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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Dow tumbles 800 points as US and UK yield curves invert – as it happened

The New York Stock Exchange (NYSE) today.
The New York Stock Exchange (NYSE) today. Photograph: Johannes Eisele/AFP/Getty Images

That’s all for today, as New York traders head home after a grueling day dominated by anxiety over the health of America’s economy. Goodnight!

The S&P 500 index, which covers a wider range of companies than the Dow, also shed 2.9% today.

Retail chain Macy’s was the worst performer, slumping by over 13% after posting dire earnings figures today.

Tech stock also struggled today, with Amazon losing 3.3% and Apple down 3%.

Our economics editor Larry Elliott argues that the slump in bond yields is vindication for Trump in his battle with the Federal Reserve.

He writes:

The Fed is highly sensitive to what is happening on Wall Street and a rate cut at its next meeting in September is a nailed-on certainty. Some analysts, Steen Jakobsen at Saxo Bank, for instance, think that the US central bank may not wait that long and instead announce an emergency cut before its scheduled meeting.

That still seems a bit of a long shot but the accumulation of bad economic news means that the battle between the Fed and the White House has been won decisively by Trump. All that remains is to see how much face the Fed’s chairman, Jerome Powell, can save.

More here:

Donald Trump is leaving no doubt about who he blames for the sell off:

However, America hasn’t yet won major concessions from China, and the trade war is clearly a factor in the slowdown.

Today’s sell off is one of the biggest points falls on the Dow ever:

However, it’s less dramatic in percentage terms:

Dow falls by 800 points

Ouch! The Dow has just closed, deeper in the red than ever.

The benchmark index shed 3%, or exactly 800 points, to end the day at 25,479.

That shows investors remain very concerned that the global economy is weakening, with recession risks rising in Germany, the US and the UK, with China also a big concern.

Here’s our news story on today’s market gyrations:

Update: Wall Street is refusing to shake off its gloom, and is actually hitting new lows.

With barely an hour’s trading to go, the Dow is down an alarming 763 points, or 2.9%, at 25,515 points.

Are you sitting comfortably? Then here’s a short story about the problem

Summary: Inverted yield curve gives markets the jitters

The New York Stock Exchange on Wednesday.
The New York Stock Exchange on Wednesday. Photograph: Johannes Eisele/AFP/Getty

Time for a recap

Stocks have plunged on both sides of the Atlantic as fears grow that America could fall into recession, dragged down by a global slowdown and the trade war with China.

On Wall Street, the main share indices have lost at least 2.5% as a big wave of selling rips through the markets. The Dow Jones industrial average lost more than 700 points at one stage, with banks, tech stocks and industrial companies suffering sharp falls.

In London, the FTSE 100 tumbled by more than 103 points, hitting its lowest closing level since March.

The selloff was sparked by alarm that both the US and UK government bond yields inverted today, as bond prices soared. That means that traders are accepting a lower interest rate to hold longer-dated bonds than the shorter-dated alternative.

The difference between US 2 and 10-year bond yields
The difference between US 2-year and 10-year bond yields, which fell below zero today Photograph: Bloomberg

An inverted yield curve is an unusual situation that typically only happens before a recession, at least in America. It’s a classic warning light, which has flashed ominously brightly today.

However, some experts - including former top central banker Janet Yellen - believe that a recession can be avoided. They believe the bond market is predicting low growth in the future, but hopefully not a full-blown downturn.

The White House has responded by renewing its call for US interest rate cuts soon. President Trump claimed the Fed had made two huge mistakes, while trade advisor Peter Navarro predicted borrowing costs would be slashed in the coming months.

Global stock markets
Global stock markets Photograph: Refinitiv

Traders were also alarmed by new data showing that Germany’s economy shrank by 0.1% in the second quarter of 2019. Germany joined the UK and Sweden as the worst-performing EU members, as eurozone growth halved to 0.2%.

Germany’s economy suffered from a slump in exports, due to trade war tensions. Economists believe that Berlin should boost government spending quickly, to prop up growth. Otherwise, Europe’s largest economy could soon fall into recession.

Updated

Trump: Fed has made two huge mistakes

Newsflash: President Donald Trump has launched another salvo at Federal Reserve chair Jerome Powell.

Trump is unhappy with the way Powell presented last month’s interest rate cut, and (as usual) is pushing the Fed for more aggressive cuts.

Given the torrent of criticism from Trump, Powell may feel his first mistake was accepting the offer to run the Fed at all!

