Blogposts

 

Powered by Guardian.co.ukThis article titled “Bank of England governor has ‘no regrets’ over interest rates – business live” was written by Graeme Wearden, for theguardian.com on Thursday 5th November 2015 14.52 UTC

Martin Beck, senior economic advisor to the EY ITEM Club, agrees that the Bank was more downbeat than expected:

“While we expected a downgrade to the MPC’s growth and inflation forecasts in November’s Inflation Report, the MPC’s latest assessment of the economy struck an unexpectedly dovish tone for interest rates.

“Based on market expectations that the first interest rate rise won’t happen until Q1 2017, the MPC forecast that inflation would only slightly exceed the 2% target by that date. This implies the Committee’s view of the appropriate timing of a rate rise is roughly in line with the market consensus.

Bank of England

Updated

The Institute of Directors has hit out at the Bank of England for playing a “dangerous game” by leaving interest rates so low.

Chief economist James Sproule, who has been calling in vain for a rate hike, says:

“Caution won out again at the Bank of England today, with the Monetary Policy Committee spooked by a worsening outlook for global growth. But, with strong consumer confidence and wages on the up, the arguments against raising interest rates from the current exceptionally low level are falling away.”

Sproule argues that the Bank is storing up trouble; asset prices are being forced up, consumers are putting on more debt, and capital is being misallocated.

And so it begins…

Savers should brace for interest rates to stay at record lows until perhaps 2017, says Maike Currie, associate investment director at Fidelity International.

“Super Thursday has quickly turned into Superfluous Thursday.

It’s now 80 months and counting since the Bank of England has failed to push the button on rising interest rates with its surprisingly dovish stance today….

It leaves investors and retirees facing the ongoing conundrum of finding a home for their money in an environment of low inflation and low interest rates – a backdrop which typically makes for measly returns

Updated

Kallum Pickering of Berenberg Bank has kindly sent a chart, showing how the BoE cut its growth forecasts today:

BoE forecasts

The FT’s Chris Giles reckons Carney attempted a repair job during today’s press conference, which was more hawkish than the actual Inflation Report.

He didn’t row too far – the pound is still down heavily.

Updated

The pound has been thumped against all major currencies since the Bank of England unleashed its unexpectedly dovish inflation report.

That highlights that investors expect rates to remain at record lows for at least another year.

If this was a “Super Thursday” club night*, you’d probably be entitled to a refund.

* – these still exist, right?

Press conference over. Hacks scramble back to base, Mark Carney and colleagues return to protecting the monetary affair of the nation.

I’ll pull some reaction together now.

Carney: We could cut rates (but we didn’t discuss it)

Business Insider’s Mike Bird asks Carney about the possibility that UK interest rates could be lowered from 0.5%.

He cites recent comments from ECB chief Mario Draghi on this issue of zero interest-rate policy, suggesting that borrowing costs could go lower than previously thought.

Carney replies that the MPC did not consider easing monetary policy today.

But it could potentially lower borrowing costs if needed.

Reuters snapped the key points:

  • BANK OF ENGLAND’S CARNEY – IF WE EVER NEEDED TO, WE COULD CUT RATES BELOW CURRENT LEVEL
  • BANK OF ENGLAND’S CARNEY – FACT WE ARE NOT AT ZERO LOWER BOUND WEAKENS ARGUMENT FOR NOT RAISING INTEREST RATES

That seems to have knocked the pound, it’s down 1.5 cents or 1% at $1.5230.

Mind you, that could be the impact of Mike’s wardrobe….

Q: What discussions has the BoE had with other central banks about the possibility that monetary policy diverges next year, with the UK and US may raising rates while the eurozone and Japan could get more stimulus?

It feels like we meet almost continually, says Carney wearily. We’ll be meeting again next week in Basel.

We don’t sit there saying ‘here’s what I told that press conference but here’s what we really think’, he promises

And he also insists that monetary policy isn’t secretly agreed in advance:

There is no major central bank that knows what it is going to do at its next meeting.

They all have frameworks and objectives, and the factors that influence its decisions.

And in all Carney’s years as a G7 central bank governor in Canada and the UK, this has only changed once:

The only time that was different was the depth of 2008, when we agreed to do certain things.

That was the wild days of October 2008, when the world banks announced co-ordinated rate cuts to try to calm the global panic.

Updated

Yield curves (which show investors’ expectations of rate hikes) have not matched up to the Bank’s own forecasts. So how worried is the governor that he’s losing credibility in the markets?

Carney insists that he’s “not at all” concerned about this. One can read too much into market yield curves.

Q: Some of this summer’s market mayhem was caused by speculation that US interest rates might rise soon, so are central banks making the situation worse?

Deputy governor Minouche Shafik agrees that there was significant volatility this summer – with the VIX index (which measures this) hitting its highest level since 2011.

But volatility has dropped back since, suggesting the markets are operating as they should.

We’re returning to how things were before the Great Moderation, Shafik adds.

Our Katie Allen asks Carney about the Bank’s belief that the UK economy is ‘resilient’ despite the government’s fiscal consolidation (George Osborne’s ongoing attempts to eliminate the deficit).

Q: Should we expect major changes to these forecasts in February, once we’ve seen the Autumn Statement?

We have incorporated the current fiscal plans into our forecasts, Carney says. We’ll make adjustment if the government’s fiscal stance changes but we won’t react to rumour.

And he notes that this fiscal consolidation is “material”, and has had a significant impact on the UK economy.

Updated

What are households expect to make of things?

Many people expect rates to go up in the next year, Carney replies, and that’s a “reasonable” idea.

Governor Carney isn’t spoiling us with too many straight answers.

Here’s the proof that the markets have been consistently wrong about UK interest rates going up:

Chris Giles of the Financial Times points out that house price inflation is running at 9% (according to the Halifax).

So, does the Bank need to unleash some macro-prudential tools to cool the housing market while it leaves rates so low?

Mark Carney agrees that the housing market appears to be picking up, and unsecured credit is growing too.

We do have to think about the balance in the recovery, and the potential implication of the continuation of those development…And that does bring into scope some macro-prudential issues.

That sounds like a YES.

So what might it mean? In theory, the Bank could impose tougher lending rules on banks and building societies to cool the market.

Updated

Q: The Federal Reserve says it could raise interest rates in December; Could the Bank of England say the same about the first half of 2016?

Mark Carney won’t be lured into any predictions.

We take a decision each month, based on many factors, and we are committed to getting inflation back to target, he says.

Sky News Ed Conway’s asks whether we should even bother looking at market expectations for bank rate (a key part of today’s inflation report).

Five years ago, market expected rates to be 3.75% today. A year ago, they expected 1%, so should we stop paying attention?

Carney says that the Bank doesn’t endorse these expectations.

Ed squeezes in a second question – is there something ‘chronic’ wrong with the UK economy that means rates are still so low, or have we just suffered a series of unfortunate events?

Ben Broadbent, deputy governor, responds, points out that the equilibrium inflation rate has been falling for many years, even before the financial crisis.

“There are deep global forces that were at work here – including demographics”

Therefore the level of official interest rates aren’t an arbitrary choice. – we are responding to the situation.

Our ambition is to return ‘sustainably’ to the inflation target, Carney says, rather than blunder by trying to fight the ‘persistent’ factors keeping prices low.

Updated

Carney: No regrets over rate predictions

Robert Peston has the microphone, and uses it like a laser beam to target Carney’s credibility.

Q: Do you regret telling the public that the decision over UK interest rates will come into ‘sharper relief’ at the turn of the year?

Absolutely not, Carney replies.

Growth has ticked down in recent months, but domestic conditions have evolved rather as the Bank expected. “Foreign effect” are to blame for weak inflation expectations.

We have a situation where there is mixed progress, but there is progress…. towards monetary normalisation.

Updated

Onto questions:

Q: Not much appears to have changed in today’s Inflation Report, but there’s a big reaction in the markets. Why?

Mark Carney says there have been some important changes since early August (the last meeting).

Firstly: Demand for risk-free assets has risen, and there’s been “a sharp selloff in risk assets”.

Bank funding costs are up, credit spreads are up, equity markets have fallen. There’s been “a big unwind”.

Secondly: concerns over the emerging markets has risen.

Now this is interesting. Carney says that the Bank expects to keep its stock of UK government bonds until interest rates have reached a level where they can be cut.

That means the BoE won’t be unwinding QE until rates have hit 2%.

There are a range of views among the monetary policy committee over the balance of risks to inflation, says Carney.

Mark Carney confirms that UK inflation is expected to remain below 1% until the second half of 2016, citing factors such as cheaper commodity prices and other imported goods prices.

Carney at Bank press conference
Carney at press conference Photograph: Bloomberg TV

Carney warns of global risks

“Remember, remember the 5th of November” grins Mark Carney as the press conference begins (maybe he’ll hand out some toffee apples later #hint)

So what’s memorable about today? There are some familiar themes – inflation remains low, rates remain unchanged, and it’s another 8-1 split.

But there are some subtle but significant shifts in the picture since August.

Global developments are the biggest change in the last three months; these post a downside risk to the UK economy.

But the UK economy is more encouraging, he adds.

Domestic momentum remains resilient, as does consumer confidence, while firms still have robust inflation intentions.

Updated

Bank of England Press Conference begins

The Bank of England press conference is starting now – you can watch it live here.

ITV’s Robert Peston is preparing to give Carney a grilling

The story: BoE signals rates will stay at 0.5% for a while

Here’s Katie Allen’s story on the Bank of England rate decision:

The Bank of England has sent a reassuring message to businesses and households that interest rates are to remain at their record low well into next year as it cut its forecast for near-term inflation.

The central bank signalled in its latest Inflation Report that interest rates would need to rise at some point from the current 0.5%, but it gave no indication a move was imminent and reiterated that when borrowing costs do go up, they will do so only gradually.

Rates have been at 0.5% since the depths of the global financial crisis more than six years ago. Minutes from the Bank’s latest rate-setting meeting, published alongside the report, showed that only one of the nine monetary policy committee members felt it was now time to start hiking. Ian McCafferty dissented from the rest of the MPC, as he has done in recent months, based on risks that inflation would start to pick up.

The Bank’s quarterly outlook said that based on recent falls in oil and other commodity prices, “inflation is likely to remain lower than previously expected until late 2017” and return to the government-set target of 2% in around two years’ time, then rise above it. The latest official figures put inflation at -0.1%.

The report also flagged a weaker outlook for global growth than at the time of its last forecasts in August and the MPC downgraded the prospects for emerging market economies. Such an outlook would continue to influence the UK economy and the path of interest rates.

Here’s the full story:

The Bank also flags up that market expectations of future interest rate rises have fallen since August:

It says:

Short-term interest rates in the United Kingdom, United States and euro area were lower in the run-up to the November Report than three months earlier.

While some of those falls may reflect lower expectations of the most likely path for policy, given the weaker outlook for global growth and inflation, some could also reflect increased perceptions of downside risks.

Bank of England inflation report

Updated

This chart explains why the Bank of England is worried about emerging markets:

Bank of England quarterly inflation report

The Bank’s new quarterly inflation report is online here (as a pdf).

It is packed with interesting charts.

These two show that the UK economy will take a serious hit if China suffers a hard landing.A 3% drop in Chinese growth wipes 0.3% off UK GDP.

Bank of England quarterly inflation report
Bank of England quarterly inflation report

The Bank says:

As in August, Chinese growth is projected to continue to moderate gently in the near term. But recent financial market developments have highlighted the challenges faced by the authorities in maintaining growth while both liberalising and rebalancing the Chinese economy…..

A sharp slowing in China could affect the UK economy.

Updated

Carney also told Osborne that inflation should start to pick up, from zero, in early 2016:

The Bank has also released a letter from governor Carney to chancellor George Osborne, explaining why he hasn’t managed to keep inflation on target.

He blames international factors such as cheaper oil and metals, the strength of sterling (pushing down the cost of imports) and limited earnings growth (although real wages are finally rising).

This chart of inflation forecasts shows exactly why the Bank isn’t rushing to raise borrowing costs:

The key message from the Bank is that the UK still needs record low borrowing costs to ward off the global downturn:

Peter Hemington, partner at accountancy firm BDO LLP, says the Bank of England made the right decision, given signs that UK growth is weakening amid a global slowdown.

“With rates so low, policymakers must act to insulate the UK economy from the increasingly gloomy global economic outlook. So far our recovery has largely been based on consumer spending, but we need business and public sector investment if we are to rebalance the economy, boost productivity and make sure that companies thrive across the country.

This will put the economy on the firmest possible footing for the potentially shaky months ahead.”

The Bank also reminds us that when (but when?!) Bank Rate does begin to rise, it is expected to do so more gradually and to a lower level than in recent cycles.

The Bank of England remains fairly optimistic about the domestic UK economy.

The minutes say:

Domestic momentum remains resilient. Consumer confidence is firm, real income growth this year is expected to be the strongest since the crisis, and investment intentions remain robust. As a result, domestic demand growth has been solid despite the fiscal consolidation….

Robust private domestic demand is expected to produce sufficient momentum to eliminate the margin of spare capacity over the next year.

But with few inflationary pressures, and worries over the global economy, eight members of the committee voted to leave interest rates at 0.5%.

Updated

Pound hit by dovish Bank of England

DOWN GOES THE POUND.

Sterling is tumbling like a wounded hawk, as traders scramble to react to the Bank’s downgraded forecasts.

Sterling was trading at $1.5391 before the news broke, and it’s now dropped to $1.5312.

The Bank has also cut its inflation forecasts.

It now expects the Consumer Prices Index to remain below 1% until the second half of 2016, far from the official target of 2%.

BoE cuts growth forecasts on emerging market gloom

The Bank of England has also cut its forecasts for economic growth in 2015 and 2016.

