UK borrowing costs fall as hopes of interest rate cut grow

A much-needed shot of decent economic news that showed the UK’s crucial services sector is growing more strongly than previously thought added to the optimism, for consumer-facing stocks including Next and Coca-Cola HBC.

The mood filtered through to the FTSE 250, which was up 133 points at 21,586 despite an 11 per cent hit to Baltic Classifieds, an Estonia-based online advertising group, which tempered growth expectations in full-year results.

World shares touched a record high: MSCI’s main 47-country world shares gauge was at its seventh record high in the past eight sessions and the dollar firmed before key US jobs data.

Analysts are forecasting a rise of 110,000 jobs in June and an increase in the jobless rate to 4.3 per cent but the stakes are high after a private-sector payrolls report surprised with the first fall in more than two years.

Some of the world’s biggest asset managers took advantage of yesterday’s sharp fall in gilts prices to top up their holdings.

Sensing that the sell-off would not descend into a Liz Truss-style rout, BlackRock and Schroders were among the finance houses to buy up UK sovereign bonds, according to the FT.

At the peak of the sell-off, the additional yield on 10‑year UK gilts over equivalent US Treasuries widened to about 40 basis points, the highest since April, when yields hit 4.68 per cent.

Yields on gilts, which move inversely to their prices, fell back sharply this morning. That on the benchmark 10-year note settled down 10 basis points at 4.53 per cent after Sir Keir Starmer appeared alongside Rachel Reeves at an NHS event.

Two thirds of UK companies do not expect US tariff policy to affect their business, according to a survey from the Bank of England.

The Bank’s monthly decision maker’s survey for June found that 29 per cent of firms said they would suffer from lower sales in the next 12 months as a result of President Trump’s trade policies and a quarter said their investment would be hit. A fifth said average prices would be lower as a result of tariffs, and about an eighth said they were preparing for higher prices.

The majority — 66 per cent — said they did not expect any impact from the White House decision to go ahead with a minimum 10 per cent tariff across most UK goods exports.

The Bank’s survey also asked companies about their wage and inflation expectations. Measures of one-year-ahead inflation expectations dropped from 3.2 per cent to 3.1 per cent last month.

Companies said their average wage growth was 4.6 per cent in the three months to June but they expected it to fall to 3.6 per cent over the next 12 months.

Economists’ views on the path for rates after the latest S&P Global PMI survey showed the fastest rate of service sector growth for ten months.

Matt Swannell, chief economic adviser to the EY Item Club: “Barring any large upside surprises in this month’s official labour market and inflation data, the MPC [monetary policy committee] will likely maintain its cut-hold trend with a 25bps cut to bank rate in August.”

Rob Wood, chief UK economist at Pantheon Macroeconomics: “Happy days as growth improves and inflation slows; the MPC could welcome the news with another cut in August.”

Tim Moore, economics director at S&P Global Market Intelligence: “A combination of easing price pressures and lower employment leaves the door open for the Bank of England to resume its run of interest rate cuts at the next policy meeting in August.”

Services activity has grown, although firms said that they were putting a pause on hiring

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Output in the UK services sector rose to a ten-month high in June as companies benefited from rising new orders and cut prices for consumers.

The latest S&P Global purchasing managers’ index for the dominant services industry rose from 50.9 to 52.8 in June, higher than an initial 51.3 reading. Any reading above 50 represents growth.

New orders rose at their fastest pace since November 2024 and companies said their cost inflation was at a six-month low, pushing down output prices to their lowest in four years.

The figures will help to encourage the Bank of England into interest rate cuts in the remainder of the year.

Services firms warned of global trade uncertainty and rising payroll taxes as reasons to pause on hiring. The index’s employment measure fell again in June for the ninth consecutive month.

“Anecdotal evidence suggested that elevated payroll costs and a lack of pressure on business capacity remained key factors leading to reduced hiring,” Tim Moore, economics director at S&P Global Markets, said.

Lenders expect that demand for mortgages will fall over the coming three months, according to the Bank of England’s latest quarterly credit conditions survey.

The survey showed that a balance of expected secured lending for the coming three months fell to minus 18.5 in the second quarter from minus 2 in the first quarter. It was the weakest reading since the third quarter of 2023.

The survey adds to signs of weaker sentiment in the housing market following an increase in property transaction taxes that took effect in April.

The boss of Currys has urged the government not to raise taxes again, warning that further increases could lead to higher prices for consumers.

Alex Baldock, chief executive, said any further addition to Labour’s “tax burden” announced in its October budget would “further dampen growth, investment and employment”.

“It would further increase prices in an inflationary way,” he said.

Baldock said he would “urge the government to think very carefully before they make the situation any worse” after Rachel Reeves, the chancellor, refused to rule out future increases this week.

Tax increases announced in the budget last year hit the retail sector, the UK’s largest private employer, with £7 billion of extra costs and put 300,000 jobs at risk.

Virgin had wanted to run services along the west coast main line to Glasgow

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Virgin Trains’ attempt to get back on to the railways has been blocked by the rail regulator.

The Office of Rail and Road has turned down all three existing applications to run private company rail services out of London Euston along the west coast main line.

It says there is not sufficient capacity. The ruling comes after pressure from Heidi Alexander, the transport secretary, to clamp down on “open access” train services because they might take income away from the government’s renationalised railway.