The president has also appeared to welcome the plunge in US bond yields today, caused by a dash to buy Treasury bills.

Yellen: Don't pay yield curve too much attention

Attention traders!

Former Federal Reserve Chairman Janet Yellen believes the markets may be wrong in assuming that the inverted US yield curve is signalling a recession.

Speaking on Fox Business, Yellen said that this time things are different....

Historically, it has been a pretty good signal of recession, and it think that’s when markets pay attention to it, but I would really urge that on this occasion it may be a less good signal.

The reason for that is there are a number of factors other than market expectations about the future path of interest rates that are pushing down long-term yields.”

Yellen also believes that America will avoid a recession, but revealed she is becoming more concerned:

I think the U.S. economy has enough strength to avoid that, but the odds have clearly risen and their higher than I’m frankly comfortable with.”

Updated

Dow falls 700 points

The floor at the New York Stock Exchange.
The floor at the New York Stock Exchange. Photograph: Eduardo Muñoz/Reuters

Ouch! The Dow Jones industrial average has now lost more than 700 points, as Wall Street traders continue hammering their sell buttons.

The benchmark index is now down 2.7% at 25,561.

Each of the 30 companies on the Dow is in the red, with the mining sector shedding 4.4%, banks down 3.6% and energy firms down 3.2%.

The broader S&P 500 index has also lost 2.7%, while the Nasdaw is down 3% as tech stocks are pummelled.

Recession fears are flooding over the trading floors, even though several economists have cautioned against panicking over the inverted US yield curve.

As David Madden of CMC Markets puts it:

The inversion of the US 2 year yield and the US 10 year yield has sent shockwaves through the markets, and that has forewarned recessions in the US, and traders are running scared.

The major indices sold-off sharply for fear the US is heading for a recession. The underlying fundamentals are solid as the jobless rate is at multi-decade lows, and average earnings are outstripping inflation, but for now dealers are focusing on the yield curve, and equities are taking a hammering.

Economics expert Duncan Weldon has written a interesting thread about today’s bond market developments.

He argues that the slump in bond yields shows anxiety about growth prospects, but not necessarily a recession.

Why? Because previous recessions have often been caused by rising interest rates (to cool inflation), while today’s central banks are likely to cut borrowing costs (where possible) to stimulate growth.

Bloomberg’s Michael McDonough makes a good point – who will get the blame if America slides into recession?

Many economists would point to the US–China trade war, which has disrupted the global economy and contributed to the slowdown.

President Trump, though, has already blamed the US Federal Reserve for raising interest rates too high (nine times since the financial crisis ended), and being too slow to respond (its first cut in a decade came last month)

The Fed’s next meeting is on September 17-18, where it could lower borrowing costs again.

But Steen Jakobsen, chief economist & CIO at Saxo Bank, claims the Fed might have to unleash an emergency rate cut to calm the markets.

He told clients today that the Fed is behind the curve:

The only way to ‘move’ the market now in my opinion being moving [rates] between scheduled meetings.

They need to produce faster or more. Both are likely, but by faster would be my choice! Rip off the band aid.

Updated

Here’s a video clip of White House trade adviser Peter Navarro predicting hefty cuts to US interest rates this autumn:

Updated

Wall Street is showing a distinct reluctance to bounce.

Stocks are ploughing new lows, with the Dow now down 660 points or 2.5%.

Today investors have scrambled desperately into safe-haven assets, such as government bonds and gold, and out of the risky stuff including oil and shares.

That’s driven bond yields to record lows (Germany’s benchmark 10-year bund fell deeper into negative yield territory), and pushed stock markets to their weakest point in several months.

Updated

European stocks hit six-month low

European stock markets have hit their lowest level in six months:

Updated

FTSE 100 hits lowest close since March

Newsflash: Britain’s FTSE 100 stock index has just closed, down 103 points at 7,147.

That’s its lowest closing level since March this year, and means the index has lost over 400 points since the start of August.

The FTSE 100 in 2019
The FTSE 100 in 2019 Photograph: Refinitiv

Engineering firm Melrose was the top faller, down 5.75%, followed by mining group Evraz (-5.2%). Holiday group TUI and airline group IAG, which would also suffer in a recession, lost 4.3%.

In the City, the FTSE 100 is being dragged lower and lower too.

The index of top London-listed shares has now lost 134 points, or 1.85%, falling to 7,116 points. That’s its lowest in over two months.

Fiona Cincotta, senior analyst at City Index.co.uk, says fears of a global downturn are stalking the markets:

Doom and gloom dominated after data showed that Chinese industrial output grew at the slowest pace in 17 years, whilst the German economy contracted.

