Markets lower on trade war fears
European markets have closed sharply lower, although off their worst levels, as a combination of factors unnerved investors once more.
In an echo of the early February slump, share prices around the globe came under pressure.
The chief reason was the growing fear of a trade war as President Trump slapped tariffs on China - although more details about the exact targets will come later - in retaliation for supposedly stealing US technology.
With the Federal Reserve raising interest rates on Wednesday and the Bank of England signalling a UK increase in May, investors were also rattled by the prospect of the cheap money which has supported markets for years now being more quickly withdrawn.
On top of all that, the controversy over Facebook and Cambridge Analytica prompted talk of increased regulation of technology companies. So the final scores showed:
- The FTSE 100 fell 1.23% or 86.38 points to 6952.59, a new 15 month low
- Germany’s Dax dropped 1.7% to 12,100.08
- France’s Cac closed down 1.38% at 5167.21
- Italy’s FTSE MIB finished down 1.85% at 22,397.84
- Spain’s Ibex ended 1.49% lower at 9487.4
- In Greece, the Athens market lost 1.57% to 787.50
On Wall Street, the Dow Jones Industrial Average is currently down 272 points or 1.11%, having lost more than 500 points earlier.
On that note, it’s time to close for the day. Thanks for your comments, and we’ll be back tomorrow.
Here’s more on the exemptions to the US steel and aluminium tariff move:
#Steel & Aluminum #tarriffs update. US Trade Rep Lighthizer confirms during Senate Finance Committee testimony that these countries will be exempt:
— Gregory Daco (@GregDaco) March 22, 2018
- Canada
- Mexico
- EU
- Brazil
- Australia
- Argentina
- South Korea
Impact of tariff now only 30% of original announcement! pic.twitter.com/a3UkTngO7A
Sanctions move "a high risk strategy"
The US move to impose sanctions on China is a high risk strategy, says Mike Jakeman, global analyst at the Economist Intelligence Unit:
This has been clearly signposted by the Trump administration and is actually likely to prove broadly popular with US businesses and in Congress. The Democratic minority leader in the Senate, Chuck Schumer, welcomed it as a sign of the US standing up to China.
But there is a lot riding on China’s response. The US is gambling that any response will be proportionate. China could hit the US hard in return, by making access to the local market harder for US farmers, for example. Were farmers faced with falling prices for the exports and higher prices at home because of the import tariffs, the popularity of the tariffs would diminish quickly.
This is a high-risk strategy for the US administration and one that is likely to weaken, rather than strengthen, the global economy.
And here’s Trump’s signed tariff sanctions against China:
Updated
US President Trump says that tariffs signed today will be the "first of many" - this is just the opening salvo in a global trade war.
— Christopher Vecchio (@CVecchioFX) March 22, 2018
Trump calls for reciprocal deals
President Trump is signing the order to impose tariffs on China, which he says could be up to $60bn.
He says he has been talking to senior Chinese representatives and asked them to cut the deficit by $100bn immediately.
He says he wants reciprical deals. “If they charge us, we charge them the same thing.”
He says China charges 25% for a US car go in,”but we charge 2% for their cars to come into the US - that’s not good.”
He says he has been talking to China, Japan, Europe, and every single one of them wants to negotiate.
“In meantime we are sending a section 301 action which I will sign here.”
The proposed tariffs on China are expected shortly. AP sums up the situation:
The Trump administration is readying restrictions on Chinese investment and tariffs on nearly $50 billion worth of Chinese imports to punish Beijing for stealing American technology and pressuring U.S. companies to hand it over.
China is already warning that it will take “all necessary measures” to defend itself, raising the prospect of a trade war between the world’s two biggest economies.
The White House says President Donald Trump will direct the Office of the U.S. Trade Representative to publish a list of proposed tariffs for public comment within 15 days. USTR has already identified potential targets: 1,300 product lines worth about $48 billion. The president is also asking Treasury Secretary Steven Mnuchin to come up with a list of restrictions on Chinese investment.
A number of countries look like they will be exempt from the proposed US tariffs on steel and aluminium, including the European Union, Mexico, Canada, Australia, Argentina, Brazil and South Korea. China of course is clearly in the frame.
