European markets edge lower
Despite an opening fall on Wall Street after two trading days of recovery, markets in Europe had a fairly calm session.
With the euro gaining some ground against a weaker dollar, they ended slightly down on the day but there was by no means any sustained burst of selling. Italy was among the worst performers, as investors started to fret about the country’s forthcoming election.
In the UK investors shrugged off the higher than expected inflation figures, which gave some credence of the Bank of England’s hints of rising interest rates. In the US, investors decided to take some profits ahead of the key inflation figures due on Wednesday. The closing scores showed:
- The FTSE 100 finished 9.05 points or 0.13% lower at 7168.01
- Germany’s Dax dipped 0.7% to 12,196.50
- France’s Cac closed down 0.6% at 5109.24
- italy’s FTSE MIB fell 1.35% to 22,034.42
- Spain’s Ibex ended 1.23% lower at 9650.7
- In Greece, the Athens market edged down 0.2% to 821.85
On Wall Street, the Dow Jones Industrial Average is currently down 111 points or 0.45%.
On that note, it’s time to close for the day. Thanks for all your comments, and we’ll be back tomorrow.
Total household debt increased 1.5% to 13.15tn in 2017Q4, marking 5th consecutive year of positive annual growth → https://t.co/yybhzpbMuF pic.twitter.com/6vulYsaRCQ
— New York Fed (@NewYorkFed) February 13, 2018
As US interest rates do go up, it will put more pressure on households who have borrowed heavily.
And the latest figures show an increase in debt, up $193bill to $13.15tn in the three months to December compared to the previous quarter. The figure was $402bn higher than the same time in 2016. The increase was driven by a rise in mortgage loans.
The markets have dealt fairly well with the stronger than expected UK inflation figures, says Connor Campbell, financial analyst at Spreadex:
Though the global indices are broadly negative, the markets haven’t coped too badly with a pretty damn hawkish UK CPI reading. It’ll be interesting to see if investors have the same kind of reaction to tomorrow’s US figures – after all, it was fears that the country’s inflation would continue to creep higher that helped spark the recent market bloodbath.
Meanwhile in Cyprus it has been announced that finance minister Harris Georgiades, much plaudited for masterminding the island’s economic recovery, will retain his position in a new government unveiled today. Helena Smith reports:
The news will go down well in Brussels. Georgiades is feted for almost single handedly overseeing Cyprus’ extraordinary return to growth after it was bailed out to the tune of €10bn during its banking crisis five years ago. The island, which exited its bailout programme ahead of schedule in March 2016 following stringent implementation of reforms, was one of the fastest growing economies in the euro area with a growth rate of 3.8 % in 2017.
At 7.4 % it also registered the biggest year-on-year drop in government debt.
But challenges still lie ahead: the island has one of the highest bank stocks of non-performing loans which, increasingly, has been cause for alarm in Brussels. President Nicos Anastasiades, re-elected to a second five year term in office ten days ago, may well have held onto him in the knowledge that the 45-year-old economist will rise to the challenge of restructuring the bad debt.
Fed "remains alert" to risks - new chair Powell
New Federal Reserve chair Jerome Powell has said the global economy has recovered strongly since the financial crisis, but the bank remained alert to any risks to stability.
In opening remarks at his swearing in ceremony, he said:
We are in the process of gradually normalizing both interest rate policy and our balance sheet with a view to extending the recovery and sustaining the pursuit of our objectives. We will also preserve the essential gains in financial regulation while seeking to ensure that our policies are as efficient as possible. We will remain alert to any developing risks to financial stability.
Updated
European markets appear relatively untroubled by the falls in the US, which seem fairly contained so far.
The FTSE 100 is off its best levels and is virtually flat on the day, but Germany’s Dax and France’s Cac have recovered from the worst of their earlier losses and around both down around 0.3%.
Wall Street opens lower
After two days of recovery, US markets are falling back again at the open.
The Dow Jones Industrial Average is down 95 points or 0.4% while the S&P 500 and Nasdaq Composite both opened around 0.5% lower.