Recession warning bells rang out across the markets as Trump’s delaying of tariffs on some Chinese imports is a case of too little too latte – the damage to economies has already been done.

Updated

Ouch! The Dow has now slumped deeper into the red, down 2.25% or 591 points at 25,688.

Here’s a reminder that inverted yield curves don’t IMMEDIATELY lead to recessions; it can take a year or more.

Investors have been snapping up long-term US government debt today, sending the yield (interest rate) on 30-year Treasury bills to record lows (meaning prices are at record highs).

A US recession may be approaching, but it might not actually arrive for a couple of years.

So argues Seema Shah, chief strategist at Principal Global Investors, who predicts the downturn could be delayed until 2021, if central bankers take action.

She writes:

“The US economy is clearly weakening and risks are piling up. Capex will inevitably slow further, but under the assumption that the trade war doesn’t escalate further, it will not weaken so much as to tip the US into recession. The Fed pivot in early 2019, global central bank easing, China stimulus and the reversal of its deleveraging process will support the global economy. Certainly our own recession risk model suggests that while the probability of a US recession has increased, it still isn’t our central scenario.

“Notably the historical success of the yield curve as a recessionary signal is too strong to dismiss. However, the lead time of its signalling can be several years, so it is our best bet that while recession is unlikely in 2020, the following year may be a fairer bet as concerns about leverage in the corporate debt maker start to come to the fore. Even so, there are certainly enough risks globally to prompt investors to take reasonable defensive positioning in their portfolios right now.

Mohamed A. El-Erian, chief economic adviser at Allianz, says this morning’s weak German GDP report has helped to drive bond yields down today.

He also cites poor Chinese industrial data released overnight, showing the smallest rise in factory output since 2002 -- another sign of economic slowdown.

Most of the big names on the Dow Jones industrial average are also in the red, haunted by recession worries.

Pharmaceutical firm WalGreens Boots Alliance is the top faller, down 3.2%, followed by chemicals firm Dow Inc (-3%), financial giant Goldman Sachs (-2.8%) and entertainment group Walt Disney (-2.75%).

This is keeping the DJIA down 1.5%, or 400-ish points, at 25,881.

Technology stocks are being hit hard now, sending the Nasdaq index down by 2%, or 150 points at 7,577.

Virtually every stock on the Nasdaq is in the red, with chipmakers AMD (-4.5%) and Micron (-3.3%) among the fallers.

White House: We're fighting the Fed's rate policy

Newsflash: Donald Trump’s trade adviser has said the slump in US bond yields proves that American interest rates should be cut.

Peter Navarro also told Fox News that the “biggest problem” which America is currently fighting is the Federal Reserve’s interest rate policy.

So much for central bank independence....

But yes, today’s selloff will pile more pressure on the Fed to cut rates at its September meeting, having already made its first cut in a decade in July.

Trump has repeatedly criticised the Fed chair Jerome Powell for not cutting rates faster, so he could weigh in too.

However, the president is currently more focused on curveballs than yield curve, judging by his latest tweet....

Updated

Wall Street tumbles after yield curve inverts

Newsflash: Stocks are sliding at the start of trading in New York, as investors fear that an American recession could be looming

In early trading....

  • Dow Jones industrial average: down 425 points or 1.6% at 25,854
  • S&P 500: Down 44 points or 1.5% at 2,881
  • Nasdaq: Down 138 points or 1.7% at 7,878

Technology stocks and banks are among the fallers, as traders shun risky assets. Bank of America has shed almost 3%, while Apple has lost 2.3%.

The inversion of America’s government bond yield curve today has clearly worried Wall Street, given its track record of predicting recessions.

Stocks on Wall Street
Stocks on Wall Street

Updated

FT: Why the inverted yield curve predicts recessions

Back in April, the Financial Times wrote a handy feature on the inverted yield curve (full marks for prescience!).

It’s online here, explaining how some experts don’t think it’s terribly reliable as a recession indicator today, while others think it could cause a recession.

Here’s a flavour:

The yield curve is Wall Street’s original ‘fear gauge’, notching up a perfect predictive record before pretenders such as the Vix index were even glimmers in the eyes of financial engineers.

Typically, countries pay less to borrow for three months than five years, and less for five years than for a decade — after all, investors want some compensation for the gradual erosion of inflation, or the risk, albeit faint, that a government could renege on its debt.