In a gloomy statement, it reveals that it is less optimistic about the UK economy.

The outlook for global growth has weakened since the August Inflation Report. Many emerging market economies have slowed markedly and the Committee has downgraded its assessment of their medium-term growth prospects.

And the Bank also fears trouble in emerging markets:

While growth in advanced economies has continued and broadened, the Committee nonetheless expects the overall pace of UK-weighted global growth to be more modest than had been expected in August. There remain downside risks to this outlook, including that of a more abrupt slowdown in emerging economies.

The BoE also voted 9-0 to leave its quantitative easing programme unchanged, meaning it will still hold £375bn of UK gilts.

Ian McCafferty was the only MPC policy maker to vote to hike to 0.75% again.

That has dashed speculation that Kristin Forbes or Martin Weale would join him on the hawks perch.

Updated

Bank of England leaves rates unchanged

BREAKING: The Bank of England has voted 8-1 to leave interest rates unchanged, at the current record low of 0.5%.

Updated

A Bank of England official is phoning the speaking clock right now…. (seriously).

ONE MINUTE TO GO!

Spoiler alert:

Reminder: We get the monetary policy decision at noon, along with the latest quarterly inflation report. Then there’s a 45 minute wait until Mark Carney faces the press pack.

File photo of the logo as seen at the Bank of England in the City of London<br />The logo is seen at the Bank of England in the City of London, Britain in this January 16, 2014 file photo. The Bank of England is expected to make an interest rate decision this week. REUTERS/Luke MacGregor/FilesGLOBAL BUSINESS WEEK AHEAD PACKAGE – SEARCH “BUSINESS WEEK AHEAD OCTOBER 5” FOR ALL 29 IMAGES” width=”1000″ height=”742″ class=”gu-image” /> </figure>
<p><strong>Over at the Bank, they’ll be putting the finishing touches to their announcements — we can expect some rapidfire tweeting once the clock strikes 12.</strong></p>
<p>That’s also the moment that economics correspondents are released from their lock-in. Fleet Street’s finest have been confined in the Bank this morning, getting an early peek at the Inflation Report. </p>
<p>My colleague <strong>Katie Allen</strong> is in Guardian colours….</p>
</p></div>
<p class=Updated

Super Thursday: What to expect

Here are some key points to watch for from the Bank of England today:

  1. The timing of a rate rise: Financial markets are pricing in the first rate hike in autumn 2016, but economists believe it will come sooner. Today’s data could force one side to rethink.
  2. The latest economic forecasts: Global inflation and growth look weaker since the Bank’s last big meeting, in August, so we could get downgrades today.
  3. The EU referendum. Is the Bank worried that Britain could vote to leave the EU? How much damage is the Brexit risk already causing?
  4. How the MPC votes. A second policymaker could join Ian McCafferty and vote to raise rates, or the committee could split 8-1 once again
  5. How the pound reacts. A hawkish performance from Mark Carney at the press conference could drive sterling up, which would not please exporters.

Marketwatch’s preview has more details:

5 things to watch for the Bank of England’s Super Thursday

The mood in the City is rather subdued today, as investors wait for the Bank of England to unleash a plethora of announcements and reports at noon.

The FTSE 100 has lost 27 points, under-performing the rest of Europe. It’s been pulled down by the mining sector, and supermarket chain Morrisons which posted a 2.6% drop in sales.

Biggest fallers on the FTSE 100
Biggest fallers on the FTSE 100 Photograph: Thomson Reuters

Alastair McCaig, Market Analyst at IG, predicts few surprises from the BoE today.

Last quarter’s Super Thursday was not that super and it is difficult to see where the shock and awe will come from this time round. City traders will have to digest a plethora of data in quick succession, with a rate decision, policy minutes and the inflation report all followed by a speech from Mark Carney.

We might see another member vote for change but other than a 7-2 result it would be hard to see any change being viewed as anything other than forced.

Despite the emissions scandal, Volkswagen still had two cars in the top-ten bestsellers in the UK last month.

This chart from today’s report shows that Golfs and Polos remained popular:

UK car sales
UK car sales Photograph: SMMT

And VW insiders are playing down suggestions that customers are shunning it.

ITV business editor Joel Hills says:

“It could have been a lot worse” a source at VW tells me. “UK sales are pretty robust”. VW’s Golf and Polo models moved up the best-seller list.

George Magnus

Experienced City economist George Magnus, adviser to UBS, is on Bloomberg TV now, arguing that there is no reason for the Bank of England to raise rates yet.

Instead, Mark Carney and colleagues should wait and let the US Federal Reserve make the first move (possibly at its December meeting).

Magnus says:

The danger if the Bank steals a march on the Fed it could push up the pound, which is bad for manufacturing.

Magnus also warned that the upcoming EU referendum is the “big unknown, hanging over the economy like a big black cloud”.

Two hours to go until the Bank of England begins the Super Thursday party:

Updated

The SMMT says it is too early to tell if the drop in VW sales is due to the emission scandal.

Mike Hawes, SMMT Chief Executive, argues that the UK car sector is still robust, even though sales growth has finally dipped.

“The UK car market has gone through a period of unprecedented growth and, so far, 2015 has been a bumper year with the strongest performance since the recession.

As expected, demand has now begun to level off but the sector is in a strong position, as low interest rates, consumer confidence and exciting new products combine to attract new car buyers. The current full-year growth forecast remains on track.”

Volkswagen UK sales fall nearly 10%

Volkswagen sales in the UK have fallen, suggesting the company has been hurt by the news that it faked emission test results.

Sales of Volkswagen-branded models tumbled by 9.8% year-on-year in October, from 15,495 to 13,970, according to the SMMT’s new report. That means its market share shrank from 8.62% to 7.86%.

Other VW brands saw sales fall.

SEAT sales tumbled by 32%, from 3,450 to 2,338, while Skoda dipped by 3%.

Audi, though, posted a 3% jump in sales compared to a year ago, even though it has been caught up in the scandal.

And it’s worth noting that other carmakers had a bad month. Sales of Minis (part of the BMW group) fell by a fifth from 5,262 to 4,112.

But it’s certainly not great news for VW, on top of the plunge in South Korean sales reported this morning (see 7.50am post)

Updated

UK car sales fall for first time in 43 months

Just in. UK car sales have fallen, for the first time since early 2012.

The Society of Motor Manufacturers and Traders reports that new registrations were down 1.1% in October, compared with a year ago.

Sales so far this year are still 6.4% higher than in 2015, but it looks like the long run of post-recession growth is finally tailing off:

UK car sales

Here’s the key points from the SMMT’s sales report:

  • New car registrations see 1.1% decline in October following period of phenomenal record growth.
  • Total market year-to-date up 6.4% to 2,274,550 units registered – the best performance on record.
  • Alternatively fuelled vehicle market enjoys 13.8% boost, with diesel and petrol registrations steady.

Just looking at the detail of the report now….

Updated

Jeremy Cook, chief economist at currency firm World First, reckons UK interest rates will remain at their record lows for another six months.

London newspaper City AM runs a ‘shadow MPC’, asking nine senior economists how they would vote.

And this month, it has split 6-3, with a trio calling for a rate hike.

One of the “shadow hawks” is Simon Ward of Henderson Global Investors, who argues:

Raise. Corporate liquidity is surging. Private pay growth is over three per cent, while productivity remains sluggish. Global risks have faded.

Andrew Sentance, who once served on the MPC, also believes the BoE should raise rates:

Here’s a handy chart showing which BoE policymakers appear keen to raise rates soon, and which are reluctant….

Andy Haldane, the premier Dove, has even suggested recently that rates might be cut to new record lows….

Updated

Some economists believe that divisions at the Bank of England over interest rate policy will widen today during Super Thursday.

At recent meetings, the monetary policy committee has split 8-1, with only Ian McCafferty voting to hike borrowing costs from 0.5% to 0.75%.

But a 7-2 split can’t be ruled out, or even a 6-3 (although that might be pushing it).

And that’s why Simon Wells, chief UK economist at HSBC, says today does feel like a “big day”.

Simon Wells of HSBC
Simon Wells of HSBC (left) Photograph: Bloomberg TV

He told Bloomberg TV:

It’s Bonfire Night, and if there are fireworks here, it will be in the vote.

Kristin Forbes has been very hawkish of late, and she may go and join McCafferty, and possibly Martin Weale too.

The markets would “react strongly” to a 6-3 split, probably driving the pound sharply higher on expectations of an early rate hike.

Wells expects that first rise will come in February 2016, so the BoE may be keen to communicate that today.

Today is probably the Bank of England’s last chance to prepare people for an interest rate hike early next year.

Brian Hilliard, chief U.K. economist at Societe Generale, explains:

“It’s make or break for clear communication on a first-quarter rate increase.

“If it is going to happen in February they’re going to have to send a strong and clear signal.”

German factory orders fall again

A German supporter with the national flags on her head watches the World Cup soccer match between Germany and Ghana at a public viewing area in Hamburg, southern Germany, on Wednesday, June 23, 2010. (AP Photo/Matthias Schrader)

As if the Volkswagen scandal wasn’t bad enough, Germany’s factories have also suffered another drop in demand orders.

Industrial orders fall by 1.7% in September, new figures show, the third monthly decline in a row.

That’s rather worse than expected – economists forecast a 1% rise – and it suggests Europe’s largest economy is suffering from weaknesses overseas.

The economy ministry didn’t try to sugar-coat the figures either, saying that “overall, industrial orders are in a weak phase”.

Updated

VW sales slide in South Korea

Sign at the Volkswagen Chattanooga Assembly Plant in Chattanooga, Tennessee November 4, 2015. Volkswagen told NHTSA that it would recall about 92,000 vehicles, which are some 2015 and 2016 models of Jetta, Passat, Golf and Beetle, in the United States. REUTERS/Tami Chappell

We have firm evidence that the emissions scandal has hurt Volkswagen, from South Korea.

Sales to South Korean customers almost halved in October, new figures show, dropping below the 1,000 mark for the first time since 2011.

The Korea Automobile Importers & Distributors Association reported that VW only sold 947 cars last month, following the revelations that it used software to cheat nitrogen oxide emission tests. That’s 46% lower than a year ago, and 67% below September’s figures.

The sales collapse for Volkswagen contrasted with a 6% rise in sales of imported cars in South Korea in the same period, Reuters points out.

Have UK drivers also abandoned VW? We find out at 9am when the latest sales figures are released….

Updated

Introduction: Bank of England rate decision, and more…

Bank of England Governor Mark Carney makes a speech at The Sheldonian Theatre in the University of Oxford on October 21, 2015 in Oxford, United Kingdom. Carney spoke about the benefits and risks of Britain’s EU membership. (Photo by Eddie Keogh-Pool/Getty Images)
Bank of England Governor Mark Carney, who will hold a press conference at 12.45pm today Photograph: Pool/Getty Images

Happy Super Thursday!

The Bank of England is preparing to hit us with a quadruple whammy of news and economic data at noon.

Firstly, the Bank’s Monetary Policy Committee will set UK interest rates. A rate rise isn’t expected, but some members of the MPC may vote for the first hike since the financial crisis began. Last month they split 8-1, but could another hawk jump the fence?

The minutes of the meeting are also released at noon, showing the details of the committee’s discussions and its views on the UK and global economy.

We also get the latest quarterly inflation report, packed with new economic forecasts.

And if that’s not enough of a treat, the Bank governor Mark Carney then holds a press conference at 12.45pm. That’s his opportunity to guide the markets – and potential housebuyers and borrowers – on the chances of an interest rate rise in early 2016.

Also coming up today….

We get new UK car sales figures for October at 9am. They are expected to show that some customers have deserted Volkswagen following its emissions crisis.

In the City, we have some disappointing results from Morrisons, which has reported its 15th straight quarterly sales fall.

And the European financial markets are expected to be calm, after a solid trading day in Asia which saw the Chinese market rise 20% above its recent low.

That means they are back into a bull market, as traders put this summer’s panic selling behind them.

We’ll be tracking all the main events through the day….

Updated

guardian.co.uk © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.


USA 

BoE has slashed its forecast for wage growth this year, warned that geopolitical risks are rising, and said contingency plans for financial upheaval over Scottish independence are ready. Here are key points from the Bank’s Quarterly Inflation Report…

 


Powered by Guardian.co.ukThis article titled “Business Liveblog: Bank of England cuts wage growth forecast, and reveals Scottish contingency plans” was written by Graeme Wearden, for theguardian.com on Wednesday 13th August 2014 12.51 UTC

US retail sales miss forecasts, with no growth in July

Over in America, a disappointing set of retail sales figures have just raises concerns over the strength of its recovery.

Retail sales were flat in July, the worst performance in six months, having only risen by 0.2% in June.

Car sales fell, and demand for electronics and home appliances was weak — not a great sign of consumer confidence.

Core retail sales, which strips out cars, gasoline, food services and building materials, rose by just 0.1% in July, and June’s figure was revised down from 0.6% to 0.5%.

Ahha! On page 29 of the BoE’s Inflation report is a bar chart, showing how most new jobs created in the last six months have been in ‘low skill’ professions.

This may help explain the low growth in average earnings in recent months, if more new hirers are taking lower paid positions.

Hat-tip to Jeremy Warner of the Telegraph for flagging it up:

Labour: Weak wage growth shows economy isn’t fixed

Chris Leslie MP, Labour’s Shadow Chief Secretary to the Treasury, has seized on the news that the Bank of England has slashed its forecast for wage growth this year, to just 1.25%.

He says:

“The inflation report shows why this is no time for complacent and out-of-touch claims from Ministers that the economy is fixed and people are better off.