The dips come ahead of consumer price data due on Wednesday, which will reinforce talk of interest rate rises if the figures come in stronger than expected. David Morrison, senior market strategist at GKFX, said:
Headline CPI (including food and energy) came in at +2.2% in November but slipped back to 2.1% in December. Investors are hoping for further evidence that inflation has topped out for now. If so, and we see another modest reduction to 2.0% then this should be enough to push bond yields down and equities up.
But in the current environment we can expect US Treasury yields to soar if January’s number were to come in at 2.1% or higher. This would be a problem as the key 10-year Treasury note yield is dangerously close to testing 3.0% - a four-year high, increasing fears that the 35-year bond bull market is finally over. This would signal higher borrowing costs to come which would not be good for global equities.
Earlier Cleveland Federal Reserve president Loretta Mester said the recent stock market sell-off would not damage the economy’s strong prospects. She added that inflation was expected to rise towards the Fed’s 2% target over time, but not so fast the Fed needed to increase rates more quickly.
The pound has come off its best levels against the dollar.
After hitting a high of $1.3923 following the stronger than expected inflation figures, it has now drifted back to $1.3874, a 0.3% gain on the day. Despite the unchanged inflation figure of 3% - rather than the expected dip - an imminent UK interest rate rise is not necessarily a done deal, says Forex.com market analyst Fawad Razaqzada:
The pound staged a small rally after this morning’s publication of the latest UK inflation figures, before giving back a sizeable chunk of its gains against the dollar. It actually turned negative against the euro and yen, though it was holding its own better against commodity currencies...Overall inflation rose more than expected, and the pound’s initial response was a swift rally. However sterling came off its best levels around midday as traders who bought the news, took profit.
It is worth noting that the Bank of England will probably not be surprised by the outcome of today’s inflation figures after it predicted that CPI will remain elevated and that it intends to combat this by raising interest rates earlier and faster than previously expected. But is the BoE correct in its projections? Can they be trusted?
While inflation could easily rise further, one has to consider the alternative scenario too. After all, the impact of sterling’s post declines has fallen away. What’s more, crude oil prices have been falling of late, with both Brent and WTI recently turning negative on the year. If oil prices fall further then this may be reflected in lower fuel and energy prices, and hopefully lower inflation. Given the ongoing Brexit uncertainty, the BoE would favour not having to hike rates if inflation were to fall back. So, an imminent rate hike is not a done deal by any means.
Still, the BoE has definitely dropped its dovish bias and the next change in interest rates will most likely be a raise than a cut. So, there is a possibility we may see the pound drift higher in the coming months. If sterling were to shine, its best bet would be against a non-US dollar currency, as the greenback has been on a good run of form against most currencies of late.
One of the concerns driving the recent turmoil in the markets was a rise in inflation and the subsequent belief that central banks might start raising interests rates more quickly than expected.
But Capital Economics believes that inflation may not rise very far. Chief global economist Andrew Kenningham said:
For a start, underlying inflation has remained low and stable recently. Core inflation in the OECD was 1.9% in December. Moreover, it has been between 1.5% and 2.0% for the past six years, and 1.1% and 2.5% since 2003. The stability of underlying inflation for most of this century suggests that only a huge economic shock, or major structural change, would dislodge it far from the typical 2% target.
Of course, the average inflation rate can mask big variations between countries. But even in economies which are closest to full employment, inflation has remained low. In Japan, where the unemployment rate is at its lowest level since 1993, inflation excluding fresh food and energy is only 0.3%. And in Germany, the unemployment rate is at its lowest since 1980 but core inflation is just 1.5%.
Second, wage inflation is not rising very rapidly. We do expect average earnings growth in the US to trend up this year but the jump to 2.9% y/y in January, which triggered the market sell-off, was exacerbated by temporary weather patterns and may be reversed. Fears that trade union demands will push Germany’s inflation rate up sharply look misplaced. (See our European Economic Update, “German pay demands won’t see inflation surge”, 30th January.) And elsewhere in the euro-zone, wage pressures are much weaker.
Third, inflation expectations remain low. For the euro-zone and the US, measures of expected inflation between five and ten years in the future derived from financial markets are still below their post-crisis average. And while the University of Michigan measure of household inflation expectations in the US edged up to 2.5% in January, this is still below its average level since the financial crisis.
