Before we close up for the day, let’s take a look at the markets.
Wall Street is up, after tech stocks recovered from a sharp sell off and there were no nasty surprises in consumer spending data:
- Dow Jones: +0.4% at 21,370
- S&P 500: +0.4% at 2,428
- Nasdaq: +0.3% at 5,668
The picture in Europe is mixed, with the FTSE 100 slipping back into the red:
- FTSE 100: -0.03% at 7,348
- Germany’s DAX: -0.1% at 12,400
- France’s CAC: +0.2% at 5,164
- Italy’s FTSE MIB: -0.2% at 20,666
- Spain’s IBEX: +0.1% at 10,541
- Europe’s STOXX 600: +0.2% at 381
The pound has not been able to push back above $1.30, and is currently at $1.2982.
Thank you for all your comments, and please join us again next week. Have a great weekend. AM
Bank of Greece warns on risk of fourth bailout
The Bank of Greece has today raised the alarm over the country’s debt pile. Issuing a clarion call to the country’s creditors to deal with a debt mountain approaching 180% of GDP, the central bank warned that failure to address the problem could risk Greece ultimately needing a fourth bailout package when its current rescue programme ends in 2018. Lenders, it said, needed to spell out their commitment to medium-term debt relief imminently.
“Letting this pending matter drag on poses potentially serious risks,” the Bank said in its annual monetary policy report. “[It] might even foreshadow the need for a new financial assistance agreement post- 2018, something that neither Greece not its partners would want.”
Germany, the biggest contributor to the three bailouts the country has received since 2010, is opposed to even discussing the issue of some form of debt relief before federal elections in September. Greece’s debt pile, by far the highest in the EU, is currently in excess of €300bn.
The traditional relationship between the level of unemployment and inflation rate appears to have vanished:
Death of Philips curve: Core PCE, Fed's fav inflation measure, knocked down to 1.4% in May, further away from 2% tgt as wages up only 0.1%. pic.twitter.com/Jjm4wHROjs
— Holger Zschaepitz (@Schuldensuehner) June 30, 2017
US consumer spending edges up in May, inflation eases
US consumer spending rose by just 0.1% last month, a slowdown compared with growth of 0.2% in April and 0.6% in March.
Meanwhile consumer prices excluding food and energy were up 1.4% from a year earlier, compared with 1.5% in April according to the Commerce Department figures.
Paul Ashworth, chief US economist at Capital Economics, said that despite weaker spending and inflation, the US Federal Reserve was likely to press ahead with plans to raise interest rates.
Despite the modest 0.1% increase in real spending in May, real consumption growth is still on track to record a solid 3% annualised gain over the second quarter as a whole.
The fundamentals suggest that consumption growth should continue at a solid pace in the third quarter too. Real personal disposable income increased by a very strong 0.6% in May and, as a result, the saving rate rebounded to 5.5%, from 5.1%.
Although the real economy is doing well, Fed officials are concerned that isn’t translating into stronger inflationary pressures. Nevertheless, with the unemployment rate plummeting even further below its long-run sustainable level, we expect the Fed to push ahead with additional interest rate hikes.
Greek strike ends amid public health fears
Over in Greece, public sector workers are cleaning mountains of rubbish off the streets after a 12-day walk-out prompted health concerns. Helena Smith reports:
Authorities say it will take at least four days to remove the mounds of rotting rubbish that have accumulated during the strike. With the country in the grip of its first summer heat wave, and worries of a public health crisis, sanitation employees are expected to work around-the-clock.
Giorgos Broulias, an Athens vice mayor, told the Greek daily Kathimerini it would take even longer to disinfect urban centres where streets are now dotted with decomposing waste.
The 12-day walk-out had enraged citizens and the tourism sector – the engine of the Greek economy – with many denouncing the workers for holding the country hostage to their demands.
But the strike has also been successful for the municipal workers with the government eventually caving in to demands for short term contracts to be renewed. Prime minister Alexis Tsipras, who stepped in personally to break the deadlock, had argued that it was impossible to challenge the hiring freeze imposed on Greece by international creditors keeping the debt-stricken country afloat. The workers had demanded that thousands of jobs be turned into permanent posts.
The stand-off was the first major run-in between the leftist-led government and labour unions and while halted for now, it may well re-erupt if disgruntlement mounts among unionists over this week’s compromise.
Analysts at Oxford Economics believe markets have overreacted to comments made by Mark Carney on Wednesday, when he said “some removal of monetary stimulus is likely to become necessary” if certain conditions prevail.
Andrew Goodwin, lead economist, does not think the Bank’s MPC will be rushing to raise rates this year.
Markets have been very sensitive to commentary from MPC members, particularly Governor Mark Carney. But in our view, the sudden move to price a rate hike in late-2017 is a major overreaction which was not in keeping with the substance of the comments.
A reminder of those Carney comments:
FTSE 100 rises after UK data
The FSTE 100 has clawed back its earlier losses and is now rising, after UK GDP data prompted a dip in the pound.