“While the economy is finally growing again and unemployment is falling, working people are still seeing their living standards squeezed. Pay growth is at a record low and lagging behind inflation and the Bank of England has halved its forecasts for wage growth this year.”

As covered earlier this morning, the latest unemployment data showed earnings growth faltering,

Total wages (including bonuses) have shrunk for the first time since 2009. And stripping out bonuses, average earnings rose by the lowest since records began in 2001, up just 0.6%.

Michael Izza, chief executive of ICAEW (which represents accountants) says the Bank of England’s new, lower wage growth forecasts are a concern:

The numbers of self-employed and part-time workers, together with those on zero-hours contracts are contributing to a flexible labour market that is keeping wages down. In addition, auto-enrolment means that employers are having to fund pensions from somewhere, and wages are suffering as a result.

David Kern, chief economist at the British Chambers of Commerce, says the Bank of England is giving out “mixed messages” on the outlook for interest rates.

The higher growth forecast for 2014 and the lower estimate for the amount of slack in the economy may be seen as a signal to bring forward interest rate rises.

However, Governor Carney’s comments will reassure businesses that the MPC will not rush any increases in rates. He also acknowledged that the rising supply of labour in the economy may provide new sources of economic capacity.

An early UK interest rate rise looks a little less likely, reckons Neil Lovatt, director of financial products at Scottish Friendly.

He says:

“To read between the lines, the message today is that rates are still destined to rise, but when that will be is still up for debate. The fickle nature of the UK economy seems to keep everyone guessing.”

“Any rate rises will be small, but even very small rises in interest rates will have a significant effect on what is still a fragile economy. That said, savers thinking that the ‘good old days’ of high interest rates will return are going to be sorely disappointed and the sooner we adapt to this environment the better.”

Those new BoE forecasts

Berenberg Bank have kindly wrapped up the changes to the Bank of England’s forecasts:

  • Growth up. The BoE raised its growth forecasts to 3.5% in 2014 and 3.0% in 2015, both up by 0.1ppts from their previous forecast. Although they cut their 2016 forecast to 2.6% from 2.8%
  • Inflation up in 2014 but down in 2015 and 2016. The BoE now forecasts 1.9%, 1.7% and 1.8% inflation for 2014, 2015 and 2016, compared to 1.8%, 1.8% and 1.9% in their previous forecast.
  • Unemployment down. To 5.9%, 5.6% and 5.4% in 2014, 2015 and 2016, from 6.3%, 6.0% and 5.9% in the previous forecasts.
  • Pay growth cut in the near term but raised later in the forecast. Specifically, the BoE now forecasts wage growth of 1.25%, 3.25% and 4% in 2014, 2015 and 2016 from 2.5%, 3.5% and 3.75%.
  • Slack now estimated at 1% of GDP, compared to 1-1.5% in the second quarter.

So, good news on growth and unemployment, but bad news on pay.

As Berenberg’s UK economist, Rob Wood, puts it, there’s “something for everyone”.

This fan chart shows the new growth forecasts:

One more key point — the Bank of England flagged up that geopolitical dangers (think Ukraine or the Middle East) are a growing threat to Britain’s recovery.

Carney said:

“Markets have been remarkably resilient to some of these geopolitical events and we’re only beginning to see the first advance signs of the middle through some of our major export markets such as Germany and the movements of some of the confidence indicators.”

(thanks to Reuters for the quote)

Bank of England’s quarterly inflation report – the key points

Quick recap.

1) The Bank of England has slashed its forecasts for wage growth, conceding that the recovery has still not fed through to people’s pockets.

The BoE now expects earnings to rise by just 1.25% this year, down from 2.5% previously. It admitted that there appears to be more slack in the economy than it realised, although it is also being eaten up at a faster rate.

Governor Mark Carney said the UK was experiencing “strong output growth”, but this has not been matched by a material pickup in productivity, or wages.

2) The prospects of an early rise in UK interest rates appear to have faded.

The pound tumbled on the news, shedding one cent against the US dollar to $1.6714 as investors calculated that an early rate rise is less likely than before.

The Bank also hammered home that interest rate rises will be gradual and limited, when the time comes to end Britain’s long period of record-low borrowing costs.

3) “Contingency plans” have been drawn up in case Scotland votes for independence.

Carney said:

”Uncertainty about the currency arrangements could raise financial stability issues….We have contingency plans.”

4) During an occasionally barbed press conference, Carney denied that the Bank was increasingly clueless about the UK economy.

He argued that rising geopolitical risks mean there is naturally more uncertainty about the situation, and denied that his precious forward guidance policy has been a muddle.

5) Europe remains a big worry. The BoE says that:

Eurozone growth continued to disappoint, net lending has been falling and inflation has stayed low.

And deputy governor Minouche Shafik warned that the UK can’t rely on the eurozone to drive its recovery.

Eurozone industrial production hits recovery hopes

Incidentally, we had further confirmation this morning that the eurozone is struggling — a poor set of industrial production numbers.

My colleague Jo Moulds reports:

Factory output in the eurozone contracted unexpectedly in June, further damaging hopes of a strong recovery.

Industrial production dropped 0.3% on the month following a 1.1% drop in May, hit by the ongoing conflicts in the Ukraine, Iraq and Gaza.

Production was flat compared to the same time last year. Economists had been targetting a 0.1% rise on the year. The annual reading was the lowest since August 2013.

Bank of England: we can’t rely on the Eurozone for our recovery

Britain can’t rely on the eurozone economy to drive our recovery, warns the Bank of England’s new deputy governor, Minouche Shafik.

Asked about the impact of the European Central Bank’s new stimulus measures (including hundreds of billions of cheap loans for banks), Shafik urged caution, saying the new impact of this LTRO programme will become clear over time.

The eurozone still faces low growth and low inflation, Shafik says, and we need to see whether the ECB’s measures lead to stronger credit growth and a stronger recovery.

The UK can’t rely on a eurozone recovery to lift our recovery. It would be good if the eurozone could drive us forwards, as it’s such an important export market, that’s not very likely, she concludes.

And that was the end of the press conference. Summary and reaction to follow…

Updated

Asked about the rise in self-employed workers (as covered earlier in the blog) deputy governor Ben Broadbent plays down the suggestion that it’s a risk. This isn’t necessarily a bad thing for productivity, he claims.

The Bank of England is tweeting some of the key points from today’s briefing, including a rather dashing (and slightly menacing?) photo of the governor:

Carney treats a question about his ‘muddled’ forward guidance policy with some distain.

Asa Bennett of the Huffington Post points out that the initial pledge (no rate rise until unemployment has fallen below 7%), has evolved into a broader measure based on slack, wage growth, and the like. Was it a muddle, or a learning process?

Not an unfair question, frankly, if a little mischievous.

But Carney doesn’t look pleased, claiming that Bennett is the muddled one, and that his guidance has been entirely consistent across many inflation reports and MPC minutes.

It’s consistent, it’s boring, but what’s what you get, he smiles.

The audience aren’t smiling, though:

Mark Carney: Bank of England has contingency plans for Scottish independence

Mark Carney has revealed that the Bank of England has drawn up contingency plans in case Scotland votes for independence next month.

Asked for his views on the prospect of ‘sterlingisation’ (that Scotland would use the pound without a formal currency union), Carney reveals that that BoE is preparing for all eventualities, as “uncertainty” over Scotland’s currency arrangements could hit financial stability.

He concedes that

He says:

We have contingency plans…. but it’s never a good idea to talk about them in public apart from to say that you have them.

Carney says that in terms of the Bank’s responsibilities for financial stability, we have “a wide range of tools and plans”. And the BoE isn’t the only body with responsibilities here — some are shared with the Treasury.

Updated

Back on the markets…. Carney says he is “encouraged” that the financial markets are more responsive to the latest data.

James Macintosh of the Financial Times takes up Larry’s point, that the Bank is looking increasingly clueless (on a spectrum between certainty and cluelessness).

Mark Carney replies; if we can agree that the range is between perfect certainty and perfect uncertainty, it’s fair that there is more uncertainty, mainly around the issue of productivity.

Here’s a link to the inflation report (sorry for the delay #hectic)

Ah, the Scotland question — is it time for Alex Salmond to produce a Plan B on an independent Scotland’s currency?

Mark Carney takes a cautious line; the Bank will implement whatever policymakers decide, but it has “noted” the statements from the three main UK political parties that they would not enter a formal currency union with iScotland.

He also points out that the Bank has a responsibility for financial stability across the UK, and will keep discharging those duties until circumstances change.

Updated

Could the Bank of England raise interest rates by as little as 0.125%, or would that be the equivalent of ‘boiling the frog’, asks Szu Ping Chan of the Telegraph.

Carney chuckles at the analogy, but doesn’t suggest such a small rise is on the agenda.

Ed Conway of Sky invites Mark Carney to comment on the financial markets’ expectations for UK interest rate rises (harking back to his Mansion House speech in June, when he suggested they were too dovish).

Carney plays the ball deftly, saying that the overall shape of market expectations are consistent with an adjustment that is both gradual and limited.

Deputy governor Ben Broadbent chips in, saying that it’s a “false dichotomy” to suggest the Bank should either be completely certain about everything, or completely clueless.

Larry Elliott, the Guardian’s economics editor, isn’t impressed by today’s report:

Doesn’t today report show that the Bank “really hasn’t got a clue, the MPC is divided, and that anyone taking out a mortgage or an overdraft would be ill-advised, as anything you say must be taken with a very large pinch of salt?”, Larry politely suggests.

Governor Carney defends his record, suggesting rather archly that Larry should try speaking to a lot of firms around the country*. The firms I speak to insist that business have understood the Bank’s ‘forward guidance’, he adds.

Interest rates will go up as the economy improves, they will go up to a limited extent, ands gradually, Carney says. But there are geopolitical dangers, and we may need to react to them.

* – Like in Rochdale, perhaps, Governor?

How much spare capacity is left to be absorbed in the UK economy?

Carney says there is “tremendous uncertainty” about the degree of slack, among policymakers on the Bank’s monetary policy committee (the overall view is that there’s 1% of capacity to mop up).

That’s not hugely reassuring, given the importance that the Bank now puts on the issue when setting monetary policy.

Updated

Alex Brummer of the Daily Mail wants more details about the Bank’s worries about geopolitics.

Carney replies that there is a “slight downturn skew” to today’s growth forecasts.

Bank of England press conference – Q&A session begins

Onto questions — Ben Chu of the Independent asks why the Bank has lowered its forecasts for productivity growth.

Mark Carney explains that firms have been taking on workers rather than investing in new equipment, as labour is cheaper than capital.

That process should end once cheap labour has been mopped up, meaning workers demand higher wages, and encouraging firms to invest in new equipment that will boost productivity. That process is taking longer than thought.

Pound hits 10-week low against the US dollar

The pound has hit its lowest level against the US dollar since last May, as the markets digest the inflation report (and the jobless data).

Sterling is down by 0.45% today, at $1.6732.

Updated

On interest rates, Mark Carney again reiterated that borrowing costs will rise in a “small, slow” manner, when the appropriate moment comes.

The economy is returning to a semblance of normality, Carney concludes.

Carney says that the amount of spare capacity in the economy has fallen somewhat in the last quarter, but the Bank also reckons there was more slack in the UK than before.

Updated

Bank of England slashes forecast for wage growth.

Over at the Bank of England, governor Mark Carney is unveiling the Quarterly Inflation Report.

He is declaring that the Uk recovery is “on track”…. “Robust growth” has taken output above the pre-crisis peak, and the Bank has revised its near-term forecast for growth up.

But the Bank has also slashed its forecast for wage growth in the UK.

  • It now expects wages to rise by just 1.25% in 2014, down from 2.5% previously.
  • It sees growth picking up to 3.25% in 2015, down from 3.5% before.
  • And in 2016, it reckons wages will rise by 4%, up from 3.75% previously.

Carney is also warning that Britain faces rising geopolitical risks, while the eurozone economy remains weak.

And the persistent strength of sterling is also a worry.

You can watch the press conference live here (right-click to open in a new tab).

Updated

So much for the year of the pay rise

Today’s report have cast a shadow over hopes that 2014 will be “the year of the pay rise.”, says the Resolution Foundation.

Adam Corlett, their economic analyst, comments:

“Once again a strong employment performance is to be welcomed but concerns remain over wages. There is still good reason to expect that real pay will start increasing during 2014 but today’s disappointing performance pushes the wages recovery further down the road.

It’s now almost impossible for average real pay in 2014 as a whole to exceed last year’s unless we see an unprecedented surge in wages during the rest of the year.

The number of people receiving the Jobseekers Allowance could soon fall below the one million mark:

The Press Assocation reports:

The claimant count fell for the 21st month in a row in June, by 33,600 to 1.01 million, according to today’s data from the Office for National Statistics.

If the trend continues, the number of Jobseeker’s Allowance claimants will fall below a million next month for the first time since September 2008.

See the report yourself

Nearly forgot… you can see the full labour market report here (as a pdf).

Iain Duncan Smith: Long-term plan is working

Work and Pensions Secretary Iain Duncan Smith has claimed that his changes to the welfare system have helped heal the labour market.

Here’s his official response to the jobless figures:

“In the past, many people in our society were written off and trapped in unemployment and welfare dependency. But through our welfare reforms, we are helping people to break that cycle and get back into work.

“The Government’s long-term economic plan to build a stronger economy and a fairer society is working – with employment going up, record drops in youth unemployment and hundreds of thousands of people replacing their signing-on book with a wage packet.

“This is transformative, not only for these individuals and their families, but for society as a whole. That is why we have set full employment as one of our key targets – bringing security and hope to families who have lost their jobs and others who never had jobs, we put people at the heart of the plan.

“The best way to help even more people into work is to go on delivering a plan that’s creating growth and jobs.”