Plotted on a graph, the bond yields of various maturities form a “yield curve” that most of the time slopes gently upwards. But sometimes short-term yields rise above longer-term ones, an “inversion” of the usual shape of the curve that has been an uncannily accurate harbinger of recessions, preceding every downturn since the end of the second world war.

Updated

It’s worth remembering that an inverted yield curve doesn’t signal an immediate US recession – the downturn could be a year away.

That would coincide with the next presidential election, potentially undermining Donald Trump’s re-election bid.

Trump has frequently pointed to the stock market as evidence that he’s doing a good job (the Dow Jones soared by almost a third during his first year in office).

So any downturn would alarm the White House, and perhaps intensify calls for US interest rates to be cut.

Updated

The futures market is signalling a rough day on Wall Street, with the US benchmark stock indices called down at least 1.3%

Wall Street premarket

That would wipe out Tuesday’s rally (sparked by relief that America is delaying some tariffs on Chinese-made electronics goods).

Economics professor Paul Krugman argues that the slump in government bond yields contains an important message -- politicians can, and should, borrow more to fund investment.

Despite today’s market turmoil, the office rental chain WeWork has just announced plans to float on the US stock market.

WeWork is a workplace start-up, which rents out co-working spaces to startups, freelancers and enterprises. At one stage it even offered free beer... which might help explain why it’s not made a profit yet, losing $2bn in 2018.

WeWork is hoping to raise around $3bn through an IPO. Earlier this year it was valued at an eye-watering $47bn by Softbank, its largest investor – or 26 times its earnings.

With more than half a million members, WeWork is clearly popular. But such companies are vulnerable to an economic downturn, which would presumably push down the rent they can charge.

The Financial Times editor, Lionel Barber, thinks this could signal the top of the market...

Updated

UK stock market hits two-month low

Newsflash: Britain’s FTSE 100 index of top blue-chip companies has hit its lowest level since early June.

The Footsie has shed 102 points to 7,148, its lowest level since 4 June.

Updated

Yuk:

European stock markets
European stock markets are being dragged down by recession worries today Photograph: Refinitiv

The oil price is sliding - another sign that traders are bracing for a slowdown.

Brent crude (oil sourced from the North Sea) has dropped by 2.8% to $59.59 per barrel.

Here’s Newsnight’s Ben Chu:

The selloff is gathering pace.

In London, the FTSE 100 is now down 93 points or 1.28% at 7,158, close to a two-month low.

Germany’s DAX has slumped by over 2%, dragged down by recession worries after today’s GDP report, to its lowest levels since March.

The gold price, meanwhile, has jumped 1% to $1,515, towards the six-year high struck yesterday.

Updated

The US and UK yield curve inversion is part of a wider surge of money into government debt.

This has been going on for months, pushing bond prices to new highs (and driving yields to new lows, as they move inversely to prices).

Astonishingly, there is now $16 trillion of debt trading at negative bond yields -- meaning the debt is changing hands above its face value.

[Reminder: government bonds pay out a regular coupon, and then investors get the value of the bond back when it matures.]

Much of that debt was issued by eurozone governments, with investors gambling that the European Central Bank will launch a new quantitative easing bond-buying programme.

Total of negative yielding debt worldwide
Total of negative yielding debt worldwide Photograph: Bloomberg

David Absolon, investment director at Heartwood Investment Management, says it’s a sign of investor angst:

While certain drivers of growth in the global economy (such as the buoyancy of the US consumer) have been robust, weak economic data overall has given investment markets cause for concern.

Growing unease has led to a flight to safe haven assets like government bonds, as continued fears around global growth push wary investors to preserve as much capital as possible at all costs.

Bloomberg have written a handy explanation of what an inverted yield curve is, and why it matters – it’s online here.

It explains that:

  1. A yield curve shows the different interest rates paid for holding shorter or longer-dated government debt. Typically you get a higher return for buying longer-dated bonds, due to the extra risk (a financial or political crisis could erupt before the bond matures and you get your money back).
  2. An inverted yield curve occurs when that premium for holding longer-term bonds drops below zero -- for example, the rate on 10-year bonds is below the two-year notes.
  3. Why does it matter? The yield curve shows whether investors think inflation (and by implication growth) will keep rising. In a recession, consumer demand will slide, dragging down inflation -- meaning investors can accept a lower rate of return.

    Plus, in a downturn, investors are more concerned with capital preservation than profits.

Updated

In America, traders are waking up to the news that the US yield curve has inverted.

Wall Street is predicted to fall by around 1% when trading begins in two hours, as investors ponder whether the bond market is signalling a recession.