Here are the latest scores across Europe:
- FTSE 100: +0.3% at 7,374
- Germany’s DAX: +0.3% at 12,448
- France’s CAC: +0.7% at 5,188
- Italy’s FTSE MIB: +0.4% at 20,786
- Spain’s IBEX: +0.4% at 10,575
- Europe’s STOXX 600: +0.5% at 383
Connor Campbell, financial analyst at Spreadex, gives his take:
The pound trickled back below $1.30 after that weak GDP was revealed, while against the euro, sterling saw its 0.3% rise shrink to 0.2%. This, combined with the halving of BP and Shell’s morning losses – the oil giants are now down 0.7% apiece after Brent Crude clawed its way back above $48 per barrel – allowed the FTSE to climb out of the red.
There was a similar situation in the eurozone as the DAX and CAC jumped 0.3% and 0.7% respectively. That’s because the euro has lost some of its lustre, slipping 0.2% against both the dollar and the pound. Despite the region-wide inflation figure arriving at a [higher] than expected 1.3% (the more important core reading also beat estimates at 1.1%), that is still a decline month-on-month, damaging the currency’s recently renewed hopes of an ECB rate hike.
Here is the full story on the UK growth figures from Larry Elliott, the Guardian’s economics editor:
Eurozone inflation falls to 1.3% in June
Eurozone inflation eased to 1.3% June from 1.4% in May because of weaker energy price rises according to a flash estimate from the Eurostat statistics office.
Economists had been expecting a bigger fall in the headline rate to 1.2%.
Meanwhile core inflation - which strips out volatile items such as energy and food - actually rose to 1.1% in June from 0.9% in May.
Jennifer McKeown, chief European economist at Capital Economists, said that despite the June rise in core inflation, the European Central Bank was unlikely to cut interest rates any time soon.
The data will add to the ECB’s sense that reflationary pressures are appearing. But core inflation is still well below the Bank’s near-2% medium-term target for the headline rate, and its rise has been concentrated in Germany. The Bank has repeatedly stressed that it will wait for core inflation to be on a clear upward path throughout the euro-zone before raising interest rates and we suspect that this is still some way off.
The health of the consumer sector combined with the slight rise in core inflation reinforces our view that the ECB will announce at its September meeting that it plans to taper its asset purchases from January 2018. But we doubt that it will act before then and expect it to keep stressing that interest rate hikes are a distant prospect.
UK services grows 0.2% in April
Scotiabank’s Alan Clarke says the chance of an August rate hike is still on a knife-edge, after the ONS said services output grew by 0.2% in April (in line with expectations).
The services sector is crucial to the growth outlook, accounting for more than three quarters of the UK economy according to the ONS.
Clarke says growth in April puts the services sector on track to grow 0.4% in the second quarter overall, as predicted by the Bank of England.
Unfortunately, that is going to leave us in agony for another month leading up to August’s Super Thursday [when the Bank will announce its next rates decision and update forecasts].
Growth will probably be in line with where the Bank expected, but their inflation forecast will be shunted up. We are probably right on the borderline for a hike.
The squeeze on UK household incomes is a concern for the wider growth outlook, according to Howard Archer, chief economic advisor to the EY Item forecasting group.
Consumer spending growth in the first quarter was supported by the household savings ratio falling to a record low of 1.7% from the previous low of 3.3% in the fourth quarter of 2016.
This is not sustainable and fuels the belief that weakened consumer spending is likely to hold back the economy over the coming months.
Archer believes that while there might be a bounce in GDP growth in the second quarter - from 0.2% in the first - the second half of the year will be more challenging for the UK economy.
TUC sounds alarm on living standards crisis
Frances O’Grady, general secretary of the TUC, says the drop in the saving ratio to a record low is a big concern.
These figures make for grim reading. People raiding their piggy banks is bad news for working people and the economy.
But with wages falling as living costs rise, many families are having to run down their savings or rely on credit cards and loans to get through the month.
With household debt now at crisis levels, we urgently need to create better paid jobs. And the government must do its part by lifting the unfair pay restrictions on public sector workers.
Ministers need to get their act together quickly. It looks like we are at the start of another living standards crisis.
Updated
UK GDP: Longest decline in disposable income since 1970s
The ONS data has provided fresh evidence that UK consumers are suffering from an income squeeze and declining living standards.
Household disposable income, adjusted for inflation, fell for the third quarter in a row between January and March, which was the worst run since the 1970s.
It dragged the household saving ratio to new record low of 1.7%, as consumers grappling with rising prices and weak pay growth run down their savings.
The ONS said the drop in the savings ratio was partly down to tax payments, but added “the underlying trend is downwards, reflecting relatively strong consumption volumes, increasing consumer prices and subdued wage growth.”
The dark blue line below tells the story of what is happening to the saving ratio:
The pound has dipped below $1.30 following the GDP data.
It is currently down 0.1% at $1.2984.
