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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden (until 12.30) and Nick Fletcher

Oil falls ahead of Opec; US data disappoints and China fears mount - as it happened

A container is lifted by a crane at a port in Qingdao, in east China’s Shandong province.
A container is lifted by a crane at a port in Qingdao, in east China’s Shandong province. Photograph: STR/AFP/Getty Images

Crude pares losses as weekly US rig count falls

The number of oil rigs drilling in the US dipped last week for the fourth week in a row, according to the regular survey by Baker Hughes.

Oil rig numbers dipped by 3 to 351, the lowest level since November 2009, while the number of gas rigs was unchanged at 89:

Weekly rig count
Weekly rig count Photograph: Baker Hughes

Following the news, Brent crude is down 1.7% at $43.08 a barrel, ahead of the key meeting in Doha over the weekend when oil producers will discuss possible production freezes.

On that note it’s time to close for the evening. Thanks for your comments, and we’ll be back next week.

Updated

There are likely to be only modest US interest rate rises this year, with economic conditions riskier than they were when the Federal Reserve raised rates in December.

That is the view of Chicago Fed president Charles Evans, in a speech in Washington.

He said that a “wait and see” approach was appropriate given the risks.

Osborne says Brexit would lead to dearer mortgage rates

UK chancellor George Osborne has added more fuel to the flames of the Brexit debate by saying in Washington that mortgage rates would rise in Britain left the EU. Rupert Neate and Katie Allen report:

The chancellor said he thought it was “likely” that interest rates, and therefore the cost of home loans, would rise if Britons vote to leave the EU in the referendum on 23 June.

Asked if he thought that the cost of mortgages would increase on a British exit from the 28-nation bloc Osborne said: “The short answer is yes. I think that is likely, but I’m not in charge of interest rates.”

Osborne said minutes of the Bank of England’s monetary policy committee, which sets interest rates, contain “repeated reference to the fact that there is an inflation mandate and they will stick to delivering their inflation mandate”.

Osborne’s argument is that if there is a vote to quit the EU, sterling would slump and that would push up the cost of imports. That would mean rising prices and the MPC would have to act to prevent inflation taking hold.

He said this could lead to the MPC raising interest rates from their all-time low of 0.5% - where they have sat since 2009. “You would have rising prices and a Bank of England with an inflation target committed to respond to that,” Osborne said at the International Monetary Fund (IMF) spring meetings in Washington on Friday.

The full story is here:

European shares end lower

With Chinese economic growth slowing down - albeit in line with expectations - and oil sliding ahead of this weekend’s meeting of producers in Doha, European shares have ended the week on a negative note. Tony Cross, market analyst at Trustnet Direct, said:

It has perhaps been a predictably muted end to the week for London’s FTSE-100. The benchmark index is sitting a little lower on the day but we’re closing well up on the week and that’s certainly worth cheering, Sustaining the rally from here however really does rely heavily on a meaningful production freeze being implemented by oil producer nations meeting in Qatar this weekend – we’ve already seen some pessimism creeping in there over the last few hours, crude is off a touch and this is certainly going to be casting a shadow over sentiment.

The final scores showed:

  • The FTSE 100 finished down 21.35 points or 0.34% at 6343.75
  • Germany’s Dax dipped 0.42% to 10,051.57
  • France’s Cac closed down 0.36% at 4495.17
  • Italy’s FTSE MIB fell 0.39% to 18,257.35
  • Spain’s Ibex ended down 0.12% at 8850.9
  • But in Greece, the Athens market jumped 4.86% to 574.73 after positive news for Greek banks from the ECB

On Wall Street, the Dow Jones Industrial Average is virtually unchanged, down just 12 points or 0.07%.

Ahead of the Doha meeting, Brent crude is currently down 2.24% at $42.86 a barrel.

In an interesting bit of timing, the news that Citigroup economist Michael Saunders was joining the Bank of England’s monetary policy committee came shortly after the US bank reported a 27% drop in first quarter earnings.

