Another indicator that a US rate rise could come sooner than expected comes with a bigger than expected rise in consumer spending.
The Commerce Department said consumer spending climbed by 0.5% in February, compared to expectations of a 0.3% increase. Meanwhile there was also a 0.5% rise in income, the largest increase since June.
And the final release of the University of Michigan consumer confidence survey rose to 91.7, up from 90.7.
But Rob Carnell at ING Bank said it was still difficult to judge the current state of the US economy:
As we head into payrolls week next week, there is still a distinct lack of clarity about where the US economy is headed. And given the nature of the non-farm payrolls jobs release, we may not be much the wiser by next Friday, and in consequence, there is likely to still be considerable uncertainty about the direction the Fed will be taking. Markets dislike uncertainty.
On that note, it’s time to close for the day. Thanks for all your comments, and we’ll be back again on Monday.
Updated
After a brief revival, the pound is slipping back to seven year lows against the dollar, on a combination of the better than expected US GDP figures and continuing uncertainty over the UK referendum on whether to leave the European Union.
Sterling is now down at $1.3925, heading back towards the seven year low of $1.3878 it reached on Wednesday.
Wall Street opens higher
US markets have followed their European counterparts higher, boosted by rising oil prices and better than expected American GDP figures.
The Dow Jones Industrial Average has climbed around 90 points or 0.5% in early trading, while the S&P 500 is up 0.3% and Nasdaq 0.7% higher at the open.
Hopes of co-ordinated global policy measures from the G20 finance ministers meeting in Shanghai seem to be fading. Reuters reports:
China sought to restore confidence in its economy as financial leaders from G20 nations gathered in Shanghai on Friday, and Premier Li Keqiang urged greater global coordination and consideration of policy spillovers.
But Germany appeared to all but rule out coordinated stimulus to counter a deepening global chill, and U.S. Treasury Secretary Jack Lew said there was no need for a crisis response, as in 2009 when the Group of 20 (G20) major economies agreed on coordinated stimulus to prevent a worldwide depression.
While the health of the world’s second-largest economy, which hosts the G20 presidency this year, is a key talking point around the two-day summit, the threat of the UK leaving the European Union and its political and economic implications have also surfaced as concerns among participants in the meeting.
“Macroeconomic policy coordination needs to be strengthened. The global economic and financial situation may have become more grim and complex. It is time for countries to stand together to tide over difficulties,” Li said in a video message at the opening of the meeting.
Several other policymakers have urged better coordination, but there was disagreement about what steps to take, making it unlikely that concrete action points will emerge from the meeting.
“Talking about further stimulus just distracts from the real tasks at hand,” Germany’s Minister of Finance Wolfgang Schäuble said, rebuffing a recommendation from the International Monetary Fund (IMF) that the G20 should start planning now for a coordinated stimulus programme.
“We, therefore, do not agree on a G20 fiscal stimulus package as some argue, in case outlook risks materialise.”
Lew had a similar message, saying there was a great deal of economic uncertainty at present but no crisis.
“It would not be reasonable to expect a crisis response in an environment that is not a crisis,” he said told reporters.
Overhanging the summit of major economy finance ministers and central bankers are global concerns about China’s ability to manage its domestic markets, currency and commitment to wider restructuring reforms. Concerns about its slowing economy and confusion over its currency policy were among the factors which sowed turmoil in global markets in January.
The case for further policy stimulus amid rising debt levels and already extremely low interest rates was a hard sell among some other G20 members.
Bank of England Governor Mark Carney warned cutting rates below zero carried serious risks, and blamed the recent global slump in shares and other assets on the failure of governments to make bold economics reforms.
Schaeuble said the debt-financed growth model had “reached its limits (and) is even causing new problems, raising debt, causing bubbles and excessive risk taking, zombifying the economy.”
And Japan’s Finance Minister Taro Aso shrugged off calls from some quarters for Tokyo to roll out fresh fiscal stimulus. Japan’s central bank stunned investors by adopting negative interest rates last month.