Finally, the inflationary impact of higher oil prices is likely to fade in the coming months. Indeed, if we are right in expecting Brent crude prices to decline, energy price inflation will turn negative next year.
He concludes:
The big picture is that global inflation is edging up, not taking off. The upshot is that while interest rates are likely to rise gradually over the next year or two, there is no need to panic. We expect government bond yields to rise, but remain very low by historical standards, with ten-year US Treasury yields, for example, unlikely to get much higher than 3% by the end of this year.
If you’re just tuning in, here’s our news story on today’s inflation figures:
UK shares up....but US may fall
Britain’s stock market is holding onto its earlier gains, and so is the pound.
The FTSE 100 is currently up 20 points, or 0.3%, on top of Monday’s 1.2% jump.
That’s despite the pound gaining half a cent against the US dollar following the inflation figures (a strong sterling is usually bad for shares).
Mining companies are leading the rally, as the weaker US dollar pushes up commodity prices, along with holiday companies after today’s decent results from TUI.
This follows a strong day on Wall Street yesterday, and gains across most of Asia earlier on Tuesday.
However, European stocks are being dragged down by the strengthening euro (the dollar is getting a kicking generally today).
The US stock market opens in just over an hour, and is expected to dip....
US Opening Calls:#DOW 24525 -0.31%#SPX 2649 -0.25%#NASDAQ 6509 -0.23%#IGOpeningCall
— IGSquawk (@IGSquawk) February 13, 2018
In other news (which I missed earlier), UK house prices are rising faster than wages or the headline inflation rate.
Average house prices in the UK rose by 5.2% in the year to December 2017, up from 5.0% in November 2017. That’s twice as fast as earnings, underlining how hard it is to get onto the property ladder (even though price rises have slowed).
London was the slowest part of the housing market, with prices only rising by 2.5% over the last year.
However, that still leaves the average house in the capital at £484,000 - more than double the UK average of £227,000.
Paul Mumford, fund manager at Cavendish Asset Management, is hopeful that inflation might fall this month:
He explains:
January’s figures exclude the full effect of the recent market shake out, a subsequent decline in oil prices and weaker sterling against the dollar. It could easily be that inflation drops back in February, something that would take the pressure off of rates.
Fears over looming UK interest rates hike
Amit Kara, head of UK macroeconomic forecasting at thinktank NIESR, predicts that UK interest rates will rise in May (probably from 0.5% to 0.75%).....and keep rising over the next couple of years:
Kara says:
UK January CPI inflation was unchanged at 3.0%. Inflation has likely peaked and is set to return to the target rate of 2.0% over the next eight quarters.
Our forecast assumes a rate increase by the MPC in May and every 6 months after that until it reaches 2%.”
In historical terms, that would be a relatively low cost of borrowing (UK interest rates averaged 5% before the financial crisis). But it could still put some families in a very tough spot - especially as wages are being eroded by inflation
Jane Tully, director of external affairs at the Money Advice Trust, the charity that runs National Debtline, is worried, saying:
Inflation remains high at three percent with wages not keeping pace, and for the thousands of people we hear from each week at National Debtline, meeting day-to-day costs, such as energy, water and council tax continues to be a challenge.
“Recent research shows that as many as half of all low income households are already struggling. We are concerned that the slightest change in circumstances, such as a further interest rate rise, could push many of these households into further difficulty.
At 3%, the UK’s consumer prices index is close to the six-year high of 3.1% struck in November.
And inflation is becoming an increasingly home-grown problem, rather than simply being driven by higher import costs.
Stephen Clarke, Senior Economic Analyst at the Resolution Foundation, explains:
“Contrary to expectations, inflation held steady on last month, meaning households will have to wait until later in 2018 for expected falls to materialise.
“But the drivers of inflation are changing. While the price of oil is something to watch in future as it pushes up input prices for UK manufacturers, the effect of the post-Brexit pound devaluation is waning slightly with items that are less import-intensive driving the recent rise ininflation.
Prices of recreational and cultural goods, such as trips to the cinema, rose at their fastest rate for 8 years.
“While Brexit continues to dominate the headlines, looking forward we need to be paying more attention to domestic cost pressures.”