Here is the European side, from Daniel Boffey in Brussels:
The EU believes it has won a temporary reprieve from president Donald Trump’s tariffs on steel and aluminium after appealing to Washington to take a step back from a potential trade war.
Following intensive talks in the US, the EU’s commissioner for trade, Cecilia Malmstrom, said she believed the omens were good, although she indicated concern that the situation could unravel.
The US is set to impose 25% tariffs on steel and 10% tariffs on aluminium on Friday. The EU has argued that it should be exempt and has threatened to impose a series of retaliatory measures including import duties on US products.
On returning to Brussels after a two-day trip, Malmstrom said she was confident the US commerce secretary, Wilbur Ross, would suggest a temporary exemption for the EU but conceded that the decision remained in Trumps’ hands.
“We expect that we are on that list, we don’t know for sure,” she told the European parliament. “It is ultimately the president who decides this. But we expect that secretary Ross will recommend that the EU is excluded as a whole.”
The proposed tariffs’ main target is China, which has been flooding the world with cheap steel and aluminium. However, Trump has had few kind words to say about the EU, claiming that it had made life difficult for US exporters.
The full story is here:
With markets tumbling it is no surprise the measure of volatility is on the way up again:
OUCH! Fear Index #VIX jumps above 20 again as sentiment in US stocks is confused following Fed meeting. Chaos in DC and Sell off in banks add to the confusion. pic.twitter.com/uEv5ySc3tB
— Holger Zschaepitz (@Schuldensuehner) March 22, 2018
Back with the Bank of England, and is a May rate rise a done deal? Our economics editor Larry Elliott says it would be a suprise if there is no increase but the Bank has been careful to give itself some wriggle room:
A rate rise will depend on the economic data that is published over the next month and a half, but judging by the minutes of the MPC’s March meeting that data would have to be quite poor for Threadneedle Street to sit tight.
His full analysis is here:
And here’s our news story on the Bank’s announcement:
Updated
The weakness in the FTSE 100 could mean UK-listed companies being targets for potential predators, says Richard Hunter, head of markets at Interactive Investor,:
At current levels, the FTSE100 is just a few points from being down 10% in the year to date, knocking on the door of what is often described as correction territory.
UK equities on the whole have fallen out of favour with international investors with the spectre of Brexit looming, whilst the recent relative strength of sterling has meant additional pressure on the premier index, where the majority of earnings come from overseas. Meanwhile, the possibility of trade disputes particularly between China and the US is denting sentiment, and the move towards tighter monetary policy is another brick in the wall of worry which investors are currently climbing.
This is despite the global, synchronised economic recovery where corporate earnings have so far continued to justify some slightly rich valuations, especially in the US. The UK economy has remained resilient despite any impending Brexit fallout, with the result that some of the top quality FTSE100 companies are moving towards bargain territory – and could even, as a consequence of this index weakness, find foreign groups running the slide rule over some of them as potential bid targets.
Markets continue under pressure, ahead of the announcement by President Trump of trade tariffs.
Apart from fears of a trade war, investors are also concerned about the fallout from the current Facebook controversy, and the prospect of increased regulation for technology companies. Facebook itself has lost another 3% so far today.
So on Wall Street the Dow Jones Industrial Average is currently down 370 points or 1.5%. In Europe, Germany’s Dax is down 2% and France’s Cac 2.16%.
With the prospect of a UK interest rate rise in May, the FTSE 100 has fallen 1.6% to a new 15 month low.
The pound’s surge in the immediate wake of the Bank of England announcement has proved short lived, as investors decided that an interest rate rise in May had really already been priced into the market.
Sterling has slipped 0.02% to €1.1455 against the euro and is down 0.16% against the dollar at $1.4116. Ken Odeluga, market analyst at City Index, said:
Sterling traded against the dollar was able to spike to a fresh seven-week high though it soon settled around 100 pips lower. It remained elevated relative to earlier in the month. Against the euro the pound made a similarly short-lived move to the highest levels since January but then retreated by 60 pips. In short, a May rate rise remains all but certain, but the market had largely priced it before Thursday.