Updated
The dollar has strengthened following the US GDP data, with sterling now at $1.3960 having earlier regained the $1.4 level.
Dennis de Jong, managing directorat UFX.com, said:
A dreary Dow Jones is likely to be perked up by today’s better than expected US GDP figures, with annualised growth jumping up to the 1% mark.
Financial markets were expecting a slowdown in the world’s largest economy, so much so that conversations about a recession weren’t far away.
Yet, with unemployment remaining low and wages increasing at their fastest rate since 2009, growth is back on the agenda. Add to that cheap fuel prices and low mortgage rates, and it may only be a matter of time until disposable incomes are fully realised and growth continues to speed up.
The better than expected US GDP figures should at least calm fears the country is heading into a recession.
US GDP growth revised upwards
The US economy saw a slowdown in growth in the fourth quarter, but not as much as first thought.
In its second revision, the Commerce Department said GDP grew at an annual rate of 1%, compared to the initial forecast of 0.7%. Analysts had been expecting the figure to be revised down to 0.4%.
But this is still a slowdown on the 2% growth reported in the previous three months.
The revision came as businesses seemed less aggressive in their efforts to reduce inventory.
Updated
German Feb inflation -0.2% v expected 0.0%.
— Jamie McGeever (@ReutersJamie) February 26, 2016
"The EZ now faces one of the longest periods of zero or negative inflation in its history" -HSBC
#Euro-area disappointments mount as #inflation rates fall short in #Germany, #France, #Spain https://t.co/hUScg7OYY4 pic.twitter.com/WQj1EK3Zkw
— Forward Guidance (@ecoeurope) February 26, 2016
German inflation rate goes negative
More signs of weak inflation across the eurozone.
German’s harmonised consumer price index is up 0.4% month on month, but down 0.2% year on year, compared to expectations of a flat figure. This is the lowest annual level since January 2015.
Downbeat data from Greece:
The recovery in #Greek economic sentiment has stalled, leaving it still consistent with sharp contractions in GDP. pic.twitter.com/RwyUk86FDT
— Capital Economics (@CapEconEurope) February 26, 2016
More for the ECB to think about, with German inflation set to go into negative territory. Reuters reports:
German inflation turned negative in February for the first time in five months, preliminary state data indicated on Friday, giving proponents of further monetary policy easing more ammunition for a European Central Bank meeting next month.
Consumer prices fell below zero on the year in five German states, the data showed. In the most populous state North Rhine-Westphalia, annual inflation slowed to 0.1 percent from 0.6 percent in January.
The state readings will feed into nationwide inflation data due at 1300 GMT (08:00 a.m. EST).
Capital Economics analyst Jessica Hinds said the state data suggested that pan-German EU-harmonized consumer price inflation (HICP) dropped to -0.1 percent from +0.4 percent in January.
The market rally is continuing, helped by renewed strength in the oil prices.
Brent crude is up 2% at $36.03 a barrel on hopes that a meeting between Saudia Arabia, Russia and Venezuela could tackle the low oil price. Analyst Connor Campbell at Spreadex said:
The global indices continued to strive for recent highs this Friday, their growth sustained by a $36 per barrel crossing surge from Brent Crude. However, if expectations of a miserly US fourth quarter GDP figure this afternoon are accurate the US open may end up slightly spoiling the end of week party.
Currently, at least, the Dow Jones is joining in with its galloping European peers, the futures promising a 110 point rise when the bell rings on Wall Street, something that would leave the index at its highest point since the first week of January. Yet the spectre of this afternoon’s latest fourth quarter GDP reading may temper investors’ enthusiasm, analysts forecasting a downward revision from an already awful annualised 0.7% to 0.4%.