However….critics, such as our own Polly Toynbee, are less impressed with Duncan Smith’s performance, given the stuttering start to his universal credit project:

Iain Duncan Smith’s delusional world of welfare reform

Today’s slump in real wages are a blow to hopes that the cost of living squeeze was easing — readers may remember that four months ago there was chatter that the squeeze was over, after pay rises (briefly) burst above inflation.

Could Britain’s falling real wages be partly due to changes in the composition of the labour market, with more people taking lower-paid jobs?

Newsnight’s economics correspondent, Duncan Weldon, reckons so:

Britain’s youth unemployment total has fallen:

The ONS reports that there were 767,000 unemployed people aged from 16 to 24 in April-June 2014; 102,000 fewer than for January to March 2014 and 206,000 fewer than for a year earlier.

These were the largest quarterly and annual falls in youth unemployment since comparable records began in 1992.

Updated

The recovery in the labour market has partly been driven by Britain’s army of self-employed people, which swelled by almost 10% over the last year.

The ONS reports that, since April-June 2013,

  • The number of employees increased by 447,000 to reach 25.77 million.
  • The number of self-employed people increased by 408,000 to reach 4.59 million.

UK unemployment, the key charts:

These two charts show what a bizarre jobs recovery the UK is experencing.

On the one hand, the employment rate is close to its highest level on record, as jobless falls and more people find work (820,000 in the last year).

But yet, real wages are shrinking – with the gap between earnings and inflation widening alarmingly (whether you include volatile bonuses or not)

One reason for caution — pay packets were boosted a year ago, because many bonuses were held back until after the UK top tax rate fell to 45%, in April 2013.

The ONS points out that “some employers who usually paid bonuses in March paid them in April last year.”

But if you strip out bonuses, pay is still up a measly 0.6% year-on-year, the lowest on record.

Updated

This chart from Bloomberg confirms that UK wages have suffered their first fall since the depths of the financial crisis:

Here are the key points on today’s unemployment data, from the ONS:

  • For April to June 2014, there were 30.60 million people in work, 167,000 more than for January to March 2014 and 820,000 more than a year earlier.
  • For April to June 2014, there were 2.08 million unemployed people, 132,000 fewer than for January to March 2014 and 437,000 fewer than a year earlier.
  • For April to June 2014, there were 8.86 million economically inactive people (those out of work but not seeking or available to work) aged from 16 to 64. This was 15,000 more than for January to March 2014 but 130,000 fewer than a year earlier.
  • For April to June 2014, pay including bonuses for employees in Great Britain was 0.2% lower than a year earlier, but pay excluding bonuses was 0.6% higher.

UK unemployment rate drops to 6.4%, but wages fall

Breaking News: Wage growth in the UK has hit its lowest level on record, and actually contracted if bonuses are included.

The Office for National Statistics reports that average earnings, excluding bonuses, rose by a mere 0.6% in the three months to June.

That means pay packets lagged well behind inflation — which hit 1.9% in June.

Including bonuses, total pay packets actually contracted by 0.2% during the quarter, the first fall since 2009.

In brighter news, the overall unemployment rate fell to 6.4% in April-June, which is the lowest since the end of 2008. And the claimant count fell by 33,000, showing that the labour market continues to recover.

But that recovery still isn’t reaching people’s pockets.

More details and reaction to follow

Updated

Nearly time for the UK unemployment data to hit the wires….

Reminder — economists expect another rise in employment, and a drop in the number of people claiming benefits.

But a crucial issue is whether earnings are picking up, after years of low pay rises.

As my colleague Katie Allen reports, many employees have been hit hard:

Angela Chicken was still in hospital with her newborn son when she was made redundant. She had been earning £11 an hour as a graphic designer. Ten years on, the 52-year-old single mother makes around £8 an hour working part-time at her local Sure Start children’s centre in Southampton.

With the cost of living rising faster than her pay, Chicken’s wages have fallen even further in real terms, a pattern likely to be reflected across the country in the latest official labour market figures today. After bills and housing costs, Chicken is left with £108 a week to feed herself and her son, buy clothes and anything else they need. They eat well, she said, but there is little left for treats or outings.

“We don’t really have enough money to go on holiday … I don’t get haircuts, I very rarely buy any clothes,” she said. “What I have had to do is pull myself back over the last 10 years to a position that isn’t as good as it was because I got knocked off my perch.”

More here:

In low-wage economy employers paying well make sound investment

Updated

Most of Europe’s stock markets have risen this morning, despite the worrying economic news from Asia overnight (details).

Germany’s DAX is leading the way, up 77 points or 0.86% at 9147.

Insurance group Swiss Re has cheered investors by posting a 3.5% jump in profits.

In London the FTSE 100 is flat (dragged back by a few companies going ‘ex-dividend’).

The Bank of England may admit this morning that it was too optimistic about wage growth, reckons Bloomberg’s Emma Charlton:

We also have confirmation that the eurozone has slipped worryingly close to deflation last month.

Fresh data this morning showed that Spain’s consumer prices index fell by 0.3% year-on-year in July, the biggest drop in almost five years. Month-on-month they slipped by 0.9%.

In France, prices were up by a meagre 0.5% last month compared with July 2013, and also fell on a monthly basis, down 0.3%.

Japan’s GDP shrinks by 6.8%; Chinese new lending slumps

Global economy watchers have two big pieces of economic data from Asia to digest today.

1) Japan has suffered its biggest contraction since the 2011 tsunami, in a blow to efforts to revitalise its economy.

Japanese GDP fell at an annualised rate of 6.8% between April and June (meaning it shrank by 1.7% during the quarter). The slump is being blamed on the recent hike in Japan’s sales tax, from 5% to 8%, which encouraged firms and households to bring forward their spending to January-March.

The government remains relaxed, saying the economy is recovering. But critics of prime minister Abe’s stimulus plan suggest he may have to postpone plans to raise the sales tax again in December.

2) The news from China isn’t too rosy either. The broadest measure of new credit has dropped to the lowest since the global financial crisis, suggesting many banks are cutting back on new lending.

Economists are concerned, as Chinese banks also face the impact of the property market downturn. Beijing may need to unleash further stimulus measures to avoid growth weakening. fastFT has a round-up of analyst comments.

Updated

Analysts at ING will be combing the inflation report for signs that the Bank of England’s monetary policy committee was divided last week, when it voted to leave interest rates unchanged.

They say:

The Bank will release new forecasts and update its forward guidance which will leave the door open for a rates rise this year. Any hints of dissent at the August meeting will boost the case for a November hike.

Inflation report: what to watch for

The Bank of England inflation report will be scrutinised for hints over interest rate rises, the latest assessment of ‘slack’ in the economy, wage growth (or lack thereof), and the outlook for growth (could possibly be revised up) and inflation (might be revised down).

Mark Carney can also expect a few questions about the UK housing market.

Here’s Angela Monaghan’s preview:

Bank of England inflation report – what to watch for

City analyst Michael Hewson of CMC Markets predicts that today’s data will show another welcome drop in the jobless rate, but an unwelcome drop in wage growth.

He writes:

The latest ILO unemployment numbers for June are expected to see a drop from 6.5% to 6.4%, while jobless claims in July are expected to show another drop of 30k, slightly lower than the 36.3k drop seen in June.

Wages growth continues to be the economic head scratcher and is the Bank of England’s biggest problem when it comes to deciding when to raise rates. If we continue to see the gap with inflation widen out then it becomes increasingly difficult to see how the Bank could even contemplate a rate rise this year.

Expectations are for flat wage growth for the 3 months to June, down from the 0.3% rise in May.

* – The wages figures are skewed by the cut in Britain’s top rate of income tax back in April 2013. That prompted some firms to hold back bonus payments until then, making comparisons trickier.

UK unemployment and Bank of England inflation report in focus

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

We’re tracking two big events in the UK this morning. First, the latest unemployment figures, due at 9.30am BST. They are expected to show another drop in the number of people out of work.

But that labour market recovery has come at a price — low wage growth, and today’s figures are likely to show pay rises lagging behind inflation again.

That would mean real wages are still falling; taking the shine off Britain’s economy recovery.

That data will set the scene for the Bank of England’s latest quarterly Inflation Report, released at 10.30am.

This is the Bank’s latest health-check on the UK economy, including forecasts for growth and inflation.

But the big issue is whether the BoE has moved closer to hiking interest rates — Governor Mark Carney will probably be quizzed on this during the press conference.

The key issue is whether the Bank thinks most of the spare capacity, or ‘slack’, in the economy has now been mopped up. Carney will probably reiterate that the Bank is watching wage growth closely – showing whether employers are having to pay more for talent, and whether households could cope with higher borrowing costs.

As Ian Williams of Peel Hunt explains:

Formal changes to the forecasts are likely to be minimal; the overall assessment of the degree of slack, especially regarding the labour market, will be the focus of investor interest.

Elsewhere, European stock markets are expected to rise modestly, despite ongoing geopolitical tensions [the Russian aid convoy chugging towards the Ukraine border could be the next flashpoint].

And in the euro area, investors are digesting yesterday’s slump in German investor confidence, and fretting about how bad tomorrow’s growth figures for the April-June quarter could be.

I’ll be tracking the key events though the day….

Updated

guardian.co.uk © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.

Following Ireland’s exit from the bailout, ECB boss Mario Draghi seems to be trying to pour cold water on the optimism. Situation in the second-largest economy in the euro-area worsens with French firms suffering. France looks like the ‘sick man of Europe’…

 


Powered by Guardian.co.ukThis article titled “Draghi warns EU on banking supervision — business live” was written by Graeme Weardenand Nick Fletcher, for theguardian.com on Monday 16th December 2013 16.24 UTC

Coming up in the UK tomorrow morning, the latest inflation data are expected to show price rises steadied last month but still outstripped wage growth. My colleague Katie Allen writes:

The consumer price index measure of inflation is expected to hold at 2.2% in November according to the consensus forecast in a Reuters poll. But some economists see the rate dropping to 2% while others have pencilled in a rise to 2.5%. Inflation has been above average annual earnings growth for several years now and the latest official figures put pay growth at 0.8%.

The RPI rate in tomorrow’s data from the Office for National Statistics – a measure often used for setting pay and pensions – is forecast to edge up to 2.7% from 2.6% in October.

Jonathan Loynes and Jack Allen at the thinktank Capital Economics say tomorrow’s data could show CPI at the Bank of England’s government-set target of 2% for the first time since November 2009. They comment: “Admittedly, petrol prices will probably make a larger contribution to inflation than in October. While they fell by about 1% m/m last month, they dropped by nearly 2% in November 2012.

“Nonetheless, food inflation should ease in November. Both global agricultural commodity prices and domestic food producer prices have been falling this year. And the British Retail Consortium’s timelier measure of food shop price inflation fell from 2.7% to 2.3% in November.

“In addition, although the two largest energy companies, British Gas and SSE, raised their prices on 15th and 23rd November respectively, these are unlikely to affect November’s CPI reading. Index Day – the day of the month on which the ONS chooses to collect prices – always falls on either the second or third Tuesday of the month. The ONS does not say which day until after the release, but given the pattern of previous Index Days, we reckon the ONS recorded prices on 12th November, before the energy companies raised their prices.

Meanwhile Portugal says it has passed the latest review by the troika of lenders:

Over in Greece, intense efforts are underway to wrap up negotiations with mission heads representing the country’s troika of creditors. Our correspondent in Athens Helena Smith reports.

With debt-stricken Greece’s next tranche of international aid resting on the talks, finance minister Yannis Stournaras said it was the government’s aim to conclude negotiations before tomorrow’s crucial euro group meeting. But the omens do not look good.

In unusually terse statements made before the onset of a fourth round of talks focusing on the thorny issue of bank repossession of homes, the development minister Kostis Hadzidakis insisted that Athens’ fragile coalition government would simply not adopt measures “at any price.”

“It is our intention to reach an agreement … but it is obvious that we are not going to agree at any price. The government cannot go back [on its promises] and accept whatever it is offered,” he said adding that under the terms offered by creditors at the EU, ECB and IMF, vulnerable Greeks would lose their homes. “It is easy to agree but afterwards you have to handle the social consequences,” he told Skai radio. The talks, which began at 4:30 PM local time, are being billed as “the very last” effort to find consensus on the potentially explosive issue.

After Ireland’s exit from the bailout this weekend, ECB boss Mario Draghi seems to be trying to pour cold water on the optimism. From his appearance at the European Parliament:

Back with Draghi:

Updated

Following the fifth and final review of Spain’s financial sector, the troika of the ECB, European Commission and IMF have welcomed signs of stabilisation at the country’s banks while warning more needs to be done:

Spain has pulled back from severe problems in some parts of its banking sector, thanks to its reform and policy actions, with the support of the euro area and broader European initiatives.

Spanish financial markets have further stabilised. Following the drop in sovereign bond yields, and the rise in share prices, financing conditions for large parts of the economy have improved, even if financing conditions for SMEs remain more challenging.

Nevertheless, the broader economic environment has continued to weigh on the banking sector, even if that impact has recently been receding. The private sector needs to reduce its debt stocks going forward, as heavy debt burdens continue to weigh on lending to the private economy.

Supervisors and policy makers have to continue to monitor closely the operation and stability of the banking sector. Continued in-depth diagnostics of the shock resilience and solvency of the Spanish banking sector remain vital. This is also important in order to ensure a proper preparation of the pending assessment of banks’ balance sheets by the ECB and EBA in the run up to the start of the Single Supervisory Mechanism.

The recent encouraging macroeconomic developments bear witness of advancement in the process of adjustment of the Spanish economy and corroborate the expectation of a gradual recovery in activity and of an approaching end to employment destruction.