Virgin had planned to run services along the line to Glasgow. First Group wanted to run a new cut-price Lumo service to Manchester. The French company Alstom wanted to run a service to north Wales.

British companies involved in a four-day working week pilot have decided to continue working a shorter week following the end of the trial, Tom Saunders writes.

The six-month pilot was organised by the 4 Day Week Foundation and monitored by researchers at Boston College in the US.

The foundation said that 62 per cent of workers “registered a reduction in how often they experienced burnout”, 41 per cent felt an improvement in their mental health and 45 per cent said they felt more satisfied with life.

Employees at the 17 companies that took part in the trial all had their working hours reduced with no loss of pay. Following its end, 12 of the participating organisations have opted for a four-day week and five have instituted a nine-day fortnight.

Government borrowing costs fell sharply this morning after Sir Keir Starmer belatedly backed his chancellor, Rachel Reeves.

Bond yields fell across the board. The yield on the benchmark 10-year UK government bond was at 4.52 per cent, down 9 basis points. Yields fall when bond prices rise.

The yield on the 10-year gilt spiked to 4.66 per cent yesterday when the prime minister failed to commit himself to retaining Reeves as his chancellor during an exchange at prime minister’s questions, spooking the markets and prompting the biggest jump in Britain’s borrowing costs since Liz Truss’s premiership.

The pound has also strengthened to $1.3669 against the dollar and to €1.1581 against the euro.

The FTSE 100 and the FTSE 250 are up 0.48 per cent and 0.5 per cent respectively.

Pension Insurance Corporation, the specialist UK insurer, faces being taken over by Athora, a savings and retirement services group backed by Apollo Global Management.

Luxembourg-based Reinet Investments, chaired by billionaire Johann Rupert, has confirmed it has been approached by Athora and is in advanced talks about a potential disposal of its 49.5 per cent interest in PIC.

Reinet said: “The terms of the proposal imply a consideration payable for 100 per cent of the fully diluted share capital of PIC of approximately £5.7 billion.”

PIC’s other shareholders include private equity firm CVC Capital Partners (17.37 per cent) and Luxinva, a wholly-owned subsidiary of Abu Dhabi Investment Authority (18.42 per cent).

Apollo explored a bid for PIC in late 2023.

Michael O’Leary, the Ryanair chief executive, said the disruption was unacceptable

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Europe’s biggest airline has been forced to cancel 170 flights because of a nationwide air traffic controller strike in France planned for later in the day and Friday.

It will disrupt travel for more than 30,000 passengers and comes at the start of Europe’s summer holidays, one of the busiest travel periods of the year.

The French civil aviation agency has asked carriers to reduce flights at Paris airports by 40 per cent on July 4 because of the planned strike. The strike will also affect passengers overflying French airspace from the UK to Greece and Spain to Ireland.

Michael O’Leary, chief executive, said: “Once again European families are held to ransom by French air traffic controllers going on strike. It is not acceptable that overflights over French airspace en route to their destination are being cancelled/delayed as a result of yet another French ATC strike.”

Watches of Switzerland Group is wary about uncertain macroeconomic conditions

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Watches of Switzerland: Full-year pre-tax profits at the luxury retailer fell 18 per cent to £76 million, from £92 million, in the year to the end of April. Revenue over the period rose 7 per cent to £1.65 billion, from £1.54 billion the year before. More here.

The company, Britain’s leading seller of Rolex, Omega and Breitling watches, said: “We are mindful of the uncertain macroeconomic backdrop, geopolitical developments, potential US tariff changes and their potential impact on consumer confidence.”

Baltic Classifieds: The online advertising business has reported that pre-tax profit rose 46 per cent to €51.1 million, up from €34.9 million. Revenue rose 15 per cent to €82.8 million, up from €72.1 million.

Chesnara: The life and pensions business has announced plans to acquire HSBC’s UK life insurance business for £260 million. The acquisition will be partly funded by a fully underwritten £140 million rights issue.

Full-year revenue at Currys rose 3 per cent to £8.7 billion

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The electricals retailer Currys has resumed dividend payments as it posted upbeat full-year results this morning.

Headline profit rose 37 per cent to £162 million in the 12 months to the end of April, from £117 million. Revenue over the period rose 3 per cent to £8.7 billion, from £8.47 billion the previous year. Like-for-like sales were up 2 per cent across the group, driven by a 4 per cent increase in the UK.

The company announced a full-year dividend of 1.5p a share. It had suspended dividends in 2023 as it grappled with its then-troubled Nordic business, which is now back on track.

Read the full story here.

Sir Keir Starmer at prime minister’s questions with a tearful Rachel Reeves after the government’s climbdown on the welfare bill

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Government borrowing costs will be in focus this morning after Sir Keir Starmer rushed to back Rachel Reeves after doubts were raised about her future following about-turns on welfare reforms that blew a hole in her budget plans.

Bond yields rose sharply across the board and the pound dropped yesterday after the chancellor appeared tearful during prime minister’s questions after Starmer had refused to confirm when questioned by Kemi Badenoch that she would stay as chancellor until the next election.

The rise in bond yields and the fall in the pound eased after Starmer’s support for Reeves but the graphs show that the markets remain nervous. Economists say the chancellor will struggle to meet her fiscal rules after the £5 billion in savings from proposed welfare reforms are wiped out by this week’s amendments. It raises the prospect of higher taxes and a freeze on tax thresholds.