US manufacturing improves in March but service sector dips
More signs of a fairly robust US economy, with the latest snapshots of the manufacturing and service sectors.
The preliminary IHS Markit manufacturing PMI for March has come in at 55.7, up from 55.3 last month and the highest level since March 2015.
The manufacturing figure was better than analysts had been expecting, but the services PMI - although strong - came in below forecasts. It fell from 55.9 in February to 54.1, a two month low.
Overall the composite PMI dipped from 55.8 to 54.3 in March, but the index has been above the 50 mark (which signals expansion) for two years now. Chris Williamson, chief business economist at IHS Markit said:
The flash PMI surveys indicate that the economy likely continued to expand at a robust pace in March, rounding off a solid opening quarter of the year. The surveys are running at a level consistent with annualised first quarter GDP growth approaching 2.5% (though we note that official GDP estimates may once again understate growth in the opening quarter of the year).
The survey’s employment index is meanwhile at its highest for nearly three years and indicative of another strong payroll rise in the order of 240,000 in March.
The improved hiring trend reflects buoyant optimism regarding future growth. Companies’ expectations for output in the year ahead remained elevated, dipping slightly in services but surging to a three-year high in manufacturing.
Inflationary pressures meanwhile remain a key theme of the surveys, especially in manufacturing, reflecting increased raw material prices, notably for metals. The survey found average prices charged for goods and services are rising at one of the strongest rates seen since 2014. Furthermore, with factory costs showing the largest jump for seven years amid growing shortages of key inputs, inflationary pressures appear to be on the rise.
US Markit PMI Data (Mar P):
— Sigma Squawk (@SigmaSquawk) March 22, 2018
- Manufacturing 55.7 versus 55.5 expected, previous 55.3 - Highest since March 2015
- Service 54.1 versus 55.8 expected, previous 55.9
Full Report: https://t.co/BbVo6HFZkb
Updated
Back with UK interest rates, and there could be four over the next two years, reckons Kallum Pickering, senior UK economist at Berenberg:
The Bank of England seems to be re-opening the playbook it used ahead of the November 2017 rate hike. Step one, signal to markets that a hike could come soon. Step two, let a couple of known hawks dissent in a policy vote shortly thereafter. Step three, hike rates. After signalling at the February 2018 Inflation Report that a rate hike could come soon, the minutes of the March Monetary Policy Committee meeting published today showed two members of the nine member Monetary Policy Committee – Saunders and McCafferty, both known hawks – voted in favour of raising the Bank Rate by 25bp to 0.75%. These are the same members that dissented ahead of the November hike. The March minutes strengthen the bank’s February guidance that a hike could come soon. The real question is, when will it happen?
...We expect the BoE to hike its Bank Rate by 25bp four times over the next two years, with two hikes in 2018 and two in 2019. This would take the Bank Rate to 1.5% by the end of 2019. We look for the next 25bp hike in May 2018.
Markets slide as trade war fears mount
Ouch! Britain’s FTSE 100 has fallen to a fresh 15-month low.
London’s index of leading shares has lost 101 points, or nearly 1.5%, to 6937. That’s its lowest point since December 2016.
And over on Wall Street, shares are sliding too.
The Dow Jones industrial average has lost 310 points, or 1.2%, to 24,371 points.
Traders are citing fears of trade wars, with Donald Trump expected to announce new tariffs on Chinese imports on Thursday. Those are likely to target China’s high-technology sector and could also include restrictions on Chinese investments in the United States.
Peter Dixon, Economist at Commerzbank, thinks there are two good reasons for the Bank of England to raise interest rates away from their near-record lows.
-
nominal GDP growth in excess of 3% is not consistent with Bank Rate of 0.5% and
-
the global monetary cycle, led by the Fed, would suggest that there is scope for a modest tightening in UK rates.”
RLAM: Bank missed a trick today
A rate rise would be good news for savers. And Craig Inches, head of rates & cash at Royal London Asset Management, suggests the Bank of England should have taken the plunge today.
He argues:
“Today’s decision not to raise rates was a missed opportunity in our opinion. With real wage growth moving into positive territory for the first time in over two years, strong retail sales (despite the adverse weather conditions) and some welcome progress on the Brexit negotiations, the uncertainty that has concerned the Bank in recent months is beginning to be demystified.
