade. 

But if the economy splutters, the seed of doubt planted by the central bank's rate-setters Sir Dave Ramsden and Jon Cunliffe in recent weeks will grow on the markets and send the pound sliding.

Ahead of the figures, sterling has dipped 0.1pc to $1.3117 following yesterday's 0.5pc retreat on Mr Cunliffe's cautious tone.

The FTSE 100 is spending a fourth day stuck in flat territory with bank Lloyds dipping despite reporting a jump in profits.

Interim results: Lombard Risk Management, Metro Bank, Antofagasta, GlaxoSmithKline

Trading statement: Centaur Media, Cobham, Lloyds Banking Group

AGM: Redde, GCP Student Living, Tlou Energy, Photo-Me International

Economics: Preliminary GDP q/q (UK), Index of Services 3m/3m (UK), CBI Realized Sales (UK), Durable Goods Orders m/m (US), HPI m/m (US), New Home Sales (US), Ifo Business Climate (EU)