Here’s a handy breakdown of the factors pushing inflation up:
[Eagle-eyed readers will note that Resolution are using ‘CPIH’, a measure of inflation which includes owner occupiers’ housing costs. It stuck at 2.7% in January]
Updated
PwC: The squeeze on real earnings will continue
Bad news for UK households: economists expect UK inflation to only fall slowly during 2018.
John Hawksworth, chief economist at PwC, fears that the real wage squeeze will continue for most of this year:
“Inflation remained stuck at 3% in January, still well above earnings growth.
“We do expect inflation to fall back gradually over the course of the year, but this will be a slow process given that global commodity prices have generally been on an upward trend in recent months. The squeeze on real earnings may therefore persist until late in 2018, which will continue to dampen consumer spending growth this year.”
Inflation has been running ahead of wages since the start of 2017, as this chart shows:
If wages do start rising, the Bank of England will face more pressure to raise interest rates. That would be a blow to indebted families who are already struggling to handle their debts.
Ben Brettell, senior economist at Hargreaves Lansdown, says:
Economists have been expecting inflation to gradually fall back to the 2% target over the coming year or so, starting today with a drop to 2.9%.
But in fact the rate remained at 3.0%, with price rises driven by clothing, footwear and recreational goods/services. Inflation’s now been above target for 12 straight months.
This adds further weight to the case for higher interest rates sooner rather than later. Indeed Bank of England policymakers said last week they’ll try and bring inflation back to target more quickly than previously expected, which means rates could rise faster and further than anticipated.
The news that recreational costs (such as zoo and parks) prevented inflation falling last month has caused a bit of a stir in the City.
James Smith of ING bank predicts that this trend won’t last:
Core inflation rose more than expected to 2.7%, as recreation prices fell considerably less rapidly than would be seasonally expected at the start of the year. Some of this is reportedly down to entrance fees at zoos and gardens, but given that much of the recreation category (things like computers and TVs) is fairly sterling-sensitive, we wouldn’t expect this resilience to last. That’s because the sharp fall in the pound after the Brexit vote has now more-or-less fed through to consumer prices and the rate of pass-through is starting to ease.
The recent sterling strength will only accelerate this process.
Roar data: UK inflation sticks at 3%, thanks in part to zoos https://t.co/tJ2lmWRIa6 pic.twitter.com/CLFjx6aArw
— fastFT (@fastFT) February 13, 2018
CPI's above two
— WorldFirst (@World_First) February 13, 2018
two
two
Dearer to see the gnu
gnu
gnu https://t.co/f2FyhKqHYc
Animal Spirits? UK inflation holds at 3% as Zoo entry prices remain elephantly high ...
— Blockchain Baccardax (@mdbaccardax) February 13, 2018
Encouragingly for consumers, the prices charged by UK factories rose at a slower rate in January.
The annual producer price inflation rate dipped to 4.7%, down from 5.4% in December. That suggests that the impact of the pound’s Brexit-vote slump may be fading.
The ONS says:
“Factory goods price inflation continued to slow, with food prices falling in January. The growth in the cost of raw materials also slowed, with the prices of some imported materials falling.”
Real wages are still falling
With inflation stuck at 3%, British workers are still suffering a cost of living squeeze.
Average wages only rose by 2.4% per year in the three months to November (the most recent figures), or by 2.5% if you include bonuses.
So in practice, wages are shrinking by around 0.5% to 0.6%.
TUC General Secretary Frances O’Grady says the government needs to act - by raising wages for the lowest paid, and pumping more money into infrastructure projects.
She warns:
“Inflation is still outpacing wages and working people’s living standards are falling fast. The government can’t keep on standing by and doing nothing. A plan to boost wages is urgently needed.
“Public sector workers must get a proper pay rise. The minimum wage must go up to £10 as quickly as possible. And the Chancellor must boost infrastructure spending in his spring statement – this would help counter the loss of confidence in the economy caused by Brexit uncertainty.”
The Treasury, though, tweets that it’s doing its bit...
New stats today show CPI #inflation was 3% in January. We’re helping families with the cost of living by ✂️ cutting taxes and 💷 increasing the National Living Wage 👇 pic.twitter.com/0Dxt2liIOj
— HM Treasury (@hmtreasury) February 13, 2018
Could inflation force an interest rate hike in May?