“The markets were warned in February that rates would rise “faster and sooner”, the question we’d ask is why the Bank thought it necessary to wait until May. The probability of a rate rise now stands at over 75% following the vote today, sterling has risen in recent weeks from £1.37 to £1.42 and gilt short gilt yields have risen to the highs of the year. Given these moves and in light of the recent slew of positive data, the economy is clearly ready for a rate hike in May, but it would have been just as ready today!
Inches is also concerned that the Bank hasn’t begun unwinding its quantitative easing stimulus programme, which holds £435bn of government bonds.
“In the meantime the Bank continues to buy gilts via the APF facility and is massively distorting the shape of the yield curve, which is detrimental for pension funds and an accident waiting to happen further down the line.”
ING: Bank of England could raise rates twice in 2018
Economist James Smith of Dutch bank ING says the Bank of England could potentially raise interest rates twice this year - perhaps once in May, and once in the autumn.
But that could be undone if Brexit negotiations hit problems, Smith adds:
By alluding to the need for “ongoing tightening”, policymakers have kept the door open to a second rate hike later this year. We certainly wouldn’t rule it out, and markets are increasingly coming around to this view – there’s now not far off two hikes priced in for this year.
But if Brexit talks – which are due to be wrapped up in October to allow time for ratification – get particularly noisy, then this could get in the way of a second rate rise in the autumn.
We're not going to rule out a second rate hike in 2018 says ING's @smitheconomics and other key takeaways from the Bank of England meeting.https://t.co/rVwZOjSbMM
— ING Economics (@ING_Economics) March 22, 2018
The City was surprised that two MPC policymakers wanted to raise interest rates today, says Ben Brettell, senior economist at Hargreaves Lansdown.
He suspects that Brexit angst is helping to split the monetary policy committee:
Ian McCafferty and Michael Saunders are worried that inaction now will mean rates will need to rise faster and further in future. Sterling jumped on the news, hitting a seven-week high against the dollar.
The Bank faces a delicate balancing act. Inflation seems to be falling back towards the target of 2%, as the effect of the weaker pound starts to filter out of the calculation. But a pick-up in wage growth points to an erosion of slack in the labour market. This raises the prospect that a wage-price spiral could push inflation back up in future. Throw in a hefty dose of Brexit-related uncertainty and it’s easy to see why the committee is divided at present.
The Institute of Director’s senior economist, Tej Parikh, reckons the Bank made the right decision this month.
“Business leaders will welcome the Bank of England’s decision not to spring any surprises this month, but firms and households will be on tenterhooks for what comes in May.
“The Bank has been paving the way for a rate rise, but must tread lightly until there is richer evidence of growing inflationary pressures, to avoid unnecessarily placing a speed bump in the way of economic activity.
Updated
UK savers and borrowers should prepare for interest rates to rise in May, warns Ed Monk, associate director for Personal Investing at Fidelity International:
Monk says the recent pick-up in UK wage growth (to 2.8%, if you include bonuses) means the Bank is worried that the economy could overheat.
“The message from the Bank of England to borrowers couldn’t really be clearer: get ready for higher rates now. Two members voted for a rate rise this month and the Bank said nothing to dispel expectations that rates will rise in May.
“The rate rise made in November felt like a straightforward reversal of the emergency post-Brexit cut, but this now feels more like we’re entering a genuine tightening phase at the Bank.
Why the Bank was split over interest rates
The minutes of this week’s meeting show that the Bank of England expects to raise interest rates over the coming months, having left them at 0.5% today.
It says:
Given the prospect of excess demand over the forecast period, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a more conventional horizon.
All members agreed that any future increases in Bank Rate were likely to be at a gradual pace and to a limited extent.
However, there was a split among the Monetary Policy Committee over when to take the plunge and hike borrowing costs.
Ian McCafferty and Michael Saunders pushed for a rise today, arguing hawkishly that it would be reckless to wait:
The minutes say:
These members noted the widespread evidence that slack was largely used up and that pay growth was picking up, presenting upside risks to inflation in the medium term. A modest tightening of monetary policy at this meeting could mitigate the risks from a more sustained period of above-target inflation that might ultimately necessitate a more abrupt change in policy and hence a greater adjustment in growth and employment.