Ouch! Deutsche Bank’s economics team have predicted that Germany will fall into recession this autumn.

They predict that GDP will contract in the current quarter, meeting the classic definition that a recession is two consecutive quarters of negative growth.

Deutsche also warned clients that the recession could last until next year, saying:

  • Q2 GDP drop of -0.1% qoq was the second quarterly contraction within the last 12 months. Given the deteriorated outlook for the second half of the year we have cut our 2019 GDP forecast to 0.3% (from 0.7%). A rapid recovery from this low growth environment in 2020 seems unlikely from today’s perspective.

  • Given the 1.5% slump in June industrial production (negative carry-over), the further clear weakening of ifo and PMI surveys in July, and the nosediving August ZEW, we expect a drop of about 0.25% for Q3 GDP, pushing the economy into a technical recession. We expect stagnation in Q4 assuming that the major global areas of uncertainty do at least not see a further escalation.

  • If this assumption turns out too optimistic, negative quarterly growth rates could prevail into 2020.

Updated

Rupert Thompson, head of research at the wealth manager Kingswood, believes that the European Central Bank will be forced to act to fight a German recession.

He writes:

German GDP fell 0.1% q/q in Q2. While this contraction followed a 0.4% gain in Q1, the underlying picture is that Germany is perilously close to falling into recession.

Indeed, German investor economic confidence nose-dived in August, suggesting there will be no early reprieve. German manufacturing has been hit hard by the US-China trade war and the woes of the auto sector is the main area of weakness. GDP in the Eurozone overall, by contrast, fared rather better in Q2 with a 0.2% gain. Even so, with the risks to growth skewed to the downside, the ECB still looks all but certain to cut rates next month and a re-start of its quantitative easing programme is also quite possible.

Updated

This chart shows how the difference between longer-dated and shorter-dated US and UK government bond yields have fallen steadily in recent months -- leading to today’s worrying inversion.

US and UK bond yields
US and UK bond yields Photograph: Bloomberg TV

The BBC’s Faisal Islam fears that the bond yield gyrations show the global economy is in trouble - just as the Brexit crisis intensifies.

European stock markets are heading further south, worried by the drama in the bond market.

Germany’s DAX is now down 1.6%, while the UK’s FTSE 100 is down 0.9%. Italy’s FTSE MIB (also hit by political instability in Rome) has lost almost 2%.

The UK yield curve has also inverted in the last few minutes, according to Reuters.

That’s the first time since the financial crisis that Britain’s two-year government debt has traded at a higher yield than the 10-year option.

James Mackintosh of the Wall Street Journal suggests British policymakers shouldn’t panic too much -- it doesn’t always herald a UK recession.

The inversion of the US yield curve is a ‘massive red warning light’ for the US economy, says Neil Wilson of Markets.com.

He points out that this is often (but not always) a harbinger of recession:

It’s the first time it’s happened since 2007. Meanwhile the 30-year has slumped to a record low. The market is saying the risks are tilted very much to the downside. We are in a new phase of the cycle for markets now.

To recap well-worn turf, this inversion been a reliable indicator of recession many times in the past, calling seven out of the last nine. There is undoubtedly a chance of this, although we must caution that so far the US data has been pretty sturdy in the face of global headwinds and the trade policies of the White House.

The US yield curve
The US yield curve Photograph: Markets.com

This yield curve inversion is a sell signal for risk assets and should put extra pressure on equities. Futures in the US had been tracking Europe lower and are extending their declines. Yesterday’s bounce is proving short-lived.

Gold pushed up higher on the news, spiking through $1506, as it cemented its recovery after yesterday’s selloff.

Recession fears surge as US yield curve inverts

Newsflash: The US yield curve has inverted, intensifying fears that America’s economy could be falling into recession.

For non-bond experts... that means that the interest rate on 10-year American government debt has now fallen below the rate on the 2-year equivalent. Right now, two-year Treasuries are trading at a yield of 1.634%, while 10-year T-Bills only offer 1.628%.

In normal times, longer-dated government debt should offer a better rate of return - as there’s simply more time for something to go wrong before the money is due to be repaid.

So an inverted yield curve is a worrying sign -- it implies that investors are more pessimistic about future growth prospects. In the past, an inverted US yield curve has been followed by a recession.

Back in the markets, shares are selling off again as investors worry about the global economy.

Fears of a German recession, and news overnight that Chinese industrial production growth has hit a 17-year low, are driving the selloff.

The burst of optimism of a breakthrough in the US-China trade talks, after America delayed some tariffs, may also be fading.