And here’s more for the ECB to think about:
CHART: Euro-area business surveys weakening since year started. Not comfortable for the #ECB https://t.co/gKu8XiC8EM pic.twitter.com/8tvU9GOUH9
— Maxime Sbaihi (@MxSba) February 26, 2016
European confidence and inflation figures make a strong case for further stimulus measures from the European Central Bank at its March meeting, says Howard Archer at IHS Global Insight:
Certainly, the marked drop in overall business and consumer confidence across the Eurozone to an 8-month low heightens concern about faltering growth.
However, price developments in the survey did offer a little bit of good news for the ECB. The bank will be slightly relieved to see that consumers’ inflation expectations picked up to a 7-month high in February, although they were still well below long-term norms. Furthermore, pricing expectations rose slightly for retailers and were stable among retailers. However, they weakened among manufacturers
In addition to the marked drop in Eurozone consumer and business confidence in February, pressure for appreciable ECB stimulus in March has been ramped up by early Eurozone consumer price data for February which suggests that a return to deflation is very possible as a consequence of lower oil, commodity and food prices. Specifically, Spanish deflation widened sharply to 0.9% in February (the sharpest since last October) from 0.4% in January while France saw consumer prices fall 0.1% year-on-year after an increase of 0.1% in January.
There is clearly now a very real risk that the Eurozone returned to deflation in February despite consumer price inflation rising to an eight-month high of 0.3% in January. While this would be primarily due to lower oil and commodity prices, it would likely reinforce ECB concerns about potential second round effects on wages and price setting.
We expect the ECB to trim its deposit rate by a further 10 basis points to -0.40% at its March meeting and believe it could very well step up its monthly purchase of assets (perhaps by €20bn-€30bn from the current level of €60bn. There are reports that the ECB is considering introducing a double tier on its deposit rate in order to ease the pressure on banks’ profitability from another cut. The higher negative rate would only be charged on banks’ deposits with the ECB above a certain level
Will the weak confidence data mean consumers and businesses keep their hands in their pockets? Bert Colijn at ING Bank says:
Economic sentiment... was worse than analysts expected and reflects the somber mood about the Eurozone economy in the beginning of the year, although the indicator is still above its long-term average. The weak external environment is clearly impacting the business sector, as both manufacturing and services indicated weakening sentiment. Consumers even experienced the largest one-month drop in confidence since 2012. Both businesses and consumers are clearly spooked by concerns about the strength of the global economy and financial markets, geopolitical risks and a looming Brexit.
For manufacturing, the global weakness is impacting current business, as orders, production and exports went down. The service sector indicated in this survey that recent demand was actually better than in January, but that expectations about future demand went down.
Without any hard data for the first quarter, it is difficult to say how the downbeat survey results translate to output growth. Will consumers and businesses act on their negative sentiment or in other words: are they walking the walk or just talking the talk? Last summer, consumer confidence declined on the latest leg of the Greek crisis and the Chinese stock market crash, but consumption growth accelerated in the third quarter. With unemployment coming down, oil prices low and a weak euro, quite a few conditions for growth are benign, but large downside risks remain apparent. In a sense, the Eurozone currently resembles a 50-year old overweight smoker: there are a lot of downside risks, but the base case for the short-term remains fairly decent.
EC Econ Sentiment Index for UK, covering whole-econ, fell in Feb to 31-month low & below EU ave. Outperformance over pic.twitter.com/vOLgVji2Xk
— Samuel Tombs (@samueltombs) February 26, 2016
Eurozone economic sentiment worsens
Eurozone economic sentiment slipped in February, according to new figures from the European Commission.
The sentiment index fell from 105.1 in January to 103.8, below an expected 104.3.
Consumer confidence was -8.8, down on January’s -6.3 but in line with forecasts.
In the run-up to the UK referendum on Europe, we should expect some dramatic moves in sterling, says Caxton FX analyst Nicholas Laser-Ebisch:
As June 23rd approaches, it is likely that the strength of the pound will correlate highly with opinion polls discussing Britain’s EU membership. However, the uncertainty surrounding the EU referendum and possible Brexit - the UK’s most historically unprecedented event of the last few decades - means that the coming months could see quite random currency movements.
