US services shrinks for first time since 2020 – ISM
There is a big decline in the latest services survey from the Institute for Supply Management, which is closely watched by markets.
It points to the first contraction in the services sector since May 2020, with the PMI headline index falling to 48.8 from May’s 53.8. The 50 mark separates growth from contraction.
The business activity index plunged to 49.6 from 61.2, a massive move.
Key events
Closing summary
The latest services survey from the Institute for Supply Management points to the first contraction in the services sector since May 2020, with the PMI headline index falling to 48.8 from May’s 53.8. The 50 mark separates growth from contraction. The business activity index plunged to 49.6 from 61.2, a massive drop.
Over here, growth in the UK service sector slowed last month amid a “seize-up” in activity as companies put projects on hold in the run-up to the general election.
The latest snapshot from the data provider S&P Global showed growth in the UK’s dominant service sector – which includes transport, IT, finance, communications, property and business services – slowed in June to the lowest level in seven months.
The survey of about 650 businesses, which is closely monitored by the Bank of England, showed a continued expansion in business activity at the end of the second quarter, stretching an unbroken growth run to eight months.
However, businesses said some clients were opting to wait and see the results of Thursday’s vote before placing orders and commissioning new projects.
In the eurozone, private sector growth eased to a three-month low, with activity in the service industries also at a three-month low.
Global stock markets have been cheered by US Federal Reserve chair Jerome Powell’s remarks yesterday about the US “getting back on a disinflationary path” and optimism about interest rate cuts. Tonight, the minutes of the last Fed meeting could give further clues on the central bank’s thinking.
Following strong gains in Asia, the French, Italian and German stock markets all rose by around 1%, led by France with a 1.2% gain. The UK’s FTSE 100 was 0.6% ahead.
There is growing confidence that a majority for Marine Le Pen’s far-right National Rally can be avoided in the second election round on Sunday, with political wrangling under way.
Our other main stories today:
Olivia Cross, North America economist at Capital Economics, has looked at the sharp decline in US services, and what it means for the wider economy.
The decline in the ISM services index to 48.8 in June, from 53.8, takes it to its lowest since the lockdowns in 2020.
Alongside a decline in the ISM manufacturing index, these surveys suggest that GDP growth will remain weak in the third quarter. They also add to evidence that labour demand is softening, and inflation will remain on a downward trend.
Disastrous fruit and veg crops must be ‘wake-up call’ for UK
UK fruit and vegetable production has plummeted as farms have been hit by extreme weather.
The country suffered the wettest 18 months since records began across the 2023-24 growing year, leaving soil waterlogged and some farms totally underwater. The impact on harvests has been disastrous. Data from the Department for Environment, Food and Rural Affairs shows that year-on-year vegetable yields decreased by 4.9% to 2.2m tonnes in 2023, and the production volumes of fruit decreased by 12% to 585,000 tonnes.
Scientists say that climate breakdown caused by the burning of fossil fuels is likely to bring more extreme weather to the UK, including more frequent floods and droughts.
Farmers said they were not able to plant due to the wet weather, and this is borne out in the statistics. The growing area of vegetables was down, falling by 6.5% to 101,000 hectares. A dry early summer in 2023 also did not help, as those who could not irrigate found it hard to plant.
EU plan to impose import duty on cheap goods could dent Shein and Temu
The EU is moving forward with plans to impose customs duty on cheap goods in a shift that could hit imports from online retailers and harm a hoped-for London listing by the fast-fashion seller Shein.
The potential change comes amid growing disquiet among retailers based in mainland Europe, the UK and the US about rising competition from Chinese-linked marketplaces Shein and Temu, which exploit a loophole that excludes low-value items from import duty.
In the EU, the threshold for the levy is €150 (£127) and in the UK it is £135, enabling retailers such as Shein to ship products directly from overseas to shoppers in those markets without paying any import duty. In the UK, items valued at £39 or less also do not attract import VAT.
Subsidised postage costs in China make it more cost-effective for businesses based there to send cheap goods by air.
US services shrinks for first time since 2020 – ISM
There is a big decline in the latest services survey from the Institute for Supply Management, which is closely watched by markets.
It points to the first contraction in the services sector since May 2020, with the PMI headline index falling to 48.8 from May’s 53.8. The 50 mark separates growth from contraction.