This is the biggest fall reported by any of the big US banks so far, with the bank blaming lower revenues from trading and investment banking and bad loans to the energy industry following the slide in oil prices.

Still, much of this was expected, and the bank’s shares have edged higher following the figures.

The European Central Bank will keep rates at their current low (in some cases negative) levels for an extended period, ECB president Mario Draghi has said in a speech in Washington.

That means well beyond March 2017 when its bond purchase programme is due to run out. Draghi said:

Taking into account the current outlook for price stability, the Governing Council expects the ECB’s key policy rates to remain at present or lower levels for an extended period of time, well past the horizon of the net asset purchases. We are confident that the very accommodative monetary policy stance will provide further support to the euro area recovery and will accelerate the return of inflation to levels that we consider to be consistent with our objective. The Governing Council has done and, within its mandate, will continue to do whatever is needed to pursue its price stability objective.

He said the eurozone economy was on a gradual path to recovery but added:

The outlook for euro area growth remains faced with uncertainty, mainly as a result of downside risks to growth prospects in emerging market economies, a clouded outlook for oil prices and their economic implications, and also geopolitical risks.

As for inflation:

Looking ahead, inflation in the euro area is likely to display slightly negative rates in the coming months before picking up later in 2016. Thereafter, supported by our substantial monetary stimulus and the projected evolution of energy prices and economic developments more generally, euro area inflation rates should recover further. In the current context, it is crucial for the ECB to ensure that the very low inflation environment does not become entrenched in second-round effects on wage and price-setting.

The banking sector has seen increased stability, he said, but non performing loans need to be dealt with:

The stability of the euro area banking sector has improved significantly over the past few years. Bank capital and provisions have been substantially reinforced and bank profitability has started to rise again. However, against the background of a moderate economic recovery, this profitability remains low. Structural factors may also be at play. In addition, in some jurisdictions, a high stock of non-performing loans (NPLs) continues to linger as a legacy of the earlier crisis. As this may constrain banks’ lending capacity and their ability to build up further capital buffers, determined action is needed. Cooperation among all major stakeholders, including governments, banks, regulators and investors, at national and European level, is necessary in order to make substantial progress in this field. Tailored approaches, based on a thorough understanding of country-specific aspects and in the context of a comprehensive strategy that is led as much as possible by the private sector, are needed. The banking supervision arm of the ECB is working from the supervisory perspective, on identifying best practices that can be adopted by individual banks. Certainly, a decline in NPL ratios will also be facilitated by an environment of stronger economic growth.

The beginning of the end of the Greek crisis?

Meanwhile Greek prime minister Alexis Tsipras has welcomed (to put it mildly) the news that the ECB will accept bonds from Greek banks in its QE programme. The Athens-Macedonian news agency reported Tsipras commenting in parliament:

This decision, he said, amounts to indirect recapitalization as Greek banks may gradually sell during the year up to 50 pct of the EFSF bonds they hold in their portfolios, whose value is estimates at over 30 billion euros. This also means the banks will have a very important boost totaling 18.5 billion euros.

“This development is not only a significant relief for banks and liquidity, it also constitutes the beginning of the end for the crisis and the imminent [program] review,” Tsipras said.

IMF director Poul Thomsen has said he expects to come to an agreement on Greece soon, but hardly seemed very positive in some of his other comments. And the various parties involved still seem at odds on key points:

The US consumer confidence figures suggest the second quarter has got off to a poor start, says Rob Carnell at ING:

Expectations for a rise in the University of Michigan index of consumer sentiment were dashed by a fall - this is beginning to look like a trend.

Despite some better recent labour market data and more positive stock market behaviour, US consumers were more downbeat in April, according to the latest University of Michigan index of consumer sentiment.

Although the current conditions index did not fall by too much, the expectations component, which has a decent correlation with real personal spending growth, fell more sharply, falling to 79.6 from 81.5 (current conditions only fell 0.2 points to 105.4 and the headline index was down to 89.7 from 91.0).