Darren Morgan, head of GDP at the Office for National Statistics has commented on the Q1 growth update:
GDP growth for the first three months of 2017 remained unrevised at 0.2%. Growth was driven by business services and construction, partially offset by declines in some consumer-focused industries, such as retail sales and accommodation.
The saving ratio has fallen again this quarter to a new record low, partly as a result of higher tax payments reducing disposable income. Some of the fall could be as a result of the timing of those payments, but the underlying trend is for a continued fall in the saving ratio.
Services output in April was up slightly on the month, with the largest contribution to the month-on-month growth coming from the retail trade.
Breaking: UK growth confirmed at 0.2%
The Office for National Statistics has confirmed the UK economy grew by just 0.2% in the first quarter of 2017, following 0.7% growth in the previous quarter.
More soon...
UK rates: '50-50 chance of an August hike'
The Bank of England’s August decision on interest rates is on a knife edge according to Scotiabank economist, Alan Clarke.
He says much will be dependent on how the crucial services sector performed in April. He calculates that a 0.2% increase in services output would put in on track for a 0.4% increase over the second quarter as a whole...
That would meet the Bank of England’s own expectation and make an August rate hike a 50-50 bet.
Any reading above 0.2% in services output in April would make a rate hike in August more likely than not,while a reading below 0.2% would probably rule out a rate hike.
The services data is due at 9.30 so let’s see what it brings.
Updated
George Osborne was within weeks of scrapping the penny
George Osborne came within weeks of scrapping the 1p and 2p pieces, the Guardian has been told.
The former chancellor of the exchequer apparently wanted to make the change in late 2015, after winning the general election, but was stopped by David Cameron who feared it would reflect badly the Tories.
Read our full story here:
Paul Donovan, global chief economist at UBS, is taking a relaxed approach to the recent hints from central bankers that ultra loose monetary policy might be coming to an end sooner rather than later.
Relaxed in a cosy Sunday evening kind of way. Think feet up, Downtown Abbey on the box.
Donovan says:
Central bank comments have been correlated (but almost certainly not coordinated) – as economist-policymakers all react logically to similar economic circumstances.
Policy tightening is to be expected – but it will be genteel, tasteful tightening (the economic equivalent of an episode of Downton Abbey).
Updated
FTSE falls in early trading
The FTSE 100 is taking the hit from the (relative) strength of the pound this morning, down 26 points or 0.4% at 7,324.
It is being dragged lower by commodity-based stocks, despite a rise in Brent crude oil prices this morning (up 0.6% at $47.70 a barrel).
Elsewhere in Europe:
- Germany’s DAX: -0.2% at 12,395
- France’s CAC: +0.1% at 5,160
- Italy’s FTSE MIB: +0.2% at 20,746
- Spain’s IBEX: +0.1% at 10,544
- Europe’s STOXX 600: -0.02% at 381
UK consumers are gloomiest since Brexit vote
UK consumer confidence dropped to the lowest level since the Brexit vote in June as people become increasingly concerned about what the year ahead will bring.
The monthly snapshot of consumer sentiment from GfK dropped five points to -10, which was the lowest since July last year, a month after the EU referendum.
The survey covered the period before and after the general election, and signalled growing unease among consumers about their personal financial situation and the outlook for the wider economy.
Joe Staton, head of market dynamics at GfK, said people were more reluctant to spend money on non essential items.
All this concern will worry the UK’s retailers, with this month’s plunge in the major purchase index (down eight points) reflecting our increased caution over non-food spending and our softening appetite for debt.
Strong consumer spending has propped up the economy since last June but now the twin pressures of higher prices and sluggish wage growth are squeezing household finances and adding to widespread fears of a Brexit- induced economic slowdown.
Read our full story on the survey:
Updated
The agenda: pound steadies above $1.30 ahead of UK GDP
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
The pound is trading at $1.3017 this morning, its highest level in six weeks, as investors bring forward their expectations of a rise in interest rates.
There has been a shift in thinking in recent days after both Mark Carney and Mario Draghi appeared to tweak their language to suggest that policy tightening might not be as far off as markets previously anticipated.
Their comments have boosted both the pound and the euro, to the detriment of equities, which suffered fairly hefty losses on both sides of the Atlantic on Thursday.
European Closing Prices:#FTSE 7350.32 -0.51%#DAX 12416.19 -1.83%#CAC 5154.35 -1.88%#MIB 20704.65 -1.63%#IBEX 10531.1 -1.60%
— IGSquawk (@IGSquawk) June 29, 2017
At 9.30 the ONS will publish its third and final estimate of growth in the first quarter of 2017. It is expected to confirm the economy grew by 0.2% in the first three months of the year, after a surprise downgrade from 0.3% at the time of the second estimate.
Growth slowed in the first quarter as rising inflation in the wake of the Brexit vote took its toll on consumer spending.
Other key data today includes a flash estimate of eurozone inflation in June at 10am, which could provide clues about the ECB’s next move. Economists are predicting a fall in the headline rate to 1.2% from 1.4% in May.
Updated