A main factor of this will be the variety of opinions (both in the UK and outside) centring around the merits of staying in the EU, versus leaving. As beliefs clash, and political rhetoric ramps up, we will likely see exchange rate swings of up to 5% in the next 4 months leading up to the referendum (we have already seen 6% and 8% movements with the pound/dollar and the pound/euro respectively this year).
Worst time to gamble on EU exit - Osborne
More from George Osborne’s interview with the BBC.
The UK chancellor has said the risks to the global economy are at their worst since the financial crisis, making it the worst possible time to be contemplating leaving Europe. Osborne tweeted:
With risks facing global economy most heightened since crash, now would be worst time for UK to take gamble of EU exit
— George Osborne (@George_Osborne) February 26, 2016
EU referendum is about people's jobs, livelihoods and living standards. EU exit would represent profound economic shock
— George Osborne (@George_Osborne) February 26, 2016
The concerns about the global economy echo a speech Osborne made in January, when he warned of “a dangerous cocktail of threats” to the UK.
Updated
Is the US heading for a recession? Ahead of the GDP figures later, UBS concludes it is not.
Mark Haefele, global chief investment officer at UBS Wealth Management said:
Financial markets are right to be concerned about a slowdown in the world’s largest economy. We expect just 1.5% growth for the US this year, reflecting a contraction in manufacturing activity, tighter credit conditions, the effects of a strong dollar in weaker international markets, and wealth losses due to recent stock market volatility.
But markets would be wrong, in our view, to assume that this deceleration represents the start of a recession. Unemployment is under 5%. Average hourly earnings are growing at their fastest pace since 2009. Mortgage rates are just 3.7%, and gasoline prices are the cheapest they’ve been in years. Household debt relative to GDP has dropped a full 20 percentage points over the past six years. These factors should enable real disposable incomes to increase at a sufficient pace to sustain consumption growth, and keep the US out of recession. Furthermore, with unemployment now so low, improved wage-bargaining power should translate into continued income growth, even if jobs growth slows from last year’s 221,000 per month pace.
Overall, it would be highly unusual for the US economy to contract against a backdrop of such strong labor markets.
There seems to be a bit of playing down G20 expectations going on.
Reuters is quoting a senior US Treasury official saying meetings like the G20 are for the gradual shifting of policies, and 20 economies can not be driven from a central meeting.
Earlier the head of Italy’s central bank said the most important aim of the meeting wsa to improve the ability to stimulate growth.
But he added, according to Reuters, that we should “not expect concrete action to come from the G20 meeting.”
Here’s our report on the latest developments in the London Stock Exchange’s proposed merger with Deutsche Börse:
The planned merger of the London Stock Exchange (LSE) with Germany’s Deutsche Börse will result in a combined company with its main public listing in the UK capital.
LSE chief executive Xavier Rolet is set to retire and his Deutsche Börse counterpart Carsten Kengeter will take the same role at the new company, according to further details of the proposed merged released on Friday.
It emerged on Tuesday that the LSE is in talks about an all-share merger with its German rival which would result in a group worth over £21bn.
In Friday’s statement the LSE said the new combined group will be a UK plc domiciled in London, with headquarters in both the British capital and Frankfurt.
The board will have equal numbers from each business, a move that was expected. Rolet, who has been credited with rejuvenating the company and embarking on an acquisition spree, will step down.
The combined company will seek a premium listing on the London Stock Exchange and a prime standard listing on the Frankfurt Stock Exchange.
Full story here:
Here are the gainers and losers so far on the FTSE 100:
More on eurozone inflation:
With French, Spanish & Saxony inflation rates all falling by 0.4%-0.5% in Feb vs Jan, next wk's #euro-zone figs may show return of deflation
— Capital Economics (@CapEconEurope) February 26, 2016
Although most European markets look set for a fall over the month - the FTSEurofirst 300 is currently down 3% in February - the London market has edged marginally higher. Tony Cross, market analyst at Trustnet Direct, said:
The FTSE-100 is charging higher again at the open, paced by a strong finish in Wall Street last night and the fact we’ve seen no repeat of that big down leg in Chinese stocks, but it’s worth noting that the London index is only just back to where we started the month.