Following a very weak first quarter, what worries us about this release is that it is giving us an early heads-up that the second quarter has also got off to a bad start.

In a boost to Greek banks, the European Central Bank earlier announced it would include EFSF notes in its list of eligible securities which it can buy under its quantitative easing programme.

Greek banks hold more than €30bn of these notes, and had not been allowed to sell them in the market, but could now make gains on the securities.

US consumer confidence below expectations

More disappointing US data, with the University of Michigan consumer confidence index coming in lower than expected.

The preliminary index for April was 89.7, down from 91 in March and below forecasts of a level of 92.

Commenting on the weekend’s meeting of oil producers in Doha, analysts at finnCap said:

The market is focussing on the meeting in Doha on the 17th when the group of OPEC and non-OPEC countries decide on whether or not to freeze production at January levels which we note were at an all-time high for OPEC. The “group” produces over half of global production, but excludes Iran, which is keen to get its production back to pre-sanction levels. Historically, OPEC has not been particularly effective at sticking to quotas so it is unclear if this new group will be any stricter should the freeze be put in place. One suspects not and this will need to be closely monitored for it to be an effective way of manageing the oil price.

On Monday we should have some visibility as to what the outcome of the meeting has been. An agreement to freeze will be good for the oil price in the short term, but any sign of cheating would be viewed negatively by the market, making the whole process to that point pointless.

Brent crude is currently down 2.5% at $42.7 a barrel.

The US industrial production figures are “bad, bad and bad”, says Rob Carnell of ING Bank, and cast doubts on a June rate rise let alone one in April. He says:

Following a 0.6% decline in February, which we felt was dominated by warmer than usual weather depressing utilities output, a small bounce in activity, or at least a smaller decline in overall industrial production looked a sensible forecast, backed up by a slight bounce in the manufacturing ISM index.

But production fell a further 0.6% month on month, utility production fell less than in February, but still by a sizeable 1.2% month on month, while mining (for which read in large part - shale extraction) fell at an accelerated pace of 2.9% (-1.0% in Feb) and manufacturing also accelerated its decline falling by 0.3% month on month, with particularly large fall (-1.6% month on month) in motor vehicles and parts. If that were not bad enough, even the February figures saw some small downward revisions.

This data almost brings to an end the major activity releases for the first quarter, and the net result is not a good one. On our rough reckoning, it will be hard for first quarter 2016 GDP to exceed 1.0% continuing the run of soft data that delivered only a 1.4% quarter on quarter rise in economic activity in the fourth quarter of 2015. So economic growth continues to slow, and the inflation data has also been a little softer of late.

Put all this together and the case for an April rate hike is non-existent, with prospects for a June hike hanging in the balance and needing a meaningful pick up in activity data over the coming months. We still prefer the idea that the Fed will keep policy unchanged until the third quarter of 2016.

Weak US industrial production

Back to the US, and some weaker than expected industrial data, to follow the better than expected New York manufacturing survey.

Industrial output fell by 0.6% in March, with February’s figure revised down from a 0.5% drop to 0.6%.

Analysts had been expecting a dip of 0.1% last month.

Industrial production fell at an annual rate of 2.2% in the first quarter

The Treasury and Bank of England have now confirmed Citigroup’s Michael Saunders will replace Martin Weale on the Bank’s monetary policy committee, as of 9 August. The Treasury said:

As an external member of the MPC, Michael Saunders will hold one of nine votes to decide the future path of UK monetary policy. The MPC currently meets monthly to set monetary policy it judges will enable the inflation target to be met.

The Chancellor of the Exchequer, George Osborne said:

“I am delighted to appoint Michael Saunders as an external member of the Monetary Policy Committee at the Bank of England.

“Michael brings a wealth of economic experience both on the UK and global economy and will make a strong addition to the MPC.