But governor Mark Carney, deputies Ben Broadbent, Dave Ramsden and Jon Cunliffe, chief economist Andy Haldane, and external members Silvana Tenreyro and Gertjan Vlieghe weren’t convinced.
They argued that it would be better to wait until they have new economic forecasts in May.
There had been few surprises in recent economic data and the February Inflation Report projections, conditioned on a gently rising path of Bank Rate, had appeared broadly on track. The May forecast round would enable the Committee to undertake a fuller assessment of the underlying momentum in the economy, the degree of slack remaining and the extent of domestic inflationary pressures.
GBP Intraday (Following BOE Decision): 7-2 in favor of no change, 2 wanted a hike pic.twitter.com/nRcXgtNfI4
— Michael McDonough (@M_McDonough) March 22, 2018
Pound jumps as rate hike nears
The pound has jumped, following the news that two policymakers - Ian McCafferty and Michael Saunders - voted to raise UK interest rates today.
Sterling has hit €1.151 against the euro, the highest level since June 2017.
It’s also up against the US dollar at $1.420, a new seven-week high.
That means traders are anticipating that the next rate hike will come soon - quite possibly at May’s meeting.
Updated
BANK OF ENGLAND DECISION
NEWSFLASH: The Bank of England has left UK interest rates unchanged at 0.5%.
Two members of the MPC voted to hike rates, but were outvoted by the other seven policymakers.
More to follow....
Five minutes to go, until we learn whether the Bank of England has voted to leave rates on hold....
Britain’s FTSE 100 shares index has fallen below the 7,000 point mark for the first time in 15 months.
Worries over trade wars, plus the strength of the pound, have combined to pull the index of blue-chip companies down to 6,983, a drop of 55 points.
Updated
The team at Deutsche Bank believe the Bank of England will raise rates in two months time...
Deutsche Bank 1/2: @bankofengland decision due out at 12pm GMT today. The consensus is for no change in policy while market pricing also assigns a low 16% probability of a hike. #forex #fx #BoE #forextrading #centralbanks
— Francesc Riverola (@Francesc_Forex) March 22, 2018
DB 2/2: bigger question is whether or not we see a more hawkish #BoE centre in light of yesterday’s stronger than expected wages numbers. Indeed, pricing for a May hike is over 80% & our #UK economists yesterday changed their view to a rate hike (from a hold) for 2 months’ time
— Francesc Riverola (@Francesc_Forex) March 22, 2018
Here’s an explanation of how the Bank of England sets interest rates:
One of Gordon Brown’s first moves as chancellor in 1997 was to hand control of interest rates to an independent Bank of England. Previously the cost of borrowing had been decided between the chancellor and the governor of the Bank.
Rates are set by the Bank’s monetary policy committee (MPC), which consists of nine members – the Bank of England governor, the three deputy governors for monetary policy, financial stability and markets and banking, the chief economist and four external members appointed directly by the chancellor.
The four external members are appointed to bring thinking and expertise from outside the Bank to the meetings. A Treasury representative also attends the meetings and can discuss policy issues but is not allowed to vote.
The committee meets monthly to discuss whether to cut, raise or leave interest rates unchanged, as well as other measures such as quantitative easing. The decisions are made after a vote by each committee member; in the event of a tie, the governor has the casting vote.
Minutes of the meetings are published after the rates decision has been announced.
Pound hits two-month high against the euro
The pound is pushing higher as traders get ready for the Bank of England decision, in under 50 minutes.
Sterling has risen to €1.1489 against the euro, its highest levels since January 25th.
The City may be preparing for a hawkish announcement from the BoE, paving the way for a rate rise in May (a hike today would be a real shock...)
Another sterling morning for the Pound, BoE likely to take GBP/EUR through €1.15 pic.twitter.com/CjyBFgO2eg
— Miles Eakers (@mileseakers) March 22, 2018
Craig Erlam of trading firm OANDA says:
While a rate hike is not expected today, it is heavily priced in for May when the central bank will also release its inflation report containing new macro-economic projections.