The Bank of England is charged with keeping Britain’s inflation rate close to 2%, so today’s data show it has a lot more work to do.
Dennis de Jong, managing director at UFX.com, says:
“There is no breathing space for Mark Carney and the Bank of England who continue to battle with high inflation, though at least that figure has steadied and not risen further.
“Despite many expecting the figure to drop, inflation remains at 3%, sitting way above the Bank’s 2% target, though policy makers will at least be pleased to see producer prices fall back.
So could the Bank raise interest rates soon, as it hinted last week?
Jeremy Cook, chief economist at WorldFirst, says a May interest rate hike is certainly possible - although he thinks Carney and co will hold off....
Today’s number will keep the May Bank of England meeting ‘in play’ for an interest rate hike.
We think that this is still too early for a hike as caveats on Brexit and the sustainability of growth remain but as we heard last Thursday, the sticky inflation picture is putting gradual but sooner increases in the base rate into more people’s central scenarios of what happens in the UK in 2018.”
The pound has jumped on the back of the news that Britain’s inflation rate was higher than expected last month.
Sterling gained half a cent to $1.39, as traders calculated that it makes an early interest rate rise more likely.
Pound briefly rises to $1.3904 after U.K. inflation stays at 3% in January vs. 2.9% estimate pic.twitter.com/ylBpQFUit4
— Carla Mozee (@MWMozee) February 13, 2018
Inflation: the key charts
UK food prices fell between December and January (which makes sense, as people tighten their belts after the Christmas festivities).
The ONS says:
This effect came from prices for a wide range of types of food and drink, with the largest contribution coming from a fall in meat prices.
However, prices are still higher than a year ago, as these charts show:
ONS: Zoos kept inflation at 3%
The Office for National Statistics says that petrol prices had a downward impact on inflation....but recreational activities kept the cost of living up.
It says:
The largest downward contribution to change in the rate came from prices for motor fuels, which rose by less than they did a year ago.
The main upward effect came from prices for a range of recreational and cultural goods and services, in particular, admissions to attractions such as zoos and gardens, for which prices fell by less than they did a year ago.
Updated
UK inflation sticks at 3%
Newsflash: Britain’s inflation rate remained at 3% in January.
That’s higher than the 2.9% that the City had expected, and means the cost of living squeeze continues.
More to follow...
The MSCI world stock market index has recovered a small slice of last week’s slump:
That’s thanks to last night’s rally on Wall Street, followed by the gains in most of Asia today.
The US dollar has weakened after the US government outlined its 2019 budget last night - showing whopping deficits in the years ahead.
Under Donald Trump’s new $4.4 trillion budget plan, the US federal deficit would hit around $1 trillion next year - even though he’s also aiming to cut welfare spending.
And looking further ahead, there’s no expectation of a balanced budget in the next decade, due to Trump tax cuts and his plans to to hike military spending.
This splurge of borrowing - if approved by Congress - would push America’s national debt to fresh record highs.
Here’s Associated Press’s take:
President Donald Trump’s budget for the upcoming fiscal year calls for steep cuts to America’s social safety net and mounting spending on the military.
That combination in the $4.4 trn budget plan submitted Monday to Congress steps far back from Trump’s promises last year to balance the federal budget. If enacted, his plan would establish annual $1 trillion-plus deficits, a major reversal for Republicans who objected to increased spending during the Obama administration.
Trump’s budget revives his calls for big cuts to domestic programs that benefit the poor and middle class, such as food stamps, housing subsidies and student loans. Retirement benefits would remain mostly untouched, as Trump has pledged, though Medicare providers would absorb about $500bn in cuts a nearly 6 percent reduction.
European stock markets are being held back today by the weakness of the US dollar.
The euro has gained 0.3% against the US dollar to $1.232, which (as in Japan) has a negative impact on shares.
So while London’s market is slightly higher, the main European indices are dipping a little.
Updated
Investec economist Victoria Clarke predicts that Britain’s inflation rate held steady at 3% las month - dashing hopes of a fall to 2.9%
She writes:
We expect CPI inflation to trend lower over the year ahead, although it may be a slow creep. Indeed, we are pencilling in a steady 3.0% in January.