“I also want to put on record my thanks to Dr Martin Weale for his record of outstanding service to the MPC since 2010, and whose perspective, expertise and insightful contributions have been invaluable during his time in office.”

From August the MPC will therefore be:

Mark Carney (Governor); Ben Broadbent (Deputy Governor, Monetary Policy); Dame Minouche Shafik (Deputy Governor, Markets and Banking); Sir Jon Cunliffe (Deputy Governor, Financial Stability); Andy Haldane (Executive Director, Monetary Analysis and Chief Economist); Kristin Forbes (external member); Ian McCafferty (external member); Gertjan Vlieghe (external member) and Michael Saunders (external member).

Commenting on the announcement, Carney said:

On behalf of the Bank of England, I am delighted to welcome Michael Saunders to the Monetary Policy Committee. He brings first-rate knowledge of the UK economy and a wealth of economic and financial experience.

I would also like to take this opportunity to thank Martin Weale for the exceptional contribution he has made to the work of the Monetary Policy Committee over the past six years. Martin joined the Committee at a time of grave economic challenge for the United Kingdom, bringing invaluable practical knowledge of the UK economy coupled with academic expertise. Amongst his many contributions, Martin advanced our understanding of the labour market, assisted in the development of unconventional monetary policy and supported the Bank’s efforts to increase transparency and effective communication.

Martin Weale joined the Monetary Policy Committee in 2010 after 15 years as director of the National Institute of Economic and Social Research.

He was appointed for a second three year term in 2013, which - by a mathematical deduction - ends this year.

The Michael Saunders news appears to have come out of Washington where chancellor George Osborne is attending the IMF spring meeting:

Here’s Citi’s profile of Saunders:

Saunders
Saunders Photograph: Citigroup

New Bank MPC member - report

Citigroup economist Michael Saunders is set to replace Martin Weale on the Bank of England’s monetary policy committee, according to MNI.

Positive New York manufacturing survey

Upbeat signs from the US economy, with the April Empire manufacturing survey from the New York Federal Reserve showing the business conditions index rising to its highest level in more than a year.

The index came in at 9.6, up from 0.6 in March and better than the forecast 2.2. The employment index dipped slightly from 1.98 to 1.92 but the new orders index rose from 9.57 to 11.14. The Fed said:

The April 2016 Empire State Manufacturing Survey indicates that business activity expanded for New York manufacturers. The headline general business conditions climbed nine points to 9.6, its highest level in more than a year. The new orders and shipments indexes registered an increase in both orders and shipments, and inventories were slightly lower than last month. The prices paid index climbed sixteen points to 19.2, pointing to a pickup in input price increases, while the prices received index rose above zero, a sign that selling prices increased. Employment levels and the average workweek were little changed from March. The six-month outlook continued to improve.

Business conditions
Business conditions Photograph: New York Federal Reserve

The UK treasury will publish its analysis on Britain’s EU membership by 22 April, with the select committee quizzing chancellor George Osborne on 28 April.

The committee will take evidence from the leave campaign a few days earlier, on 20 April. Committee chair Andrew Tyrie said in a statement:

The chancellor will be questioned on the Treasury’s own analysis of the UK’s membership of the EU, and the alternatives to it. He has undertaken to publish this by Friday 22 April.

Updated

Greece will be on the agenda when German chancellor Angela Merkel meets US president Obama on Sunday, according to newspaper Kathimerini:

Greece is expected to be among the topics on the agenda of talks on Sunday when US President Barack Obama is to meet with German Chancellor Angela Merkel in Hanover.

Obama is traveling to Germany to join Merkel for the launch of the Hanover Messe, a major global trade fair for industrial technology.

A German government spokesman did not confirm that Greece will be on the agenda, noting that issues relating to the global economy, the Eurozone and Syria will be among the matters up for discussion.

Updated

It’s exactly one year since the European Central Bank’s press conference was disrupted by a campaigner throwing glitter at Mario Draghi.