The economic situation remains however subject to risks as imbalances continue to be worked out. Respecting fully the agreed fiscal consolidation targets – so as to reverse the rise in government debt – and completing the reform agenda remain imperative to return the economy on a sustainable growth path.

Following progress during 2013, the policy momentum needs to be maintained to finalise ongoing and planned reforms – amongst which are the delayed law on professional services and associations, reforms of public administration, further strengthening of labour market policies, eliminating the electricity tariff deficit and the forthcoming review of the tax system – and to ensure effective implementation of all reforms.

Full report here.

Updated

The protests in Ukraine have put pressure on the country’s credit rating, according to Fitch. The agency said:

The duration and scale of anti-government protests in Ukraine has put additional pressure on the country’s credit profile. The longer the standoff goes on, the greater the risk that political uncertainty will raise demand for foreign currency, cause inward investment to dry up, or trigger capital flight, causing additional reserve losses and increasing the risk of disorderly currency moves.
Developments over the weekend suggest the crisis is some way from resolution as the opposition hardens demands for a change of government. Between 150,000 and 200,000 protestors gathered in Kiev, according to press reports.
Even if the immediate crisis were defused and protests ended, political uncertainty would persist. The government would still be likely to find it hard to resolve the diplomatic challenge of building closer relations with the EU while placating Russia.

Full report here:

Ukraine Protests Increase Pressure on Credit Profile

And here’s ECB president Draghi on any trimming by the US Federal Reserve of its $85bn a month bond buying programme:

Markets jump as Fed fears ease and US deals enthuse investors

After days in the doldrums, markets are moving sharply higher. Investors have been selling shares in recent dayks amid concerns the US Federal Reserve could start turning off the money taps as early as this week’s meeting.

Strong US economic data – including industrial output today – has made that more likely, as has the signs of political agreement about the US budget. But on the whole, observers still think, in the main, the Fed will wait until next year.

So with a spate of acquisitions, including Avago Technologies paying $6.6bn for LSI Corporation, shares are back in favour for the moment. The Dow Jones Industrial Average is currently nearly 1% or 156 points higher, helping to pull the FTSE 100 to its highest levels of the day, up more than 1.3%.

Back to the news that Lloyds of London has appointed its first female boss, and my colleague Jill Treanor has the full story:

Forty years after the first woman entered the Lloyd’s of London dealing floor as a broker, the 325-year-old insurance market has named its first female boss.

The company is to be run by 30-year industry veteran Inga Beale from January. Currently the chief executive of Canopius, a Lloyd’s managing agent thought to be the subject of a takeover bid, Beale will replace Richard Ward who surprised the industry by resigning in the summer.

More here:

Lloyd’s of London appoints first female chief executive in 325-year history

Draghi is strking a dovish tone, according to Annalisa Piazza at Newedge Strategy:

The ECB’s Draghi comments in front of the EU Parliament strike a rather dovish tone on the current state of the EMU economy. Indicators signal that the EMYU recovery is set to grow at a modest pace in Q4 and the ECB is ready to act if needed. The effects of past policy easing will be clear only with a certain delay. In the meanwhile, the ECB is fully aware of downside risks on inflation.

And it seems more MEPs have now turned up to hear Draghi:

Draghi warned:

We should not create a Single Resolution Mechanism that is single in name only. In this respect, I am concerned that decision-making may become overly complex and financing arrangements may not be adequate. I trust that the European Parliament, together with the Council, will succeed in creating a true Banking Union.

Draghi also discussed the Single Supervisory Mechanism, and there would be stress tests for sovereign bonds as part of the process:

An important element of our preparations is the comprehensive assessment, which comprises a supervisory risk assessment, an asset quality review and a stress test performed in cooperation with the European Banking Authority (EBA).

…The process for the selection of asset portfolios to be reviewed for the asset quality review was initiated in November, based on specific data collections. Furthermore, we expect to announce the key parameters of the stress test exercise together with the EBA towards the beginning of next year.

In this context, let me explain again the treatment of sovereign bonds: The Asset Quality Review is a valuation exercise where we will apply the current regulatory framework. It is not for us to change this framework – this is a global discussion, and the Basel Committee is the right forum for it. That said, we will of course “stress” a wide range of assets as part of the stress tests: Sovereign bonds will be among them.

On interest rates and other measures, Draghi said:

Our forward guidance still remains in place: we continue to expect ECB key interest rates to remain at present or lower levels for an extended period of time. Thus, monetary policy will remain accommodative for as long as necessary.

Adjusting interest rates is not always sufficient to maintain price stability. In this crisis, interest rate cuts have been transmitted more slowly and unevenly across euro area countries due to the fragmentation of financial markets. To address this problem, we adopted in recent years a series of non-standard measures. The purpose of these was – and remains – a more effective transmission of the ECB’s interest rate cuts, so that our monetary policy can reach companies and households throughout the euro area.

This was also the purpose of our decision in November to continue conducting all our refinancing operations as fixed rate tender procedures with full allotment at least until July 2015. Thus, we have helped to alleviate funding concerns of banks, which are still hesitant to lend to households and firms.

Two years ago, we provided funding support to euro area banks through two Long Term Refinancing Operations with a maturity of three years each. As the funding situation of banks has improved significantly since then, banks have this year opted to repay about 40% of the initially outstanding amount. Accordingly, excess liquidity in overnight money markets has been gradually receding. We are monitoring the potential impact of these developments on our monetary policy stance. We are ready to consider all available instruments.

Over in Europe, ECB president Mario Draghi is speaking at the European parliament. here are the Reuters snaps:

16-Dec-2013 14:10 – DRAGHI – UNDERLYING PRICE PRESSURES ARE SUBDUED

16-Dec-2013 14:10 – DRAGHI – SEE MODEST GROWTH IN Q4

16-Dec-2013 14:11 – DRAGHI – ACCOMMODATIVE ECB MON POL STANCE WILL SUPPORT RECOVERY

16-Dec-2013 14:12 – DRAGHI – GROWTH RISKS ARE ON DOWNSIDE

16-Dec-2013 14:14 – DRAGHI – GOVERNING COUNCIL EXPECTS KEY ECB INTEREST RATES TO REMAIN AT PRESENT OR LOWER LEVELS FOR EXTENDED PERIOD

16-Dec-2013 14:17 – DRAGHI – MONITOR MONEY MARKET CONDITIONS CLOSELY, READY TO CONSIDER ALL AVAILABLE INSTRUMENTS

16-Dec-2013 14:18 – DRAGHI – WE ARE FULLY AWARE OF DOWNWARD RISK THAT PROTRACTED PERIOD OF LOW INFLATION ENTAILS

16-Dec-2013 14:19 – DRAGHI – SEE NO RISKS OF FINANCIAL IMBALANCES RELATED TO LOW INTEREST RATE ENVIRONMENT

16-Dec-2013 14:21 – DRAGHI – SOVEREIGN BONDS WILL BE TREATED RISK-FREE IN AQR, WILL BE STRESSED IN EBA STRESS TESTS

16-Dec-2013 14:22 – DRAGHI -CONCERNED THAT SRM DECISION MAKING MAY BECOME OVERLY COMPLEX, FINANCING ARRANGEMENTS MAY NOT BE ADEQUATE

Updated

Back in the world of economics, US factory output has slowed a little this month, mirroring the news from China overnight (see 8.02am post).

Markit’s monthly flash measure of American manufacturers came in at 54.4, down from 54.47 in November. That indicates that US firms (manufacturers and service firms) still grew, but at a slightly slower rate.

The employment measures showed that firms hired new staff at the fastest rate in nine months, and Markit reckons that this quarter is turning into the best three months for US factories this year.

And separate data from the Federal Reserve backs this point up — it just reported a 1.1% jump in industrial output in November.

On that note, I’m handing over to my colleague Nick Fletcher.

Updated

Inga Beale’s appointment as boss of Lloyd’s of London will go a small way to closing the gender gap at the top of the City. But there’s still some way to go.

Currently there are just three women running FTSE 100 companies — Angela Ahrendts at Burberry; Carolyn McCall at EasyJet, and Alison Cooper at Imperial Tobacco. Moya Greene will become the fourth when Royal Mail enters the index on Wednesday night.

Lloyd’s of London isn’t a listed company, so Beale won’t join the quartet.

The total will rise to five when BT executive Liv Garfield moves to run Severn Trent — but, with Ahrendts joining Apple next year, the total could soon drop back to four.

Concern has been growing recently that the City is still a tilted playing field. A survey last week found that a man who starts his career with a FTSE 100 company is four and a half times more likely to reach the executive committee than his female counterpart (the Financial Times has more details).

The UK has a target of 25% female representation across corporate boards by 2015 — currently the figure is 19%, up from 12.5% in 2010. So there appears to be progress…. except that women who do reach senior positions are in jobs that are traditionally lower paid.

Updated

How times change…. Inga Beale is appointed as Lloyd’s first woman CEO just 40 years after the London insurance market welcomed its first ever female broker into the ranks.

Liliana Archibald was a pioneer in 1973 when she became the first ever Lloyds broker, after Lloyd’s decided to move with the times. She now gets a space in the Historic Heroes section of Lloyd’s website, which explains:

At that time, Lloyd’s made a decision to accept women as Names. Archibald applied and in 1973 was accepted.

She told Lloyd’s List, ‘I did not break down the barriers; they were broken down for me by the members of Lloyd’s in a very charming way.’

Updated

Lloyd’s of London appoints first female CEO

Lloyd’s of London has appointed its first ever female chief executive.

Inga Beale will succeed Richard Ward in January. She currently runs Canopius Group, the Lloyd’s-based insurance and reinsurance group.

There had been many whispers in the City in recent days that Beale was in line for the top job at Lloyds, making her the first women to lead the insurance market in its 325-year history.

Beale has worked in insurance for three decades — beginning her career in insurance as an underwriter with Prudential. She’s also previously worked as Global Chief Underwriting Officer of Zurich Insurance, and as Group CEO of Converium Ltd.

John Nelson, Chairman of Lloyd’s, said:

I am absolutely delighted that we have appointed Inga as Chief Executive. She has 30 years’ experience in the insurance industry.

Her CEO experience, underwriting background, international experience and operational skills, together with her knowledge of the Lloyd’s market, make Inga the ideal Chief Executive for Lloyd’s. I very much look forward to working with her.

In the statement just published, Beale said Lloyd’s has “an extraordinary opportunity to increase its footprint and to cement its position as the global hub for specialist insurance and reinsurance”.

Back in June, she argued that more diverse boardrooms could deliver stronger results. Beale explained: 

I think the business is run differently if you have women around the decision making table and that’s why it’s good to have diversity, not just on the gender side.

Different people approach things differently and provide alternative views – diverse boards help companies make better decisions, which affect the bottom line.

It’s been a good few days for gender equality in the corporate world, with Mary Barra being appointed to lead General Motors last week.

Updated

The Eurozone’s trade surplus almost doubled year-on-year in October — but a fall in imports, rather than a surge of exports, is the main factor.

Eurostat reports that the eurozone’s posted a trade surplus of €17.2bn with the rest of the world in October, up from €9.6bn in October 2012..

The trade surplus was also much larger on a month-on-month basis, up from €10.9bn in September.

That sounds encouraging, but a peek at the data confirms that the flow of goods into the eurozone has stumbled since the eurozone crisis began.

Seasonally adjusted imports fell by 1.2% in October compared with September, while exports rose by 0.2%.

So far this year, exports are up 1% to €1.578trn, while imports are down 3% at €1.455trn. The resulting trade surplus, of almost €123bn, is double last year’s €57.4bn.

The data also underlined today’s theme — the divergence between Germany and France.

So far this year, the largest surplus has been recorded in Germany (+€148.3bn in January-September 2013), followed by the Netherlands (+€40.5bn), Ireland (+€28.5bn), Italy (+19.6bn), Belgium (€11.6bn) and the Czech Republic (+€10.6bn).

The biggest deficit was registered in France (-€57.5bn) , followed by the United Kingdom (-€55.1bn), Greece (-€14.5bn) and Spain (-€11.6bn).

Updated

Troubled insurance firm RSA is the biggest faller on the FTSE 100 this morning, shedding almost 3%.

Trader fear RSA’s recent problems — three profits warning, and the resignation of its CEO — could hit its credit rating.

RSA Insurance drops another 3% on credit rating fears

Updated

In the City, power firm Aggreko is leading the FTSE 100 risers after announcing decent results — and a deal to supply temporary power for the World Cup and Commonwealth Games in 2014.

That’s sent its shares up 6% (clawing back losses suffered last week).

Aggreko wins World Cup and Commonwealth Games power contracts

The euro has risen this morning, up 0.2% to $1.3765 against the US dollar. That reflects Markit’s view that today’s PMI data doesn’t make fresh stimulus from the European Central Bank more likely.

There’s also edginess ahead of the Federal Reserve’s meeting on Wednesday -when it might start to ease back on its $85bn/month bond-buying programme

Peter O’Flanagan of Clear Currency reckons the Fed won’t taper this week:

 Although there are continued signs of improvement in the US economy we feel the Fed may well look for one more month of strong data before they announce the scaling back of their QE program.

That being said we think this decision will be down to the wire.

European market: morning update

It’s a positive start to the week in Europe’s stock markets.

The Spanish and Italian markets are the best performers, following the news that private firms in the periphery are enjoying their best month since April 2011, according to Markit

  • FTSE 100: up 32 points at 6,472, + 0.5%
  • German DAX: up 45 points at 9,052, +0.5%
  • French CAC: up 16 points at 4,076, + 0.4%
  • Spanish IBEX: up 141 points at 9,414, + 1.5%
  • Italian FTSE MIB: up 253 points at 18,089, +1.4%

Howard Archer of IHS sums up the good news in today’s data…..