The Monetary Policy Committee has become notably more hawkish recently and the reference to rate hikes needing to come “somewhat earlier and by a somewhat greater extent” than it expected in November, last month was a clear reference to an upcoming meeting. If the MPC is still planning to raise in May, I would expect another clear hint from the central bank today.
De La Rue shares slide after passport snub
Over in the City, shares in printing group De La Rue have slumped by 5% after it missed out on the contract for Britain’s new blue-coloured passport.
De La Rue is fuming over the snub, especially as the contract has been awarded to Gemalto, a Franco-Dutch security firm.
Somewhat ironic, as these new passports have been hailed by Brexiteers as a benefit of leaving the EU.
De La Rue’s CEO, Martin Sutherland, has warned that jobs could be lost. He wants Theresa May to:
“come to my factory and explain my dedicated workforce why they think this is a sensible decision to offshore the manufacture of a British icon”.
Unions are urging the government to reverse the decision. Unite national officer Louisa Bull says:
“Theresa May and Amber Rudd need to explain to De La Rue workers why ‘taking back control’ means their jobs could be put at risk while the production of Britain’s new iconic passport is shipped overseas to France.
“It wouldn’t happen in France because of national security and it shouldn’t happen in the UK. De La Rue is the UK’s leading security printer making bank notes as well as passports sustaining thousands of decent jobs in the UK.
“Ministers need to reverse this decision and start supporting British business and UK workers through public procurement and an industrial strategy which is more than just sound bites.”
The contract was awarded under EU procurement rules, though, so a u-turn wouldn’t be easy. One could even argue that this is what free trade is all about.....
The BBC’s Rob Watson reckons the government will be worried:
#passport issue potentially very toxic for government. 1) there is comedy element of new blue passport being made overseas and 2) the danger voters think free trade promise of #Brexit = things they don’t like.
— robwatsonBBC (@robwatsonbbc) March 22, 2018
EU hopes to resolve US trade war threat
Optimism is building that Europe could win an exemption from America’s new US tariffs on steel and aluminium.
EU trade commissioner Cecilia Malmstrom has just held high-level talks with US officials, in an effort to prevent European metal-producers from being hit by Donald Trump’s import duties, which kick in tomorrow.
There’s nothing official yet, but EU officials are hopeful that Malmstrom’s efforts will pay off - and mean Europe needn’t enforce its threat of retaliatory tariffs on US imports.
European Commission vice-president Jyrki Katainen told Bloomberg TV that the visit went well.
“Cecilia Malmstrom had a good, very fruitful visit to Washington,.
We have good opportunities now to solve the issue and stabilize, or calm down, the problem.”
Last night, Malmstrom tweeted that the meetings had been productive:
Good meeting here in snowy Washington DC with Secretary of Commerce Wilbur Ross. We have agreed to launch immediately a process of discussion with President Trump and the Trump Administration on trade issues of common concern... 1/2
— Cecilia Malmström (@MalmstromEU) March 21, 2018
...including steel and aluminium, with a view to identifying mutually acceptable outcomes as rapidly as possible. I will also speak to @USTradeRep Lighthizer later today. Returning to Brussels this evening. https://t.co/xnKyJbp7Q0 2/2
— Cecilia Malmström (@MalmstromEU) March 21, 2018
UK retail sales rebound, but underlying picture is weak
Newsflash: UK retail sales rose last month, but the broader picture is still downbeat.
Retail sales volumes (the amount of stuff people bought) rose by 0.8% in February, compared to forecasts of just 0.4%.
But after sharp falls earlier this winter, retail sales volumes are down 0.4% over the last quarter.
On an annual basis, retail sales were up 1.5% - again, much weaker than last year, as households are stretched by the cost of living squeeze.
This might make the Bank of England reluctant to raise borrowing costs....
The report also shows that consumers continued to spend more online. Internet shopping made up 17.2% of all retail spending, up from 15.6% a year ago. That helps explain why various high street chains have been struggling, or gone bust, in recent months.
Rhian Murphy, ONS senior statistician, says:
“Retail sales did grow in February, with increases seen in food, non-store and fuel, but this followed two months of decline in these sectors.