The business activity index plunged to 49.6 from 61.2, a massive move.
June data signalled near broad-based growth in output across the seven monitored sectors, with technology the only area to register a fall in activity, according to a separate survey from S&P Global.
Leading the growth rankings for a second month running was the financials sector, where the rate of expansion in output picked up again to the sharpest since the end of 2021.
Although returning to contraction territory for the second time in the last three months, technology firms recorded only a fractional drop in output in June. It was, nonetheless, the worst performing of the seven sectors.
In contrast, the healthcare sector returned to growth in June, as output rose for the first time since March. Moreover, the rate of expansion in business activity was solid and the sharpest so far this year.
The consumer goods and consumer services sectors saw differing trends during June, as growth in the latter accelerated to the fastest for two years. Meanwhile, consumer goods firms recorded the slowest upturn in output over the past six months.
The basic materials sector saw an acceleration in the pace of output growth during June. Production levels rose at a solid rate that was the second-quickest since April 2022 (behind that seen in March 2024).
US service sector growth picks up – S&P Global
The US service sector picked up momentum in June, with the biggest rise in new orders in a year. Companies responded by taking on more staff for the first time in three months, but even so backlogs of work built up.
Price pressures from both input costs and output prices eased in June, but remained above pre-pandemic averages, mainly because of higher labour costs.
The seasonally adjusted S&P Global US services PMI business activity index increased for the second month running in June, to 55.3 from 54.8 in May.
Activity in the sector has now risen in each of the past 17 months, with the latest expansion the most pronounced since April 2022.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said:
US service sector companies reported an encouragingly solid end to the second quarter, with output rising at the fastest rate for over two years. Both new order inflows and hiring have also accelerated, the latter buoyed by firms taking on more workers in response to rising backlogs of work.
With additional – albeit more muted – support coming from the manufacturing sector, the survey data point to GDP rising at an annualised 2.0% rate in the second quarter, with a 2.5% rate seen for June. Forward momentum is therefore gathering pace.
There is some nervousness creeping in regarding the post-election business environment, but for now at least confidence about the outlook for the coming year remains elevated by recent standards and supportive of businesses investing in expansion.
Some of this optimism relates to ongoing convictions that interest rates will start to fall before the end of the year. In this respect, a further cooling of price pressures in the survey – notably in the services sector – adds to signs that inflation should trend lower in the coming months to open the door further for rate cuts.
Baillie Gifford-run trust sells Rio Tinto stake
An investment trust run by Scottish asset manager Baillie Gifford has sold its £20m stake in Rio Tinto, accusing the mining giant of not doing enough to tackle environmental and social concerns.
Disclosure of the disposal by the FTSE 250-listed Monks Investment Trust, first reported by the Times, comes weeks after Baillie Gifford came under pressure from environmental activists in a row that led to it pulling out of sponsoring the Hay Edinburgh and other book festivals.
Baillie Gifford pulled out after calls by campaign group Fossil Free Books (FFB) for the company to divest from fossil fuels and companies linked to Israel. Nine festivals that were previously sponsored by Baillie Gifford are now seeking donations, we reported earlier this week.
Monks said on Tuesday that it would sell shares in companies that are not making enough progress on environmental, social and governance factors and named the mining group as a company it had ditched.
Karl Sternberg, chair of Monks, said “concerns regarding governance and the approach to environmental impact” had not been “adequately addressed” by the world’s second-largest mining group.
Monks first voiced concerns over Rio Tinto after it bulldozed a 46,000-year-old sacred Aboriginal site in Western Australia in 2020. The scandal triggered the departure of both Rio Tinto’s chief executive and chair.
US trade deficit widens slightly, labour market data softer
US trade data and labour market figures are out.
The trade deficit widened slightly to $75.1bn in May from $74.5bn, as exports fell by 0.7% month on month, countering a 0.3% decline in imports.
Paul Ashworth, chief North America economist at Capital Economics, said:
Nevertheless, the decline in exports was more modest than the advance goods data had implied, so net external demand should now be a slightly smaller (albeit still sizeable) drag on second-quarter GDP growth. Factoring in the disappointing May construction spending data released yesterday too, we now estimate that GDP growth was 1.9% annualised – a little stronger than the first quarter, but well below the economy’s immigration-boosted potential growth rate.