Some relatively decent news for Eurozone recovery prospects with the December purchasing managers surveys indicating that overall Eurozone manufacturing and services output expanded for a sixth month running and at the fastest rate since September.

Furthermore new orders picked up in December to the highest level since mid-2011, thereby lifting hopes that Eurozone activity can pick up at the start of 2014.

… and the bad:

However, there was pretty dire news on France where overall manufacturing and services activity contracted for a second month running in December and at the fastest rate for seven months following on from GDP contraction of 0.1% quarter-on-quarter in the third quarter.

This suggests that there is a very real danger that France is slipping back into shallow recession and reinforces concern about France’s underlying competitiveness.

France lags behind as eurozone recovery picks up

Activity across the Eurozone private sector has risen this month as the single currency area ends the year with ‘fragile’ growth, according to Markit’s new data published this morning.

It found that output in peripheral eurozone countries picked up in December.

With Germany already reporting solid growth this morning (see here), France looks increasingly like the ‘sick man of Europe’ as its firms struggle.

Markit’s Eurozone PMI Composite Output Index — which measures activity at thousands of firms across the eurozone — rose to 52.1 in December, up from 51.7 in November. That’s a ‘flash’ estimate, of course, but it suggests stronger growth in most parts of the euro area – not just Germany.

December is turning into a good month for eurozone manufacturers, with output rising for the sixth successive month. The rate of increase was the highest since April 2011 .

Service sector growth was more modest, though, with the rate of expansion hitting a four-month low (but there was still growth)

But as this graph shows, France was the laggard – with its service and manufacturing firms reporting a drop in activity (see 8.23am for details).

Chris Williamson, chief economist at Markit, said the data suggested the eurozone will grow modestly this quarter, by 0.2%. He fears that France could fall back into recession though, as the gap between the eurozone’s two biggest countries gets bigger .

Williamson explained:

The rise in the PMI after two successive monthly falls is a big relief and puts the recovery back on track. The upturn means that, over the final quarter, businesses saw the strongest growth since the first half of 2011, and have now enjoyed two consecutive quarters of growth.”

On the downside, the PMI is signalling a mere 0.2% expansion of GDP in the fourth quarter, suggesting the recovery remains both weak and fragile.

The upturn is also uneven. Growth is concentrated in manufacturing, where rising exports have helped push growth of the sector to the fastest for two-and- a-half years, while weak domestic demand led to a further slowing in service sector growth.

However, it‟s the unbalanced nature of the upturn among member states that is the most worrying. France looks increasingly like the new “sick man of Europe‟, as a second successive monthly contraction may translate into another quarterly decline in GDP, pushing the country back into a technical recession. In contrast, the December survey data round off a solid quarter of growth in Germany, in which GDP looks set to rise by 0.5%.

There‟s little here to suggest that euro area policymakers need to increase their stimulus, but on the other hand the sluggish nature of the upturn adds to the sense that policy will remain ultra- accommodative for quite some time.

And here’s some reaction to the news that growth in Germany manufacturing sector is currently running at a 30-month high….

Tim Moore, senior economist at Markit:

 Manufacturing achieved a particularly strong end to the year, with improving new order flows and renewed job creation also providing encouragement that the sector has gained momentum since the autumn.

Growth of new work was the fastest for over two-and- a-half years while stocks of finished goods were depleted at an accelerated pace.

Quite a contrast with France, where firms reported that orders are falling (see 8.23am)

Now over to Germany…..

Germany’s private sector is leaving France in the dust, Markit reports, led by its manufacturers.

Private sector output in the eurozone’s largest economy is growing steadily this month, for the eighth month in a row.

German factories saw output growth accelerate, pushing the manufacturing PMI up to a 30-month high of 54.2, up from 52.7 in November.

Service sector firms expanded at a slower pace than in November, but growth was still solid. The Service sector PMI was 54.0, down from 55.7.

This meant the composite German private sector PMI fell slightly to 55.2 in December, down slightly on November’s 55.4 — but still indicating healthy expansion.

That suggests Germany’s economy will grow this quarter.

Credit Agricole’s Frederik Ducrozet points out that other French economic surveys have been less pessimistic than the PMI readings…

And this graph shows how recent PMI data has been more negative than the official growth data:

Updated

French PMI: Instant reaction

Here’s how experts are reacting to the news of France’s weakening private sector:

Markit chief economist Chris Williamson said the drop in French private sector activity suggests that France’s GDP will shrink by about 0.1% in the current quarter.

That would follow the 0.1% contraction in July-September — putting France back into recession (defined as two consecutive quarters of negative growth)

Williamson added:

The pipeline of work that companies have to deal with is drying up and we’ll get to a stage where, if that doesn’t turn around, there will be increased job losses.

French private sector keeps shrinking

France could be sliding into a double-dip recession, as its private sector activity continues to fall this month.

Data provider Markit reports that the rate of decline in French private sector output accelerated during December. It recorded the biggest contraction in output in seven months.

That suggesting that France’s economy is still shrinking, as manufacturers and service sector struggle to win new contracts.

The Markit Flash France Composite Output Index, slipped to 47.0, from 48.0 in November — that’s the second month in a row that it’s been below 50 points (which signals a drop in activity).

In a report shy of good news, Markit found that new orders are decreasing in the French private sector, meaning companies are relying on existing work to keep busy.

 Backlogs of work fell solidly and at the sharpest pace in eight months, it said. Staffing levels also continued to decline during December, as firms shed staff.

Andrew Harker, Senior Economist at Markit, said the readings “paint a worrying picture on the health of the French economy.

The return to contraction in November has been followed up with a sharper reduction in December, with falling new business at the heart of this as clients were reportedly reluctant to commit to new contracts.

Firms will hope that such reticence ends in the new year as they seek to avoid another protracted downturn.

Details to follow….

Chinese factory growth slows

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

The last full working week of 2013 (in these parts, anyway) begins with the news that growth in China’s factory sector has slowed this month, for the third month in a row.

It’s that stage in the month when data provider Markit produces its ‘flash’ estimates of activity in key economies, based on interviews with purchasing managers (We get data from France and Germany this morning too).

And China’s PMI has fallen to 50.5 for December, from November’s 50.8, with firms reporting that output growth slowed. That’s closer to the 50-point mark that splits expansion from contraction.

It may suggest the global economy is ending the year on a weaker note. As well as slowing output growth, firms also reported a drop in employment. On a happier note, new orders have picked up.

The news sent China’s stock market sliding to a four-week low, with the Shanghai Composite Index shedding 1.6%.

That’s set the tone for an edgy start to the week, as global investors await the US Federal Reserve’s monthly meeting on Wednesday night (where the Fed might take the plunge and slow the pace of its stimulus programme).

Also on the agenda– the implications of Germany’s new government, after the CDU and the SPD formally formed a coalition over the weekend.

And I’ll be keeping an eye on Greece, where the government and the Troika are continuing to hold talks over its bailout programme…..

Updated

guardian.co.uk © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.

While jobs growth and output are rising fast in the construction industry, retail offers a more mixed picture of the UK economy. Forecasting groups have modest expectations for growth in 2014: a 2% increase in GDP following 1.4% in 2013…

 


Powered by Guardian.co.ukThis article titled “Construction and retail – contrasting perspectives on UK economic recovery” was written by Larry Elliott, economics editor, for The Guardian on Tuesday 5th November 2013 00.01 UTC

Construction and retailing offer contrasting perspectives on Britain’s economic recovery. On the UK’s building sites, things are looking up . The monthly construction industry health check from CIPS/Markit showed jobs growth and output rising at their fastest for six years. Although that may be more a reflection of the deep hole the sector plunged into during the recession, sentiment has certainly improved. The Government’s Help to Buy scheme has boosted house building, but Monday’s report suggests demand for commercial property is also on the up.

Tuesday’s report from the British Retailers Consortium is more mixed. After a strong summer, spending growth in the high street has cooled in the last couple of months. That could be because sales of new winter fashions have been hit by unseasonally warm weather, or it could be that consumers are saving up for a big splurge at Christmas. It could be that individuals are finding it hard to make the sums add up during a prolonged period when prices have been rising more quickly than wages. In all probability, the cautious mood is a combination of all three.

Rising consumer spending is the reason economic activity picked up in the second and third quarters of the year. There was little boost from the other components of growth -– investment, exports and the state – so the expansion was the result of higher household spending. How is this possible when real earnings are falling? In part, spending has been encouraged by rising employment. In part, it has been aided by stronger consumer confidence, which has led to people running down the precautionary savings they built up when they were more pessimistic about the future.

Clearly, consumers will be unable to continue dipping into their savings to fund their spending for ever. That’s why forecasting groups such as the National Institute for Economic Research have only modest expectations for growth in 2014: a 2% increase in GDP following 1.4% in 2013. NIESR sees little prospect of stronger investment kicking in, and with the prospects for exporters decidedly mixed that means consumers will again bear the strain.

Even so, the NIESR forecast looks too low. There will be some recovery in investment in response to stronger consumer spending. More significantly, perhaps, the housing market now has real momentum and that will lead to some further drop in the savings ratio to compensate for squeezed incomes.

guardian.co.uk © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.

In May, the US treasury was able to employ some “extraordinary measures” to keep borrowing. These measures run out on 17 October. If the USS America goes down, little HMAS Australia will find it tough not to get sucked into the vortex…

 


Powered by Guardian.co.ukThis article titled “Why Australia should fear a US government default” was written by Greg Jericho, for theguardian.com on Monday 7th October 2013 07.34 UTC

The current US government shutdown has little impact on Australia, but if the US hits the debt ceiling Australia will feel the consequences of a bitterly partisan US political system.

One of the more ironic aspects of the US government shutdown is that if it goes on for much longer, the government won’t be able to calculate its economic impact because it won’t be able to collect the data.

Last Friday was supposed to be the most recent release of US jobs figures, and yet those logging on to the BLS website would have seen this:

During the shutdown the BLS won’t be able to collect the data to calculate the employment figures. Similarly the Bureau of Economic Analysis is also shut down, which rather makes collating data for the GDP figures a tad tricky.

But for Australians the big issue is not so much the shutdown. Costly as it is to the American economy – wiping about 0.1% of GDP growth each week – it does not have a great direct impact outside its borders. After all there are not many Australians employed by the US government or about to go to a US national park this weekend. The real bitter pill for the rest of the world (and US) comes in a couple weeks when the US reaches its debt ceiling.

The debt ceiling is often lazily referred to as the US government’s credit card limit, but it is not about giving the US government the right to spend more, but the ability to borrow to pay off spending it has already undertaken.

The debt ceiling is currently at $US16.699tn, and was actually reached in May but the US treasury was able to employ some “extraordinary measures” to keep borrowing. These measures will run out on 17 October.

At that point the US will no longer be able to borrow money to pay its bills. In the short run that is OK, because the US government gets enough cash from tax revenue to cover its expenses. But on 1 November it gets a bill for US$67bn for social security, medicare and veterans benefits. By 15 November the US government will be short about US$108bn. And that means defaulting on its payments.

No one really knows what will happen if the debt ceiling is not raised. Views range from, it’ll be fine, to it’ll be Armageddon. The US Treasury for its part has put out a paper that paints a pretty scary picture.

After looking at what has occurred in 2011 when the US nearly reached the debt limit, it concluded that a debt default “could have a catastrophic effect on not just financial markets but also on job creation, consumer spending and economic growth”.

It also noted that “many private-sector analysts believing that it would lead to events of the magnitude of late 2008 or worse, and the result then was a recession more severe than any seen since the Great Depression”.

And just in case you are a glass-half-full kind of person and you still have some optimism, the report ends on this less than upbeat note: “Considering the experience of countries around that world that have defaulted on their debt… [the] consequences, including high interest rates, reduced investment, higher debt payments, and slow economic growth, could last for more than a generation.”

Cheery.

Thus far the markets have been rather sanguine. The US Treasury 10-year bond yields are lower now than they were a month ago – suggesting investors are not too spooked about the long-term US economy. There is also a sense that investors are a bit jaded – the debt ceiling fight is now becoming an annual event.

But in the past few days, investors have become very worried about holding US treasury bonds which mature in the next month.

The spread of the six-month to one-month treasury bonds fell off a cliff, to the point where investors are now demanding a higher return for buying a one-month US treasury bond than for a six-month.

Should the default actually occur you could expect those jaded investors would suddenly get very alert. A US government default would put the world economy into uncharted waters. Around 87 % of all foreign exchange transactions involve US dollars. If the US government can no longer guarantee it will pay its bills (even for a short time), that rather upsets the integrity of the entire system.

In 2011 when the debt ceiling was almost breached, the US’s credit rating was downgraded to AA. It hurt US confidence, put a big hand brake on economic growth, and the turmoil on financial markets reduced American household wealth by around US$2.4tn.

For Australia, in 2011 our dollar at the time soared to US$1.10 as the American currency lost value. With the value of our dollar already rising the last thing our manufacturing sector needs is for the dollar to be given a boost.

For the moment most expect congress to back down and raise the debt ceiling (or perhaps even suspend it for a few more months like they did last year).

But Australians should hope that the US gets its act in order soon. While it is nice to think that we are now bound to China, a look over the past 20 years shows that aside from extraordinary circumstances – such as the dotcom bubble and September 11 attack, and our mining boom in 2006 – Australia and the US’s GDP growth is quite closely linked.

Our economy is like a dinghy in the ocean of the international economy. If the US scuttles itself though political intransigence, without another mining boom, little HMAS Australia would find it tough not to get sucked into the vortex as USS America goes down.

guardian.co.uk © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.