As we run down to the weekend break, it’s looking relatively quiet in terms of the domestic economic calendar although German inflation and US GDP readings could provide some broad direction. Any further signals out of the G20 meeting in Shanghai which runs again tomorrow will also gave the ability to shift sentiment – February may look as if it’s going to conclude on an upbeat note, but it’s certainly been a wild ride to get here.
Meanwhile consumer confidence in the UK fell to a 14 month low in February, while export orders fell sharply in the last quarter of 2015, according to new figures out this morning. Katie Allen reports:
We have known for some time that the UK economy has been largely relying on consumer spending for growth - something confirmed in Thursday’s GDP figures.
Economists are warning that’s a dangerous position to be in given that households’ real incomes look set to slow this year. On top of that, there are fears that the EU referendum and ongoing global economic gloom will prompt consumers to rein in spending over coming months.
Fresh figures out today suggest Britons are already becoming more cautious about the economic outlook. Consumer confidence fell to a 14-month low in February as people became more worried about the state of the UK economy and about its prospects over the next 12 months, according to market research company GfK. Its monthly confidence barometer, taking in the views of 2,000 people, also showed that consumers were less confident about making big purchases such as furniture or electrical goods. But consumer remained upbeat about their personal financial situation.
“Despite the positive impact of continued low interest rates and subdued inflation on our day-to-day household budgets, the feeble outlook for growth and a variety of economic uncertainties since the start of the year has depressed our New Year optimism,” says Joe Staton at GfK.
Separate figures on exporters also point to more challenging times ahead. Export sales and orders across both manufacturing and services sectors fell significantly in the last quarter of 2015, according to this morning’s report from the British Chambers of Commerce (BCC) and DHL.
“British exporters have faced considerable challenges in recent months. Slowing growth in China and the US, along with the continued weakness in the eurozone, have made it harder for firms to build momentum,” said BCC director general John Longworth.
Labour has seized on the BCC report to argue the UK needed a new industrial strategy to tackle challenges around access to finance, skills and infrastructure.
“These figures show that George Osborne has been asleep at the wheel, he’s leaving our economy insufficiently resilient to advancing global threats and not in a high-enough state of readiness to seize on the fast-approaching opportunities to make sure that Britain benefits most,” said Kevin Brennan MP, Labour’s shadow minister for trade, investment and intellectual property.
Updated
UK chancellor George Osborne has been speaking to the BBC on the referendum and the prospect of Brexit:
Osborne tells me leaving EU would be 'enormous economic gamble' and he'll do everything to stop it happening
— Laura Kuenssberg (@bbclaurak) February 26, 2016
The French deflation figure of course puts more pressure on the European Central Bank to provide further stimulus at its meeting next month, since it is well shy of its inflation target. ECB president Mario Draghi has already promised he will not hesitate to act, and he may well have to.
#Spanish #deflation widening to 0.9% in Feb & #Fance seeing deflation of 0.1% piles ramps up already strong pressure on #ECB to act in March
— Howard Archer (@HowardArcherUK) February 26, 2016
European markets open higher
The recent rally is indeed continuing, with European markets making a bright start on the last trading day of the week.
The FTSE 100 has jumped 1% or 64 points to 6077, despite an 8% slump in Royal Bank of Scotland following its figures.
Germany’s Dax has opened up 1.5%, France’s Cac has climbed 1.1% and the FTSEEurofirst 300 has risen 0.8%.
LSE: Carsten Kengeter to become chief executive of merged group
Elsewhere the London Stock Exchange has just said that following its proposed merger with Deutsche Börse, the combined group would be a UK plc domiciled in London.