The $3.1bn decline in goods exports was driven by a $2.1bn drop in industrial supplies, which was partly linked to the fall in energy prices. The $1.9bn decline in goods imports was more than explained by a $4.2bn fall in pharmaceutical drugs, which tend to be quite volatile on a month-to-month basis. For the second quarter as a whole, we estimate that exports declined by 0.8% annualised, with imports up by 8.3%.
The latest labour market data still look a little softer ahead of key June payrolls figures, due on Friday. ADP employment increased by a muted 150,000, and initial jobless claims edged up to 238,000, from 236,000.
Alongside the news that GDP growth remained lacklustre in the first half of this year, this new-found labour market softness is a little disconcerting.
Oil prices hit two-month high ahead of summer driving season
Oil prices have climbed to a two-month high, ahead of the summer driving season, and amid renewed tensions in the Middle East.
Brent crude, the international benchmark, rose as high as $86.83 a barrel today, and is now trading at $86.41 a barrel, up 0.2% on the day. It has gained nearly $10 a barrel since the start of June. US light crude touched $83.36 a barrel and is now 0.2% higher at $82.97 a barrel, after pushing through $84 yesterday for the first time since April.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said:
Oil prices are ticking upwards again, following a drop in US crude stockpiles for the week ending 28 June. Demand for fuel to power trips over the US holiday season is expected to be high. But traders are also eyeing potential supply constraints. Geo-political escalation in the Middle East is still a threat, given the ongoing violence in Gaza.
The hurricane season forecast to be particularly fierce this year, given the devastation wreaked on the Caribbean this week and if severe storms hit the Gulf Coast, refining capacity could be significantly disrupted.
Gene therapy firm raises £134m to push eye disease treatments through trials
Also on the health front, Syncona’s portfolio company Beacon Therapeutics has today raised $170m (£134m) to develop gene therapies that save and restore the vision of patients with blinding retinal diseases.
Syncona, a London-based life science investor that is listed on the FTSE 250, committed £33.5m to the Series B financing, resulting in a £14.1m uplift in its valuation of Beacon. (Series B financing is the second round of funding for a business through investment.)
Syncona launched Beacon last year, after taking advantage of challenging biotech market conditions to acquire Applied Genetic Technologies Corporation off Nasdaq in 2022, and combining it with other pre-clinical programmes, including from the University of Oxford.
Beacon, headquartered in London with another base in Massachusetts, focuses on developing gene therapies for both rare and prevalent diseases of the eye that lead to blindness, including X-linked retinitis pigmentosa (XLRP) and dry age-related macular degeneration (dAMD).
Beacon’s lead asset in XLRP is currently in intermediate to late-stage clinical trials.
Eli Lilly’s Kisunla is second Alzheimer’s drug to get FDA approval
The approval of Eli Lilly’s Kisunla drug by the US health regulator means competition is heating up in the Alzheimer’s drug market, analysts say.
The Food and Drug Administration (FDA) yesterday approved the experimental Alzheimer’s drug donanemab, marketed as Kisunla, for the treatment of patients with mild cognitive impairment or mild Alzheimer’s disease (AD).
The anti-amyloid beta monoclonal antibody slowed the early stages of the fatal mind-robbing disease in studies.
It is the second disease-modifying therapy to reach the AD market in the US, after Eisai/Biogen’s Leqembi (Lecanemab) received full FDA approval last July.
Philippa Salter, managing neurology analyst at the data and analytics firm GlobalData, forecast that Leqembi and Kisunla could generate global (US, France, Germany, Italy, Spain, UK, Japan and China) sales of around $3.5bn and $2bn by 2030, respectively. She said:
Despite gaining approval nearly a year ago, uptake of Leqembi has been slow. While the approval of Kisunla will provide further confidence [in this type of treatments], which could help drive the uptake of both drugs, many of the challenges faced by Leqembi will also apply to Kisunla.
Both drugs require brain scans before treatment, a positron emission tomography (PET) scan to assess levels of amyloid in the brain, and a magnetic resonance imaging (MRI) scan, with further MRI scans recommended prior to further drug infusions. She said access to these scans is a “key limiting factor for the uptake of these drugs”.