“However, the underlying three-month picture is one of falling sales, mainly due to strong declines across all main sectors in December.
“Store prices continue to rise across all store types, but at a lower rate than the previous month due to a slowdown in price growth, though clothing and household goods stores continued to see stronger price rises.
Updated
Eurozone growth hits 14-month low
Just in: The eurozone’s recent economic surge seems to be levelling off.
Data firm Markit has reported that growth across eurozone service sector firms and manufacturers has slowed to its slowest since January 2017.
Companies reported that growth had slowed after a very strong performance last year, with new order and exports both rising at a slower rate.
Markit’s ‘composite output PMI’, which tracks activity across the eurozone’s private sector, dropped to 55.3 in March from 57.1 last month.
At a country level, output growth slowed to a seven-month low in France and an eight-month low in Germany.
It’s not a reason to panic -- the PMIs had been remarkably strong last year, so this is a return to more normal growth levels.
Chris Williamson, chief business economist at IHS Markit, says recent bad weather is one factor, plus ‘growing pains’ as European supply chains struggle to keep pace with recent growth.
But political issues - such as Brexit, and trade tariffs - are another factor.
Williamson says:
The fact that export order book growth has more than halved since the end of last year suggests the stronger euro is taking an increasing toll on export performance. Survey responses also highlighted how political uncertainty also appears to have intensified, dampening demand.
The data therefore suggest that eurozone growth peaked around the turn of the year and the region is settling into a slower, but still robust pace of expansion.
Updated
European stock markets have dropped this morning, as investors fret about the risks of a trade war.
The FTSE 100 is down 13 points, or 0.2%, at 7021 after falling through 7,000 points at the start of trading. Germany’s DAX has lost 0.4%.
Exporters are suffering from the strength of the pound and the euro against the US dollar today.
The markets are also being pulled down by signs that Wall Street will fall, especially if Donald Trump does to hit China with new sanctions.
Connor Campbell of SpreadEx says:
The state of the Dow futures, alongside the re-emergence of trade war chatter ahead of Trump’s China tariff announcement later this Thursday, left the European indices in a sorry state after the bell.
Alan Clarke of Scotia Bank is confident the Bank of England will leave rates on hold today:
- We expect policy to be left unchanged at this meeting.
- The focus of attention will be on whether there are any clues that support the case for a rate hike at the May MPC meeting.
- Given fairly mixed data since February, we would not be too surprised if the vote was 9-0 for unchanged rates and that should not be seen as an obstruction to a hike in May.
But analysts at Mitsubishi UFG warn that a shock hike can’t be ruled out....
MUFG: "Outside chance that the BoE could deliver a rate hike as soon as today" pic.twitter.com/3Nie292crV
— Katie Martin (@katie_martin_fx) March 22, 2018
Dollar falls after Fed meeting
The US dollar has fallen against other major currencies overnight, as traders digested Jerome Powell’s debut press conference since becoming Fed chief.
I thought Powell handled the occasion pretty well (rattling through the questions within 45 minutes, not the full hour available). He was upbeat about the US economy, avoided any bear traps, and reassured listeners that the Fed would take the ‘middle ground’ as it seeks to normalise monetary policy without slowing growth.
So why has the dollar fallen?
Firstly, the Fed stuck to its forecast of three rate hikes in 2018, rather than slipping in a fourth. Investors can take that as a dovish signal (although the Fed is now forecasting an extra hike in 2019).
Secondly, Powell revealed that business leaders have told Fed officials they’re worried about a trade war breaking out. That’s a timely warning, as president Trump is expected to announce new tariffs and investment restrictions on China later today.
That’s enough to drive the pound up to a six-week high against the dollar, at $1.417.
Updated
China raises borrowing costs.
China’s central bank has responded to last night’s move in US interest rates, by hiking its own borrowing costs.
The People’s Bank of China increased the cost of short-term loans to commercial lenders, hours after the Fed announced it was tightening policy in America.
Bloomberg has the details:
The People’s Bank of China raised the interest rates it charges on 7-day reverse-repurchase agreements by five basis points, the central bank said in a statement. The move is “in line with market expectations and a normal reaction to the Fed’s rate hike”, the PBOC said in a statement on the website.