Margaret Yang of CMC Markets explains:

Here the damage:

  • FTSE 100: Down 49 points or 0.7% at 7,200
  • German DAX: Down 125 points or 1% at 11,624
  • French CAC: Down 51 points or 0.95% at 5,312

Andrew Kenningham from Capital Economics has warned that a no-deal Brexit would hurt German exporters, making a recession even more likely.

He says:

The bottom line is that the German economy is teetering on the edge of recession.

Updated

UK and Germany lagged behind rest of Europe

The UK and Germany - Europe’s largest economies - were also its worst-performing members in the second quarter of this year.

They, along with Sweden, were the only countries to suffer a contraction in April-June.

Italy performed poorly too, with no growth, while France and Belgium managed lacklustre growth of 0.2%

Here are some highlights from today’s growth report from Eurostat (which includes today’s German GDP data, and last week’s UK GDP)

  • Poland: Grew by 0.8% in Q2, quarter-on-quarter
  • Portugal: Grew by 0.5%
  • Spain: Grew by 0.5%
  • Netherlands: Grew by 0.5%
  • Belgium: Grew by 0.2%
  • France: Grew by 0.2%
  • Italy: Stagnated
  • Sweden: Contracted by 0.1%
  • Germany: Contracted by 0.1%
  • The UK: Contracted by 0.2%
  • The Eurozone: Grew by 0.2%
  • The EU: Grew by 0.2%

Updated

Eurozone slowdown confirmed

NEWSFLASH: Growth across the euro area halved in the last quarter, from 0.4% to 0.2% in Q1, as Germany’s contraction held the region back.

That’s according to data firm Eurostat, and matches its initial estimate of eurozone GDP released at the end of July.

The wider EU also only grew by 0.2%, down from 0.5% in January-March.

Eurozone GDP, to Q2 2019
Eurozone GDP, to Q2 2019 Photograph: Eurostat

More to follow...

The jump in UK inflation to 2.1% last month could spur the Bank of England to raise interest rates, despite Brexit uncertainty.

My colleague Richard Partington explains:

City economists had forecast CPI to fall to 1.9% - instead, it’s now over the Bank’s target of 2%.

The unexpected rise could pile pressure on Threadneedle Street to raise interest rates, even as economic growth falters, in a potential sign the UK could begin to mirror the stagflation of the 1970s - when growth stalled yet inflation continued to rise.

The Bank has said it could be forced to raise interest rates if Britain leaves the EU without a deal, saying the pound would plunge to drive up the cost of imports.

However, most analysts believe it would need to cut rates to support jobs and growth.

Sterling has come under intense selling pressure since the elevation of Boris Johnson to No 10, however the ONS said it was still too early to identify whether the weakness in the pound had started to push up the cost of living. It said the rising price of computer games, consoles and hotel prices rising more than they did last year had pushed up the rate of CPI from 2% in June.

In an ironic twist amid the public anger over British rail fares, the ONS said that little change in the price of an international train ticket over the past year prevented UK inflation from rising by a greater extent in June.

A reminder of how Germany’s economy has stumbled over the last year, including this morning’s disappointing drop in GDP.

Updated

House prices fall across the South

Brexit uncertainty may also be having a chilling impact on UK house prices - at least in the South of England.

Figures just released shows that the average property price fell in London, again, by 2.7% compared to a year ago. London house prices have now been falling over the year since March 2018.

Prices also dropped by 0.6% in the South East, and by 0.2% in the South West.

But... the picture is brighter elsewhere, with prices 3.2% higher in the East Midlands.

Overall prices rose by 0.9% per year, according to the Office for National Statistics.

UK house prices
UK house prices Photograph: ONS

Updated

UK inflation data released

Newsflash: the latest UK inflation data is out, showing that the cost of living keeps rising.

Britain’s consumer prices index rose by 2.1% in the year to July, up from 2%. That’s higher than expected: economists thought the CPI would drop to 1.9%.

UK inflation

However, real wages are still rising – we learned yesterday that basic pay grew by 3.9% over the last year.

Another inflation measure, the Retail Prices Index, dropped to 2.8% in July from 2.9% in June.

That will be used to set UK rail ticket prices next year, meaning commuters face higher costs.

Updated

Katharina Utermöhl of Allianz has written about the growing risk of a German recession:

After a good start to the year, the German economy has gone in reverse gear. In the second quarter, seasonally adjusted GDP shrank by 0.1%.