Chinese finance minister: US must act fast. US Treasury secretary: Congress is ‘playing with fire’. Goldman Sachs: 4.2% wiped off US GDP without debt deal. The US AAA credit rating was downgraded by S&P two years ago after the last debt ceiling standoff…

 


Powered by Guardian.co.ukThis article titled “China warns US over debt ceiling, as markets fall again – live” was written by Graeme Wearden, for theguardian.com on Monday 7th October 2013 14.40 UTC

Oil price drops

The oil price is down today, with a barrel of Brent crude dropping by over one dollar to $108.44.

That doesn’t look to be related to the US standoff, though. Instead, it reflects relief that Tropical Storm Karen weakened over the weekend. That means oil work in the Gulf of Mexico is resuming, having been suspended a few days ago as Karen approached.

China’s warning to America to raise its debt ceiling swiftly comes as the issue becomes intertwined with Congress’s failure a week ago to agree a budget for the new fiscal year (triggering the partial government shutdown).

Terry Morris, senior vice president of National Penn Investors Trust Company in Pennsylvania, says the deadlock is a growing worry, telling Reuters:

Now you’ve got not only the budget but the debt ceiling and time is running out and everybody knows it..

The longer this goes on, the more the uncertainty, the closer the deadline and the more nervous investors are going to be.

Gold has risen to a one-week high, with the spot price gaining 1.3% to $1,327 a ounce.

Updated

Although shares are down on Wall Street, there’s no sign of panic in the US stock markets over the budget and debt ceiling deadlock.

Todd Horwitz of Average Joe Options is telling Bloomberg TV that traders don’t like the uncertainty caused by the ‘blowhards in Washington’, saying:

It’s not a panic selloff, it’s very controlled.

Horwitz added that trading volumes are light at the moment, but could pick up as the debt ceiling deadline approached

The closer we get to the 17th [October], the more action we’ll see.

Wall Sreet open: Dow falls

Shares are falling in New York as the echoes from the Wall Street opening bell fade away.

The Dow Jones industrial average is down 140 points in the first few minutes to 14931, a drop of almost 1%.

The other indices are also down, matching losses in Europe.

FTSE 100: down 51 points at 6403, – 0.8%

German DAX: down 73 points at 8549 ,- 0.85%

French CAC: down 28 points at 4136, -0.67%

Reaction to follow

Business is underway in Washington DC, with White Officials sticking to their position that President Barack Obama will not negotiate with congressional Republicans under the threat of a debt default.

Via Reuters:

“There has never been a period where you have a serious faction or a serious strategy by one political party … to use the threat of default as the main tactic in extracting policy,” White House National Economic Council Director Gene Sperling said at a Politico breakfast on Monday.

On asset class isn’t suffering from the looming debt ceiling today – US sovereign debt.

The price of 10-year Treasury bonds has actually risen this morning, showing stronger demand for America’s debt.

One-month bills are slightly weaker today, but are still changing hands at a yield (or rate of return) or just 0.147%. That doesn’t suggest bond traders are frantically dashing to sell them.

US debt is still being treated as a a place of safety, even though it’s at the centre of this particular storm.

Nick Dale-Lace, senior sales trader at CMC Markets, comments:

Ironically it seems one beneficiary of a risk off morning is US treasuries, with investors continuing to flock to the very bonds that are apparently at risk of default.

The ramifications of a default on bond markets are not clear cut, with much confusion about what the fallout would be given the dependency of the financial world on US debt markets. What are the legal triggers of such a default and are they irreversible? With every minute passed we edge closer to the unknown, and that is rarely good for the markets

US politicians get their chance to heed China’s chiding over the debt ceiling, when Congress returns to work today.

Both the House and the Senate will be in session, with votes scheduled for the afternoon.

However, none of the legislation on the table amounts to the ‘clean’ budget bill (stripped of cuts to the Affordable Care act) which the Democrats are demanding.

CBS’s News Mark Knoller is tweeting the state of play:

China warns US on debt ceiling crisis

China has raised the pressure on the US today, warning that time is running out to raise its debt ceiling.

Vice finance minister Zhu Guangyao told reporters in Beijing that America needs to take decisive steps to prevent hitting its debt limit in a fortnight’s time. The intervention came as European stock markets remained lower, on the seventh day of the US shutdown.

In the Chinese government’s first public comments on the deadlock, Zhu also urged Washington politicians to “learn lessons from history”. A reminder that the US AAA credit rating was downgraded by S&P two years ago after the last debt ceiling standoff.

Zhu said (quotes via Reuters):

The United States is totally clear about China’s concerns about the fiscal cliff.

We ask that the United States earnestly takes steps to resolve in a timely way before October 17 the political [issues] around the debt ceiling and prevent a U.S. debt default to ensure safety of Chinese investments in the United States and the global economic recovery

This is the United States’ responsibility.

As the biggest single holder of US debt, China would be in the front line to suffer if Treasury prices fell – and would obviously be hit if the US were to stumble into a technical default.

Beijing must have watched the deadlock in Washington with growing alarm (yesterday, Republicans continued to demand healthcare cuts as the Treasury Secretary warning Congress was playing with fire).

Analysts were already concerned about the lack of progress (round-up here). with Goldman Sachs warning of drastic cutbacks if America breaches the debt ceiling (details here).

Zhu’s warning added to the jitteriness in the City. Shares remain down across Europe’s trading floors, with the FTSE 100 down 50 points at 6402, a fall of 0.8%. The German and French stock markets are both down around 1%. Here’s a round-up:

Alastair McCaig, market analyst at IG, says there is an increasing ‘fear factor’ in the City as America moves closer to its debt ceiling:

The news that US politicians have again put self-interest ahead of the greater good of the country by failing to make any progress in sorting out the budget or tackling the debt ceiling will have surprised few.

As yet the US debt markets have remained calm but the closer we get to the mid-October deadline the less likely that is to remain the case.

And as mentioned earlier, the US dollar is still down against most major currencies. The pound has gained almost 0.5% to $1.608 so far today.

Updated

US showdown: What the experts are saying

Here’s a round-up of what City experts are saying about the deadlock in America over its budget talks, and the debt ceiling — which the US will hit on 17 October.

Louise Cooper of Cooper City:

As the disaster that is Washington continues, the world needs bond vigilantes to bring the political class to its senses. Sadly thanks to the Federal Reserve’s endless QE, that restraint and imposed market discipline is no longer in place. And that is dangerous. Without the market check, Washington is risking ruin.

So how are these “bond vigilantes” and how do they impose discipline on the ruling classes? They are simply the mass of investors in government debt who by their actions force governments back to the financial straight and narrow. If they think a Nation is spending too much without enough taxation, resulting in excessive deficits and ballooning debt, they will demand a higher interest rate. That is basic finance; higher risk is compensated by a higher return. So as a Nation’s debt rises rapidly, the nation has to pay higher interest rates. So bond yields – borrowing costs – rise. And that is the restraint imposed upon governments – borrowing becomes more expensive the more fiscally irresponsible the government becomes.

That is the check to stop politicians getting their country overly indebted.

And it is the same mechanism with irresponsible monetary policy too – a higher yield is required by investors to compensate for the loss in monetary value from inflation. So bond investors are really important for financially feckless nations, because they that drag the ruling classes back to sensible economic policies (by demanding higher interest rates).

But the problem is that the Federal Reserve is currently buying $85bn of bonds a month, manipulating America’s borrowing costs lower.

The Fed is the biggest player in the markets and if it wants bond yields down then few will bet they will go up. Thus there is no corrective mechanism. Without the Fed’s QE, the current Washington fiasco would have increased America’s borrowing costs and that would have helped to force politicians back to the negotiating table. It now looks likely that the Fed didn’t taper in September as it was concerned about the impact the shutdown would have on the economy. It is also likely that with no non farm payrolls figure being released on Friday, the Fed will not taper in October either.

Implicitly the Federal Reserve is bailing out the incompetency of Washington. The stick has been removed allowing the political class to play wild and threaten default.

Kit Juckes of Societe Generale

I have no vote and hope I am non-partisan in this debate but I think that this is a row about principles as much as about power, which argues for a drawn-out impasse, though the odds still favour last-minute resolution. A good question (from Joe Weisenthal) was what the Republicans would have used to justify the stalemate if Obamacare wasn’t there to argue over.

And while I am sure the GOP could have found a reason for disruptive politics, it also seems clear that Obamacare is too important to the President’s ‘legacy’ for him to compromise on that, while the right wing of the GOP is opposed on principle as much as anything else. But it’s also clear that the Republicans are
‘losing’ the public relations war. I don’t think that merely reflects my Twitter stream or choice of on-line reading.

The big winner of this mess will be Hilary Clinton. And that, in turn, means that a compromise, with tax cuts elsewhere, is likely to be found to get a deal through that allows the debt ceiling to be increased by 17 October.

Jane Foley of Rabobank

The rallying call of Republican House Speaker Boehner over the weekend that it is “time for us to stand up and fight” looks set to commit the shutdown of the US government into a second week.

The vote by Congress in favour of paying the government workers who has been sent home on leave will offset some concerns about the economic costs of the shutdown. Even so, with the October 17 deadline for a debt default looming, investors are likely to become increasingly nervous with every passing day.

Marc Ostwald of Monument Securities:

Shutdown Day 7 is unfortunately the theme for the day, and quite possibly for the week…

While mutterings ahead of the weekend suggested that Boehner said he would make sure that there was no default, and some hopeful whispers of a few Tea Party aligned members of the House softening their stance, positioning as the week starts appears to be even more entrenched.

The backlog of official US economic data is building quite rapidly with little obvious prospect of anything being published this week. One assumes that the end of week G20 meeting of finance ministers and central bank heads may have little else to discuss, though the protests about the US political impasse (assuming it has not been resolved) from other G7 and EM countries will be vociferous.

Elsa Lignos of RBC Europe:

The hard line on both sides has unsurprisingly been taken negatively by risky assets. The Yen and Swiss franc are outperforming, US equity futures are pushing down towards Thursday’s lows, while US Treasuries are still trading sideways.

It is still a case of waiting and watching on developments in Washington. Our US Strategists expect that the longer the government remains dark, the greater the likelihood that the shutdown and debt ceiling issues are resolved together, which would result in a better outcome

Investec Corporate Treasury

Some analysts have estimated that default is likely by November 1st when the Treasury Department is scheduled to make nearly $60 billion in payments to Social Security recipients, Medicare providers, civil service retirees, and active duty military service members.

With such a limited window of time available all eyes will be on the US this week to see if a resolution can be reached. In the meantime expect the US shutdown to dominate currency markets and be prepared for some volatility if a default starts to look more likely.

Updated

Greek budget predicts growth in 2014

Back to Greece, where the government has predicted a return to growth next year after a six-year slump.

The draft 2014 budget, announced this morning by deputy finance minister Christos Staikouras, also forecasts a surplus excluding debt financing costs. This is a crucial target for Athens as it aims to agree further assistance from its international partners.

Reuters has the details:

Greece will emerge from six years of recession next year, its draft 2014 budget projected on Monday, in one of the strongest signs yet that the country has left the worst of its crippling debt crisis behind.

The economy, which has shrunk about a quarter since its peak in 2007, will grow by 0.6% next year thanks to a rebound in investment and exports including tourism, the budget predicted. The economy is set to contract by 4 percent this year. Athens is also targeting a primary budget surplus of 1.6% of national output next year and is on track to post a small surplus this year.

Attaining a primary surplus – excluding debt servicing costs – is key to helping Athens secure debt relief from its international lenders.

“In the last three years Greece found itself in a painful recession with an unprecedented level of unemployment,” Deputy Finance Minister Christos Staikouras said as he unveiled the 2014 budget.

“Since this year the sacrifices have begun to yield fruit, giving the first signs of an exit from the crisis.”

These signs of recovery are encouraging hedge funds to buy stakes in Greek banks (see 9.12am) and fuelling rumours that Greece could swap some debt for new 50-year bond (see opening post).

The budget also shows that Greece will run a deficit of 2.4% (including debt costs). This will push its public debt to 174.5% of GDP, despite investors taking a haircut early last year.

How much damage would be caused if American politicians doesn’t raise the debt ceiling before the October 17 deadline?

Goldman Sachs has crunched the numbers, and told clients over the weekend that the Treasury would be forced into a drastic cutback in spending from the end of October which would wipe 4.2% off annualised GDP.

The research note (from Saturday, but still well worth flagging) showed how the Treasury is on track to hit its borrowing limit in two weeks.

After that point, the amount of money coming into the Treasury will equal only about 65% of spending going out, Goldman said. There are various ways that the US could play for time — such as prioritising some payments over others, or delaying payments altogether.

But officials would soon be forced to implement measures that would hurt growth badly, in a bid to avoid missing a debt repayment and triggering a downgrade to Selective Default status.

Here’s a flavour of the note:

If the debt limit is not raised before the Treasury depletes its cash balance, it could force the Treasury to rapidly eliminate the budget deficit to stay under the debt ceiling. We estimate that the fiscal pullback would amount to as much as 4.2% of GDP (annualized). The effect on quarterly growth rates (rather than levels) could be even greater. If this were allowed to occur, it could lead to a rapid downturn in economic activity if not reversed very quickly.

And more detail….

A very short delay past the October deadline—for instance, a few days—could delay the payment of some obligations already incurred and would create instability in the financial markets. This uncertainty alone could weigh on growth.

But a long delay—for example, several weeks—would likely result in a government shutdown much broader than the one that started October 1. In the current shutdown, there is ample cash available to pay for government activities, but the administration has lost its authority to conduct “non-essential” discretionary programs which make up about 15% of the federal budget.

By contrast, if the debt limit were not increased, after late October the administration would still have authority to make most of its scheduled payments, but would not have enough cash available to do so.