China’s CB, PBoC raises borrowing costs after Fed hikes, (interest rates it charges on 7-day reserve repo by 5bp), chart @business https://t.co/tOJlglx4yn pic.twitter.com/kSus99plX4
— ACEMAXX ANALYTICS (@acemaxx) March 22, 2018
#China’s central bank conducts 10 billion yuan 7-day reverse-repo, with rate going up to 2.55%. It follows US Fed’s move to raise rates. It comes only days after China’s newly appointed PBOC governor Yi Gang said its rate hike decision will largely based on domestic situations. pic.twitter.com/KlG1iOiF3V
— Henry Yin (@HenryYinCNA) March 22, 2018
The Bank of England could send the pound shooting higher at lunchtime, if it hints at a rate hike in the next few months (or even raises rates today, of course).
Konstantinos Anthis, head of research at ADS Securities, explains:
The focus today will be on the Bank of England rate decision which will have a significant effect on the medium-term outlook of the British pound. The UK currency has seen good demand over the past few days being supported by expectations for a positive labour market report - which indeed printed in a bullish fashion yesterday - but also hopes for a hawkish tone from the BoE today. The key drivers for this upbeat bias? Inflation rebounded higher last month, we noted good wage growth in yesterday’s employment report and there has even been progress in the Brexit negotiations.
All these factors paint a positive outlook for the pound and shape expectations for a bullish BoE message which will underpin investors’ hopes for a rate hike soon. There’s some speculation that the BoE might even go ahead and raise rates today but we believe that this is too optimistic - our base scenario suggests an interest rate increase in the summer, either in May or June. Today though a positive message and a consistent bullish bias from the British central bank will keep the pound in demand: we’re looking to the pound/ dollar to extend gains towards 1.42 and euro/ pound to break below the 0.87 mark.
The agenda: Will Bank of England hint at a May hike?
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It’s the Bank of England’s turn under the spotlight today, as policymakers on the Monetary Policy Committee will set UK interest rates at noon today ,
We’re not expecting a rate hike today, just four months after the first one in a decade. But the MPC could decide to steer the markets towards a move in May, as it tries to balance inflation pressures against Brexit uncertainty.
The MPC have some interesting economic data to digest, which may encourage policymakers to reach for the ‘rate hike’ button soon.
Tuesday’s drop in inflation to 2.7% took some pressure off the Bank, although prices are still rising faster than its 2% target.
That was followed by yesterday’s strong labour market report, showing that wages are rising at their fastest pace since 2015, and catching up with inflation. Policymakers may conclude that this strengthens the case for a rate hike soon, rather than risk waiting too long.
This chart, from Berenberg bank, suggests the labour market is recovering from the Brexit shock of 2016, which drove real wages down.
Kallum Pickering of Berenberg explains:
Thanks to the drop in headline inflation to 2.7% in February (3.0% in January), and the uptick in nominal weekly earnings to 2.8% in January (up from 1.9% in May 2017), the real wage squeeze is probably over.
Tight labour markets should push nominal wage growth higher over the medium term as inflation gradually trends towards a rate of about 2-2.5%. Real weekly earnings growth can rise towards 1.0% by the end of the 2018.
Helped by continued jobs growth, this should allow real consumption to grow at close to 1.5% over the medium term.
The minutes of the meeting, released at noon, will give an insight into the MPC’s thinking.
Last night, the US Federal Reserve raised its benchmark rate to 1.75%, and lifted its growth forecast. It also predicted two more rate hikes this year, and three in 2019, as the process of normalising monetary policy continues under new Fed chair Jerome Powell.
Powell sounded upbeat about the US economy, but also warned that fears of a trade war are building.
We also get a new healthcheck on eurozone service sector firms and factories, fresh UK retail sales figures, and the weekly US jobless claims numbers.
Here’s the agenda
- 9am GMT: Eurozone ‘flash’ PMI surveys showing how companies are faring this month
- 9.30am GMT: UK retail sales figures for February
- Noon GMT: Bank of England decision on interest rates
- 12.30pm GMT: US initial jobless claims for last week
Updated