Salter explained:
The MRIs help monitor for a known side effect of these drugs, the development of amyloid-related imaging abnormalities (ARIAs). The rates of ARIA were lower in Leqembi’s Phase III trials compared to Kisunla’s Phase III trials, giving Leqembi a key advantage in its safety profile.
However, an important competitive advantage for Kisunla is its once-monthly dosing schedule compared with Leqembi’s dosing of once every two weeks. Further, despite having a higher annual cost of therapy of $32,000 for Kisunla compared with $26,500 per year for Leqembi, Lilly states that in the long term, Kisunla will be cheaper and more convenient for patients since they won’t have to take the drug indefinitely, something that was included in the FDA label, which states that once amyloid plaques have been reduced to minimal levels on PET imaging, stopping treatment can be considered.
While there are clear advantages in not having to take a drug indefinitely, many questions have been raised about what happens once donanemab therapy is stopped. Further real-world evidence and clinical trial data will be key for physicians to feel confident in stopping treatment with Kisunla and therefore vital for the success of the drug.
Vodafone and Virgin Media beef up mobile network sharing agreement
Jane Croft
Vodafone UK and Virgin Media O2 have announced they will extend and enhance their existing mobile network sharing agreement for the next decade.
Vodafone is seeking to acquire Three UK in a deal which is currently being probed by competition regulators, but many aspects of the new network sharing agreement are independent of the outcome of the Vodafone UK and Three UK merger.
The agreement will see a combined Vodafone UK and Three UK commit to invest £11bn in its network for the next decade – although this will be subject to regulatory approval of the deal – as well as Virgin Media’s £2bn annual investment in its network.
The two operators have agreed subject to completion of the merger, Virgin Media O2 will acquire spectrum from the newly enlarged Vodafone and Three UK group establishing three scaled mobile network operators each with better alignment of spectrum holding.
Ahmed Essam, chief executive of European markets at Vodafone, said:
With this agreement and our merger with Three, we will transform the mobile experience for over 50m customers in the UK for the long-term, providing significant network improvements including more choice, better quality and greater coverage across the country.
Lutz Schüler, chief executive of Virgin Media O2, said:
We are extending and bolstering elements of our existing network sharing arrangement,while also ensuring there is a robust, balanced and functional structure in place for the long-term should Vodafone and Three’s proposed merger gain consent.
Topps Tiles shares sink after sales slump in tough market
Shares in Topps Tiles have fallen as much as 6% to the bottom of the FTSE Small Cap index after the British tile retailer said tough market conditions had lasted into the second half of its year.
The shares fell as low as 38p and later traded at 39.4p, down 4.2%.
Total sales were 6.9% lower year on year in its third quarter, while the UK tile market is down between 10% and 15%, and the company said it was taking market share.
Demand for repair, maintenance and improvement has remained weak, especially for bigger projects. Like-for-like sales were 9.7% lower in the third quarter, similar to the 9.2% decline seen in the first half, although sales levels stabilised somewhat through the quarter.
Topps said that slowing inflation, a pick-up in real wage growth, improving consumer confidence and increased activity in the housing market “provides some confidence in a cyclical recovery”. But it cautioned that this recovery is yet to feed through into its market, and it is working to improve its digital offer to trade customers and other measures.
European shares rise after Powell remarks, French optimism
Following strong gains in Asian stock markets on optimism about US interest rate cuts, European equities are also pushing higher, led in part by France.
There is growing confidence that a majority for Marine Le Pen’s far-right National Rally can be avoided in the second election round on Sunday, with political wrangling under way.
France’s CAC has gained around 1%, while the UK’s FTSE 100 is 0.6% higher ahead of tomorrow’s general election, Germany’s Dax is also up by 0.6% and Italy’s FTSE MiB has risen by 1.3%.
Joshua Mahony, chief market analyst at the trading platform Scope Markets, said:
With President Emmanuel Macron’s centrist group and a left-wing alliance withdrawing candidates to minimise the number of three-way contests that might split the anti far-right vote, we have seen French [bond] yields head lower and stocks on the rise. With a hung parliament providing the basis for Macron to continue calling the shots, the market perception of a Le Pen victory comes down to the ability to achieve a majority or not.
Tomorrow’s UK election looks unlikely to create too many shockwaves given the sheer size of the majority expected for the Labour party. While Reform have been busy chipping away at the Conservative vote, recent scandals will have likely stifled support with two candidates defecting due to perceived racism within the party.