The weak foreign trade performance and declining construction investment proved sufficient to bring the German economy to its knees, despite continued positive consumption impulses. In view of the subdued outlook for world trade and the automotive industry and lingering elevated political uncertainty around trade, Italy and Brexit, at best mini-growth rates can be expected in the coming quarters.

It is particularly worrying that the weakness in industry is increasingly affecting domestic demand. After all, the German economy has so far been kept afloat primarily by private consumption and construction investment. Due to the very weak start to the third quarter, the recession risk is now at a high level.

The French flag.

In better news for the eurozone, French joblessness has hit its lowest level since the financial crisis.

Reuters has the details:

France’s unemployment rate fell to 8.5% in the second quarter from 8.7% in the first, according to data from the INSEE national statistics office, marking the lowest jobless rate in the euro zone’s second-biggest economy since the end of 2008.

Six economists polled by Reuters had forecast on average an unemployment rate of 8.7% for the second quarter.

A steady improvement in the jobs market has offered French President Emmanuel Macron some relief in the face of months of street protests against government policies often criticised for favouring the wealthier members of society.

Netherlands economy keeps growing

Children on an electric cargo bike in Amsterdam, Netherlands.
Children on an electric cargo bike in Amsterdam, Netherlands. Photograph: Marcin Rogozinski/Alamy Stock Photo

Just in: The Netherlands economy outperformed Germany in the last quarter.

Dutch GDP increased by 0.5% in April-June, new government figures show, as it shook off the impact of the global slowdown and the US-China trade dispute.

Growth was supported by strong exports and consumer spending.

The banking district in Frankfurt.
The banking district in Frankfurt. Photograph: Kai Pfaffenbach/Reuters

Germany’s weak (non) growth report has dampened the mood on the Frankfurt stock exchange.

The DAX index of top German companies has fallen by 33 points, or 0.3%, in early trading to 11,713.

Banks and industrial groups are among the top fallers, with Deutsche Bank losing 2.2%, tyremaker Continental down 1.7% and conglomerate ThyssenKrupp shedding 2.7%.

France’s stock market is also down 0.4%, while Britain’s FTSE 100 is flat this morning.

Matthias Weber, economist at the University of St.Gallen, argues firmly that Germany should increase government spending to shore up growth -- especially as borrowing costs are so low.

Given the current economic situation at the beginning of a recession, now would be the perfect time for Germany to support the economy by investing in its future.

Public investments in railways, roads, bridges, childcare centres, public schools, and renewable energy are much needed. Such investments could currently be made at an extremely low (even negative) interest rate and they would boost the slowing aggregate demand. It is unfortunate that some politicians cling to an economically unsound “concept” of zero debt and therefore miss out on these investment opportunities for Germany.

German government bonds prices have jumped to fresh record highs this morning, driving down the yield (or interest rate) on the debt to new record lows.

The yield on Germany’s 10-year bund has now hit MINUS 0.62%, the lowest ever - meaning traders are paying MORE than the face value of the bonds.

The yield on 10-year German debt is at record low levels
The yield on 10-year German debt is at record low levels Photograph: Bloomberg

That means:

  1. Investors anticipate low growth and weak inflation
  2. They’re looking for somewhere safe to park their money
  3. Germany would have no problem borrowing to invest in new infrastructure to spur growth

Updated

Strategist Andreas Steno Larsen of Nordea Markets says Germany’s woes aren’t a surprise, given all the grim economic data recently:

Economist Oliver Rakau of Oxford Economists suggests Berlin could launch a ‘cash for clunkers’ scheme - subsidising new car sales - to ward off a recession.

But stimulating the economy won’t be easy, he warns in this Twitter thread:

Economist: German government needs to act

The slump in German growth could force Angela Merkel to ditch her long-running opposition to government borrowing.

Germany’s ‘debt brake’ law forces its leaders to run balanced budgets, rather than running up deficits. But with an economy struggling, and borrowing costs extremely low, there’s a strong argument for tapping the bond market to fund more investment.

As Marija Veitmane of State Street put it on Bloomberg TV this morning:

We are getting to a point where the German government has to do something to stimulate the economy.

Yesterday, Merkel hinted that she could loosen the purse strings, telling a town hall meeting that her government would take action if needed.

The chancellor said:

“It’s true, we’re heading into a difficult phase....We will react depending on the situation.”

Updated

Unicredit analyst Andreas Rees reckons Germany’s economy has been hurt by the uncertainty over Britain’s exit from the European Union.

Rees says:

For a year now, the German economy has been only crawling forward.