Jo Witt’s call to “End ECB dick-tatorship” made headlines around the world, after she was hauled out of the room by security.

She later told us she hoped to draw attention to the unfairness of eurozone austerity.

We can try to change our economy. If the ECB was a democratically elected institution we could use it far more for the better.

12 months later, the eurozone economy looks to be in slightly better shape. But the economic imbalances that so angered Witt are still prevalent.

She hasn’t forgot about the ECB either, judging by this morning’s tweet:

Updated

Brent crude is also falling ahead of Sunday’s OPEC meeting, down 1.7% at $43.09 per barrel.

Joshua Mahoney of IG says nervousness is gripping the City:

A tangible sense of apprehension has swept across global markets today, with traders unwilling to hold positions into the weekend given the clear risk of events in Doha on Sunday.

Once more money is beginning to flock into safe haven assets such as gold and the yen, at the expense of the week’s best performers.

So if oil producers fail to make progress on Sunday, there could be a nasty market reaction on Monday.

City economists are extremely worried that China has embarked on a dangerous new credit bubble, after lending almost doubled in March.

Oil falls ahead of crunch OPEC meeting

The oil price is dipping this morning as hopes of a breakthrough deal between oil producers this weekend fade.

OPEC producers are due to gather in Doha on Sunday, to discuss whether to freeze output at January’s levels.

But the latest word is that Iran’s oil minister will not be attending the OPEC meeting on Sunday, according to newswire reports. Instead, the country’s OPEC governor will be there.

Iran has already guided that it won’t accept a freeze at January levels -- it is looking to boost its production, as sanctions on its oil sales have only just been lifted.

Other OPEC members will be desperate to take action to raise the oil price, as cheap crude prices have cost them billions of dollars.

However, with or without Iran, OPEC’s ability to influence the market is limited, given the supply glut.

US crude oil has fallen by 1% this morning, to $41 per barrel. It could slump sharply next week if OPEC doesn’t make any progress on Sunday.

Joe Rundle, Head of Trading at ETX Capital , explains:

Confusion reigns supreme and it’s unclear whether we will see oil producers agree to limit production. Swing producer Saudi Arabia is key, but it’s made it clear it will only act if Iran joins the party.

In the wild west of oil, no one wants to put down their gun first.

The output freeze rumour has been doing the rounds since early February after oil touched on its lowest level in 13 years and it’s proved a useful catalyst for oil bulls as prices have surged 50% since.

Indeed any ‘deal’ is more about sending a signal to markets, rather than achieving any meaningful limits to production.

Updated

The FTSE 100 index is ending the week on a low note.

It’s down by 22 point, or 0.35%, now, led by housebuilders, with China’s slowing growth rate also weighing on the City.

More here:

Meanwhile in the UK, new housebuilding has jumped at its fastest rate ever.

The Office for National Statistics has reported that new homebuilding has jumped by 6.8% in the three months to February.

That helped the overall sector to grow by 1.5% during the quarter, despite a slump in demand for new factory plants.

Curiously, the ONS’s report is rather more upbeat than the latest survey from data firm Markit, which found that output hit a 10-month low in February.

The ONS has actually just published a report (online here) into why the two reports rarely match:

Both measures offer the user something different; the Markit PMI is the more timely estimate, but our slower release of data enables us to provide a more comprehensive coverage of the sector.

Chinese debt fears mount after credit surges

Concern is growing over China’s debt levels after the amount of new credit surged last month.

Chinese banks extended 1,370 billion yuan of new loans (£150bn) in March -- almost doubling Februarys’s 726.6 billion yuan.

That confirms that China’s growth is still heavily dependent on credit, as Beijing tries to ensure an orderly slowdown rather than a full-blown crash.

Tom Rafferty, Asia economist at the Economist Intelligence Unit, is concerned that Chinese debt levels are simply too high, and could trigger problems in the future.