For traders, the prospect of a stable Labour majority appears to be a positive, with sterling one of the best performing currencies over the past week.
Looking ahead, the US jobs market remains in focus. Yesterday’s JOLTS job openings data showed an unexpected rise counteracted by a downside revision to the May reading. Mahony said:
With traders expecting a decline in Friday’s non-farm payrolls release, today’s ADP figure looks to similarly head lower in a sign of weakness in the employment picture.
The weakness seen for the dollar yesterday came off the back of comments from Powell, with the data dependent nature of the Fed being seen as a positive given the weakness expected in the jobs data this week. Nonetheless, traders will be concerned over the inflationary impact of the recent rise in crude oil, with yesterday’s rise pushing WTI [West Texas Intermediate] through $84 for the first time since April.
UK private sector growth at six-month low – PMI
Expansion in the UK services sector slowed further in June with some evidence of a “pre-election seize up” feeding into a wider slowdown across the private sector to a six-month low, according to surveys.
More momentum was lost in June, with the upturn at its weakest since last November as tomorrow’s general election prompted some clients to adopt a “wait-and-see” approach before placing orders and commissioning new projects.
New business intakes rose at a historically subdued pace, while the pace of job creation also eased. Meanwhile, firms’ cost pressures continued to cool, but remained elevated. The rate of output price inflation accelerated slightly from May’s recent low.
The seasonally adjusted S&P Global UK services PMI business activity index remained in expansionary territory during June, posting 52.1. While this was the eighth consecutive monthly increase in output across the service sector, the headline index fell again, from 52.9 in May.
Activity across the UK’s private sector slowed to a six-month low. The composite output index, which pulls together the manufacturing and services surveys, remained in expansion territory at the end of the second quarter, but the pace of growth in business activity slowed for a second month running to its weakest in 2024 so far. At 52.3, down from 53.0 in May, the index was at a six-month low.
Joe Hayes, principal economist at S&P Global Market Intelligence, said:
We are seeing some evidence of a pre-general election seize up across the UK services economy, with growth in business activity slowing to a seven-month low in June as the prospect of a change in government led to the adoption of a “wait-and-see” approach by some, restraining sales.
Nevertheless, we’re on track for another quarter of GDP growth, according to composite PMI data for the three months to June, albeit one that will be less punchy than the first quarter’s 0.7%.
Turning to prices and firms’ costs, he said:
Prices still continue to show a high degree of stickiness across the UK service sector, although input cost inflation once again trended lower in June. The direction of travel here is encouraging for the Bank of England, but our survey’s gauge of prices charged actually rose on the month as some companies noted their pricing power was strong enough to raise their fees.
While costs, mostly from wages, have been the major driving force behind strong services inflation, the recovery of the UK economy from it’s late-2023 lull adds another dynamic for policymakers to consider should stronger economic conditions motivate more companies to raise their prices.
Keywords Studios to be taken private by Sweden’s EQT
Keywords Studios, an Irish video game services company that has worked on Fortnite and Call of Duty, has accepted a bid from the Swedish private equity firm EQT that values the business a £2.1bn.
Investors will receive £24.50 a share in cash, the companies said in a statement today. This is below a May offer of £25.50 a share, but Keywords’ board unanimously recommended the bid, which EQT described as its final offer.
The London-listed shares rose 2.8% to £23.82 today.
Keywords was founded in Dublin in 1998 by Giorgio Guastalla and Teresa Luppino and listed on the London Stock Exchange’s junior AIM market in 2013. It provides game development, audio and art services to clients including the US video game makers Epic Games and Activision Blizzard.
The company has expanded rapidly since going public by snapping up a string of support studios, and titles it has worked on include Fortnite, Call of Duty, Baldur’s Gate 3, Diablo IV, Starfield and Hogwarts Legacy. It operates across 26 countries.
EQT returned with a lower bid, after Keywords said that a number of games and development projects had been delayed or cancelled, with the industry struggling to recover from last year’s Hollywood strikes. The company said it expects growth to pick up in the second half of the year.
EQT was founded in Sweden more than 30 years ago with investment from the Wallenberg family, industrialists who are part-owners of international companies with Swedish roots, including AstraZeneca, ABB and Ericsson.