Besides Brexit, this is above all the U.S.-Sino trade dispute and possible U.S. tariffs on European cars.

ING: End of a golden decade for Germany

Today’s GDP report marks “the end of a golden decade for the German economy”, says Carsten Brzeski, chief economist for Germany at Dutch bank ING.

Brzeski sounds deeply disappointed to learn that the German economy contracted by 0.1% in the last quarter.

He blames the damaging uncertainty caused by Donald Trump’s trade war with China, along with problems at Germany’s carmakers, writing:

Trade conflicts, global uncertainty and the struggling automotive sector have finally brought the German economy down on its knee.

In particular, increased uncertainty, rather than direct effects from the trade conflicts, have dented sentiment and hence economic activity.

Brzeski points out that Germany had been on a decent run since the financial crisis, growing at around 0.5% per quarter. Not any more....

It was a decade of strong growth on the back of earlier structural reforms, fiscal stimulus, globalisation at its peak and steroids provided by the ECB in the form of low-interest rates and a relatively weak euro.

This decade, in which strong German growth looked so effortless, is coming to an end.

The full note is online here.

Here’s Nadia Gharbi of Pictet Asset Management:

Germany is clearly struggling, but it’s not alone.

Last week, we learned that Britain’s economy contracted by 0.2% in the second quarter of this year, as the boost from Brexit stockpiling earlier in the year faded.

But the UK is still doing better on a longer-term basis -- UK GDP grew by 1.2% over the last year, compared to just 0.4% annual growth for Germany.

Growth across the eurozone halved last quarter, from 0.4% to 0.2%, with France growing by 0.2% and Italy stagnating (again). That data will be updated at 10am UK time....

Several economists are warning that Germany’s economy could still be shrinking - plunging it into a full-blown recession.

Katharina Utermöhl, senior economist for Europe at insurance giant Allianz SE, points out that Germany has looked very weak this summer:

Economics professor Sebastian Dullien agrees that recession risks are rising:

Martin Grieve of German newspaper Handelsblatt points out that recent German manufacturing data has been very weak (industrial production slumped in June).

Germany isn’t technically in recession yet -- that would mean two successive quarters of negative growth.

But still.... its economy has really struggled over the last year, and has contracted in two of the last four quarters.

Today’s growth reports shows that:

  • Q3 2018: German GDP contracted by 0.1%
  • Q4 2018: German GDP grew by 0.2% (revised higher this morning)
  • Q1 2019: German GDP grew by 0.4%
  • Q2 2019: German GDP shrank by 0.1%

That adds up to annual growth of just 0.4% - well below the 2.2% recorded in 2017, or the 1.5% in 2018.

Updated

Germany economy hit by trade wars

Germany’s exporting powerhouse stumbled in the April-June quarter.

German exports fell during Q2, Destatis says, which is why the economy shrank by 0.1%.

However, consumer and government spending helped to prop the economy up.

Destatis says:

Household final consumption expenditure increased, together with government final consumption expenditure.

In addition, more was invested than in the first quarter, however, gross fixed capital formation in construction declined. The development of foreign trade slowed down economic growth because exports recorded a stronger quarter-on-quarter decrease than imports.

Introduction: Germany's economy shrinks

The German flag

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Newsflash: Germany’s economy has shrunk, fuelling worries that the eurozone could be teetering close to recession.

Europe’s largest economy shrank by 0.1% in the second quarter of 2019, new data shows, following 0.4% growth in the first three months of the year.

Destatis, the Federal Statistical Office, reports that Germany experienced “a slight decline in economic performance” in the last quarter, as it was dragged down by a fall in exports.

Destatis also reports that Germany’s economy only grew by 0.4% over the last 12 months, which looks to be the weakest performance in several years.

This data confirms that Germany has suffered a blow from the slowdown in the global economy, and the US-China trade war which hurt demand for German-made goods.

More to follow.....

Also coming up today

New UK inflation data is expected to show a slight slowdown last month, with prices rising less sharply than earnings in July. That would be a relief for households, although the recent slump in sterling could push inflation higher this summer.

Global investors are feeling slightly more optimistic, after Donald Trump delayed planned tariffs on Chinese-made goods such as cell phones, laptops and video game consoles. That will avoid pre-Christmas price hikes - and could also soften tensions with Beijing.

The agenda

  • 9.30am BST: UK inflation data (CPI expected to drop to 1.9%, from 2%)
  • 10am BST: Eurozone Q2 GDP (expected to confirm that growth slowed to 0.2%, from 0.4%).

Updated

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