Clarke reckons that air fares fell less in January than a year ago; meaning they applied “some upward pressure” to the 12-month inflation rate.
But food and fuel may have risen slower, she adds:
We expect this to be more than offset by drags from elsewhere in the wider transport category, given that the rise in petrol prices looks set to be notably less than in January 2017. Another negative influence is the food price category.
Britain’s stock market is gaining a little ground in early trading.
FTSE 100 has risen by 17 points at the open, sending the blue-chip index up 0.22% to 7191.
Holiday group TUI is the biggest riser, up 2.5%, after reporting an 8% rise in turnover in the last quarter and a smaller net loss.
TUI says sales of summer holidays for 2018 has “started well”.
Demand remains strong for the Western Mediterranean and Caribbean (despite hurricane disruption and reflecting demand from North America) and continues to improve for Turkey and North Africa.
Japan’s stock market isn’t coming to the party, though.
The Nikkei fell 0.7% today to 21,244.68. The selloff came as the yen hit a five-month high against the US dollar, which hurts Japanese exporters.
Analyst: The correction isn't over
China’s stock market helped led the recovery in Asia today, with South Korea and Hong Kong close behind.
The benchmark Chinese index, the CSI 300, has gained almost 1.2% in late trading.
South Korea’s Kospi 200 is up 0.9%, the Hong Kong Hang Seng has gained 1.3%. while Australia is up a more modest 0.6%.
But this doesn’t mean the recent phase of volatility is over, as Konstantinos Anthis of ADS Securities explains:
What we’re seeing right now is a continuation from Friday’s bullish session that allowed the global stock markets to breathe a bit easier and with bond yields retreating slightly from their recent highs equity traders are looking for bargains.
Nevertheless, it is still too early to suggest that the correction that we’ve witnessed since the beginning of the month is over.
The agenda: Markets steady; UK inflation coming up
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
After last week’s turmoil, a degree of calm has returned to the financial world.
Most Asian stock markets are rallying today, after a strong performance on Wall Street last night which saw the Dow jumping 410 points.
With fears of a crash fading, investors can indulge in one of their favourite pastimes - trying to bag a bargain.
As Jim Fong, portfolio manager at Oceanwide Asset Management Ltd, puts it: (via Marketwatch)
“It’s a golden opportunity to accumulate some good, quality stocks.
Asia's stocks are generally higher, with signs that markets are becoming more stable https://t.co/PcCK453kP3 pic.twitter.com/TJwC6ALRaZ
— Bloomberg (@business) February 13, 2018
European markets are expected to open calmly; a change for traders who have watched the major indices swing violently in recent days.
Jasper Lawler of London Capital Group explains:
Overnight the Dow had its best session in two years jumping over 400 points. It’s fair to say that whilst volatility has eased up from the 1000 plus swings last week, these are still much more volatile sessions than what we are used to.
The impressive rally on Wall Street spilled across into Asian markets, which posted healthy gains across the session. Unsurprisingly European bourses look set to follow suit and push on higher at the open.
The Dow made 11 all-time closing highs during the first 18 days of the year, and investors responded by pouring a record $58 billion into stocks. The V-top caught investors off guard and sent them diving for the exits https://t.co/CUxtVPcPAc pic.twitter.com/fuXDECI6Zq
— MarketWatch (@MarketWatch) February 13, 2018
Here’s the opening calls for Europe’s major stock markets:
-
UK FTSE to open 7 points higher at 7184
- German DAX to open 26 points higher at 12,308
- French CAC to open 12 points higher at 5152
But the mood in the City could change when the latest UK inflation figures are released this morning.
The Consumer Prices Index is expected to fall to 2.9% in January, down from December’s 3%. But, given the strength of the oil price, some City economists doubt whether inflation has started falling yet.
Royal Bank of Canada say:
With the oil price having risen significantly in recent months it now looks more likely that CPI inflation will be relatively slow to fall in 2018 even though the impact of previous exchange rate depreciation starts to fade.
A high inflation reading puts more pressure on the Bank of England to raise interest rates soon - as it threatened last week.
Here’s the agenda
- 9.30am GMT: UK Consumer Price Index figures for January
- 9.30am GMT: UK house price data for December
Updated