It has taken considerable monetary and fiscal policy loosening to stabilise economic growth at this level and this effort has distracted from the reform agenda that is fundamental to long-term economic sustainability.

Levels of debt within the Chinese economy are too high and we are concerned that the authorities are not moving quickly enough to address the issue.

Rafferty also fears that China’s growth rate will stumble in the coming months, and beyond.

Looking further ahead, we are very sceptical that the government’s targeted 6.5% “floor” for annual economic growth over the next five years will prove attainable and the risk of a sharp economic slowdown, or hard-landing, will persist.”

Zhu Haibin, chief China economist at JPMorgan in Hong Kong, is also concerned that China is piling up more and more debt.

“This can’t continue. The key is efficiency of credit use because we know that some of the credit is used to keep these zombie companies alive.”

This chart shows how Chinese corporations have been piling up new debt at a faster pace than the country’s growth rate for years:

Updated

Rating agency Moody’s is worried that China’s stimulus efforts are storing up long-term problems:

Today’s growth figures suggest that the recent splurge in Chinese government spending is working.

Anna Stupnytska, Global Economist at Fidelity International, shows how investment by state-controlled companies has soared by nearly a fifth:

European shares have edged lower at the start of trading:

The main European markets this morning

China’s official news agency, Xinhua, is sticking to the party line today.

It has tweeted several graphs, arguing that the country’s economy is in good health:

Xinhua

Updated

Chinese growth slows: What the economists say

Julian Evans-Pritchard of Capital Economics reckons China’s true growth rate is lower than the official estimate or 6.7%.

He’s hopeful, though, that its economy is stabilising.

“As always, the GDP figures will be met with some scepticism. For our part we do think that China’s economy is expanding slower than the official figures suggest – our China Activity Proxy (CAP) points to growth of 4.1% y/y during the first two months of the year.

More positively though, our CAP looks to have at least stabilised last quarter, suggesting that policy easing has helped to avert a deeper downturn.

Craig James, chief economist at Commonwealth Securities in Sydney, says there will be relief in Australia, and beyond.

All the results are above market expectations, it shows the rebalancing of the economy is proceeding to plan. If anything, the figures are surprisingly high, so one wonders about the sustainability of the growth rate for future months. Hopefully we’ll see other economies around the world focus on lifting their own growth rates.”

Gerard Lyons, economic advisor to London mayor Boris Johnson, is also optimistic:

Asian stocks fall

Asian markets have fallen following the news that China’s annual growth rate has fallen to 6.7% in the last three months.

The Shanghai Composite index has dropped almost 0.5%, while Japan’s Topix is down 0.75%.

Not a major selloff; which is understandable, as the GDP figures are bang in line with forecasts.

Introduction: Chinese growth drops to 6.7%

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

If only everything in life was as reliable as China’s GDP.

Economists had expected the country’s growth rate to slow to 6.7% in the first quarter of this year. And sure enough, that’s exactly what the country’s statistics body has reported, down from 6.8% three months earlier.

At 6.7%, China is now growing at its slowest pace since the aftermath of the 2008 financial crisis.

Not unexpected, since Beijing’s attempts to shift away from manufacturing towards a more consumption-driven economy.

Encouragingly, separate data has shown that China’s economy was a little stronger than expected in March. Industrial production rose by 6.8%, up from 5.9%, while retail sales jumped by 10 .3%, up from 10.2%.

So analysts are hoping that China’s recent efforts to ward off a hard landing may be paying off.

Louis Kuijs of Oxford Economics said:

“Data from the investment-industry nexus show that the tried and tested stimulus measures of recent months have stirred up the physical part of the economy, especially towards the end of [the first quarter], while consumption remained relatively robust.”

However, some investors had hoped that growth might have been a little stronger.

Jasper Lawler of CMC Markets explains:

The data confounded some expectations that improved economic performance in February and March would offset the sharp slowdown seen during January.

We’ll be tracking the reaction to the Chinese growth data, and other key developments through the day...

Updated

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