The news is likely to help appease some fears that the German exchange was gaining greater control of the business. But Carsten Kengeter, the German banker running the Frankfurt exchange, will become chief executive.
The group also said it was setting up a joint committee to look at the implications of the UK referendum on Europe.
Updated
Despite equal growth of 0.3% q/q, underlying growth of #French #economy in Q4 2015 was slightly stronger than Q3 given hit from Paris attack
— Howard Archer (@HowardArcherUK) February 26, 2016
But first we have French fourth quarter GDP, which is better than expected.
The economy grew by 0.3% in the final three months of the year compared to the previous quarter, which has been revised up from the initial estimate of 0.2%.
The INSEE statistics agency said consumer spending and household investment fell less than had previously expected, Reuters reported.
Meanwhile French consumer prices fell 0.1% in February, pushing the 12 month inflation rate into negative territory, down -1% compared to estimates of an increase of 1%.
Updated
Agenda:Eurozone consumer confidence and US GDP
Here’s the schedule for the main economic data due later:
- 10.00 am (GMT) Eurozone consumer confidence
- 13.00 pm German consumer price index
- 13.30 pm US GDP (fourth quarter)
As far as the US figures are concerned, the second reading of GDP is expected to see a revision down from 0.7% to 0.4%.
Updated
Royal Bank of Scotland is the latest bank to report its results, and it has announced a £2bn loss, its eighth consecutive year of losses. But chief executive Ross McEwan still received a pay package of £3.9m.
Our full story is here:
Introduction: Markets buoyant ahead of US GDP
Global markets are being buoyed again by hopes of more stimulus from central banks and reports that oil producers will meet again to discuss the slump in crude prices.
As G20 finance ministers meet in Shanghai, the head of China’s central bank hinted the country was preparing to launch another round of stimulus as he sought to reassure the financial markets about the country’s flagging economy.
Our full story is here:
Michael Hewson at CMC Markets said:
The recent rebound in the yuan does appear to have assuaged concerns that the Chinese appear intent on sharply devaluing their currency, however given the timing and location of this week’s meeting, it seems to me merely good policy to avoid criticism from fellow G20 members. It would not be unexpected to see the yuan start sliding again once this weekend’s meeting is in the rear view mirror.
The recent call by the IMF earlier this week, followed by the OECD this morning, for the G20 to take bold action at their meeting this weekend could also be a factor behind the rebound in the latter part of this week, at a time when data showed that global trade slowed sharply in 2015, led largely by a slowdown in emerging markets.
But he added:
It is highly unlikely that the G20 finance ministers will be able to deliver on anything more substantial than mere warm words and empty rhetoric, though I’m sure UK officials will somehow be able to shoehorn a mention into the statement about the risks of a “Brexit” as “Project fear” continues to get ramped up by the various vested interests in the global economy as well as big business.
Indeed the Financial Times is reporting (£) that US chancellor George Osborne is pressing for the G20 to warn of the dangers of Brexit in its official communique due on Saturday.
Meanwhile Mark Carney, the governor of the Bank of England, said central banks had not run out of ammunition to boost the global economy, as was sometimes suggested, but he also called on the G20 to adopt more positive measures to help growth.
So ahead of a raft of data later, notably US GDP figures, markets are continuing their recent rally, with the NIkkei up 0.3% and the Hang Seng 1.8% better. In China the CSI300 is up 1%.
European markets are also expected to open higher:
Our European opening calls:$FTSE 6051 up 38
— IGSquawk (@IGSquawk) February 26, 2016
$DAX 9400 up 69
$CAC 4281 up 33$IBEX 8273 up 57$MIB 17258 up 153
This follows a 1.2% gain overnight on Wall Street, as crude prices climbed on reports that Saudi Arabia, Venezuela and Russia planned to meet next month. But any major deal seems unlikely following this week’s comments from Saudi suggesting oil producers would not cut production.
Updated