US deadlock hits euro investors

The US government shutdown debacle has hit investor confidence within the eurozone, according to the latest data from German research firm Sentix.

Sentix’s monthly measure of investor sentiment dropped to 6.1, from 6.5 in September. Analyst had expected the index to jump to 8.0, but it appears morale has suffered from the deadlock in Washington.

Sentix reported that investors’ current assessment of the United States, and the assessment of prospects in six-months time, has been noticeably damaged by the budget row and the debt ceiling fears. Its headline index for the US dropped to 16.8, from 24.8 last month.

Overall indices for the emerging markets regions rose, while those surveyed remain optimism for Japan’s prospects.

Over in Italy, Silvio Berlusconi is preparing to request a community service sentence, following his tax fraud conviction in August.

Berlusconi, whose efforts to bring down the Italian government (and reignite the eurozone crisis) failed last week, has now turned his attention to his legal troubles.

From Rome, Lizzy Davies has the story:

“Silent and humble manual tasks” are not something to which Silvio Berlusconi has ever felt naturally drawn. Before big business and politics he sold vacuum cleaners and sang on cruise ships.

Now, however, thanks to the Italian legal system, a very different kind of activity awaits him. His lawyer has said he intends to ask to serve his sentence for tax fraud in a community service placement.

Franco Coppi said that barring any last-minute changes, the former prime minister’s legal team would submit the request to the Milan courts by the end of this week. It would be then up to the judges to decide how to proceed.

More here: Silvio Berlusconi to request community service for tax fraud sentence 

Former Greek minister convicted over money-laundering charges

Court drama in Athens this morning, where a former defence minister has been found guilty of money-laundering.

Akis Tzohatzopoulos was one of 17 defendants convicted after a five-month trial. Associated Press reports that Tzohatzopoulos’s wife, ex-wife and daughter were also found guilty.

Tzohatzopoulos was charged with accepting bribes in exchange for agreeing military hardware contracts, in the 1990s and the early 2000s. The court heard that these kickbacks were laundered through a network of offshore companies and property purchases.

Sentences will be handed down tomorrow.

Greek journalist Nick Malkoutzis reckons this is the most serious conviction of a Greek politician in around 20 years.

In March, Tzohatzopoulos was convicted of corruption charges, after lying on his income statements and hiding luxurious spending. He was jailed for eight years following that case.

Updated

Some interesting stories about Greece this morning. First up: John Paulson, the hedge fund boss who made billions of dollars betting against America’s mortgage market before the crisis began, is a big fan of Greek banks.

Paulson is making a serious move into the Greek financial sector, as investors gamble that the worst of its woes are over.

The FT has the details:

Mr Paulson, best known for his successful wager against the US subprime mortgage market in 2007, praised Greece’s “very favourable pro-business government”.

“The Greek economy is improving, which should benefit the banking sector,” Mr Paulson told the Financial Times.

He confirmed his fund, Paulson & Co, had substantial stakes in Piraeus and Alpha, the two banks that have emerged in best shape from the crisis. “[Both] are now very well capitalised and poised to recover [with] good management,” he said in rare public comments.

More here: Paulson leads charge into Greek banks

The US dollar has also dropped this morning against most major currencies. This pushed the yen up around 0.5%, to ¥ 96.9 to the dollar. That won’t please Japanese exporters, who’d rather see the yen over the ¥100 mark.

America’s stock indices are also expected to drop around 0.8% when trading begins in about 6 hours, Marketwatch flags up.

The head of ratings agency Moody’s reckons America won’t default, even if it ploughs into the debt ceiling this month.

Raymond McDaniel told CNBC overnight:

Hopefully it is unlikely that we go past October 17 and fail to raise the debt ceiling, but even if that does happen, then we think that the U.S. Treasury is still going to pay on those Treasury securities.

Markets drop:

Europe’s stock markets have followed Asia by falling in early trading, as investors fret over the lack of progress over America’s government shutdown.

In London the FTSE 100 swiftly shed 46 points, or 0.7%, with 95 of the companies on the index . It’s a similar tale across Europe’s markets, with Germany’s DAX down 0.85% and the French CAC shedding 0.75%

Mike van Dulken of Accendo Markets sums up the mood in the City:

Sentiment is still dampened by USuncertainty as the partial shutdown moves into its second week and the more troubling debt ceiling of 17 October nears. How long will this drag on for? Only the politicians know.

The congressional stalemate shows no signs of progress with House Speaker Boehner adamant that a clean spending bill will not be approved while Treasury Secretary Lew says congress is playing with fire putting the nation’s sovereign reputation at risk, on top of President Obama’s highlighting of the potential impact on Q4 GDP.

It all adds up to another sea of red on the European markets:

Updated

World Bank cuts China growth forecasts

America’s deadlock isn’t the only issue worrying the City today. The World Bank has warned that East Asia’s economic growth is slowing as it cut its GDP forecasts several nations, including China.

In a new report, the Bank said weaker commodity prices means weaker growth in the region. It also urged Chinese policymakers to tackle the consequences of recent loose policy and tighten financial supervision.

Here’s a flavour:

Developing East Asia is expanding at a slower pace as China shifts from an export-oriented economy and focuses on domestic demand,” the World Bank said in its latest East Asia Pacific Economic Update report.

“Growth in larger middle-income countries including Indonesia, Malaysia, and Thailand is also softening in light of lower investment, lower global commodity prices and lower-than-expected growth of exports,” it added.

It now expects the Chinese economy to expand by 7.5% this year, down from its April forecast of 8.3%. For 2014, the forecast is cut from 8% to 7.7%.

Full story here: World Bank cuts China growth forecasts

US deadlock continues to worry the markets

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

It’s the seventh day of the US government shutdown, and the lack of progress in Washington continues to cast a shadow over the financial world.

Shares have slipped in Asia overnight; in Japan, the Nikkei shed another 1.2%. European markets are expected to fall again.

America seems no closer to a solution to the deadlock, nearly a week after the Federal government began shutting services and sending workers home. It is, though, closer to its debt ceiling — the US is still on track to hit its maximum borrowing limit of $16.7bn on 17 October.

Yesterday, Treasury secretary Jack Lew warned that America would default if the ceiling isn’t raised. Congress, he said, was ”playing with fire”.

Lew said:

I’m telling you that on the 17th, we run out of the ability to borrow, and Congress is playing with fire.

But the Republican-controlled House of Representatives hasn’t blinked — continuing to demand concessions from President Obama.

House speaker John Boehner was defiant last night, saying his side would “stand and fight” for concessions on issues like healthcare reforms.

Boehner told ABC television:

You’ve never seen a more dedicated group of people who are thoroughly concerned about the future of our country.

The nation’s credit is at risk because of the administration’s refusal to sit down and have a conversation.

So the deadlock continues, with investors pondering whether this impasse really could turn into a catastrophic debt default.

Stan Shamu of IG explains that traders are more nervous than late last week:

While Friday’s modest gains in US equities were driven by a glimmer of hope that leaders are getting closer, this seems to have waned over the weekend.

House speaker John Boehner was quoted as saying he wouldn’t pass a bill to increase the US debt ceiling without addressing longer-term spending and budget challenges. This has really rattled markets and is likely to result in further near-term weakness for global equities.

Not much on the economic calendar today, although we do get the latest eurozone reading of investor confidence at 9.30am BST.

In the UK, the row over the Royal Mail privatisation continues, with critics warning that it’s being sold off too cheaply.

While in Greece, there were reports on Saturday that Athens is considering swapping some bailout loans for new 50-year bonds, as part of a third aid package.

Reuters had the story: Greece mulls swapping bailout loans with 50-year bond issue: source

I’ll be tracking all the action through the day….

Updated

guardian.co.uk © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.

IMF Chief Christine Lagarde says “vital to raise US debt ceiling”. The US Treasury Department also weighed in, warning of dire calamity. US services sector showed growth was slowing, with the PMI coming in at 54.4 in September, down from 58.6 in August…

 


Powered by Guardian.co.ukThis article titled “Lagarde demands urgent action over US debt ceiling as markets get jittery – as it happened” was written by Graeme Wearden, for theguardian.com on Thursday 3rd October 2013 16.51 UTC

The end

The big story tonight remains the US government shutdown - which my US colleagues are live-blogging here. So here’s a brief summary to finish with.

• Christine Lagarde has piled pressure on America’s politicians to raise the US debt ceiling quickly. The IMF chief said it was “mission-critical” to avert the danger of a US default. The country’s Treasury Department also weighed in, warning of dire calamity.

• Fears over a possible US default hit shares on Wall Street. There were also signs of investors moving money out of short-term US debt, pushing up bond yields. Encouraging US jobs data was cancelled out by weaker service sector growth. Here’s what analysts are saying about the debt ceiling….

• Europe’s private sector has posted its biggest rise in activity in 27 months. Italian firms reported a stronger month, boosting hopes that the country is pulling out of recession. Retail sales also picked up.

• China’s service sector performed well in September too, pushing activity to a six-month high.

• In Greece, the head of the Golden Dawn party is being held in custody ahead of the criminal trial into the party, as the clampdown continues to raise fears over the country’s political stability. Another GD MP appeared in court, as the party raged against the decision to jail its leader.

• A survey of a Cyprus gas field found smaller reserves than hoped, but the government will still push on with exploiting it.

Back tomorrow, hopefully for a more lively day. Goodnight. GW 

An uninspiring day in Europe’s stock markets is over.

The FTSE 100 finished up 11 points at 6449, but the other main markets all lost ground. The French CAC shed 0.7%, the German DAX closed 0.37% lower, Spain’s IBEX is down 0.7% and the Italian FTSE MIB dropped 0.5%. No boost from today’s decent eurozone economic data, while the US debt ceiling deadline gets closer…..

Updated

The Japonica Partners investment fund, which has a big holding of Greek debt, has been holding a conference call for City analysts to explain why Greece’s bonds are actually much better quality than people realise.

Here’s a screengrab of Bloomberg’s news flashes:

FT Alphaville’s Joseph Cotterill is on the call, and flags up that Japonica was asked whether it’s planning to buy Greek state assets with its Greek government bonds. The idea wasn’t ruled out….

Wall Street falls

Those warnings over the US debt ceiling from Christine Lagarde, and from the US Treasury, come as shares fall on Wall Street today.

US traders pushed down the Dow Jones industrial average, as they watched Barack Obama lay into the Republicans in a speech in Rockville, Maryland (details in our US liveblog).

The Dow Jones industrial average is down 130 points, or 0.8%, with 28 of its 30 members losing ground.

It’s not all because of the deadlock on Capitol Hill. A monthly survey of the US services sector showed growth was slowing, with the PMI coming in at 54.4 in September, down from 58.6 in August (anything over 50 shows growth).

There are already fears that the shutdown will cost jobs and hit growth.

United Technologies, which supplies helicopters and jet engines to the U.S. military, has warned that if there’s no deal by Monday it might tell 2,000 workers to down tools. Bloomberg has the details.

My US colleague Tom McCarthy has launched a new liveblog tracking Day Three of the government shutdown:

Government shutdown enters third day after talks fail to break deadlock – live

It includes details of a report from the US Treasury Department which warns that there would be catastrophic consequences if America doesn’t raise its debt ceiling on time.

It certainly sounds scary:

A default would be unprecedented and has the potential to be catastrophic,” the Treasury reported.

“Credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.

Surely they’ll get a debt ceiling deal in time, right? Surely….

Heads-up, Alexis Tsipras, head of Greece’s Syriza party, is giving a press conference with European Parliament president Martin Schulz.

It’s being streamed here.

The Golden Dawn clampdown has been raised. Schulz said there was “no place” for those with Nazi views in a democratic society while Tsipras welcomed the EP’s plans for a special session on “Golden Dawn and right-wing extremism”.

Tsipras also slammed the Greek bailout programme, saying: “One shouldn’t be taking new loans to pay off old ones,” according to AP’s Jurgen Baetz.

I don’t think he’s arguing against rolling over sovereign debt….

The IMF are tweeting highlights from the Lagarde speech, where she’s warning about the looming debt ceiling:

Lagarde: Mission critical to resolve US government crisis now

The head of the International Monetary Fund, Christine Lagarde, urged America’s warring politicians to settle their differences as she warned that an escalation of the budget row would harm the entire global economy, our economics editor Larry Elliott writes:

Speaking ahead of the Fund’s annual meeting in Washington next week, Lagarde said it was “mission critical” that Democrats and Republicans raise the US debt ceiling before the October 17 deadline.

Financial markets have started to take fright at the prospect that America could go into technical default as a result of the impasse in Washington and the IMF’s managing director said the dispute was a fresh setback for a global economy that would take at least a decade to recover from the deep slump of 2008-09.

Lagarde said:

I have said many times before that the U.S. needs to “slow down and hurry up”—by that I mean less fiscal adjustment today and more tomorrow.

She added that the world’s biggest economy needed to put its finances in order, but favoured back-loaded measures to raise revenues and limit entitlement spending that did not jeopardise short-term growth.

Lagarde added:

In the midst of this fiscal challenge, the ongoing political uncertainty over the budget and the debt ceiling does not help. The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse, and could very seriously damage not only the US economy, but the entire global economy.

So it is “mission-critical” that this be resolved as soon as possible.

We’ll have the full story online shortly

Some early snaps from Christine Lagarde’s speech, in which she also warns that America was too eager this year to cut spending and raise taxes:

03-Oct-2013 15:00 – IMF’S LAGARDE SAYS U.S. ECONOMIC GROWTH THIS YEAR WILL BE ‘TOO LOW,’ BELOW 2 PCT, DUE TO TOO MUCH FISCAL TIGHTENING

03-Oct-2013 15:00 – LAGARDE SAYS U.S. GROWTH WILL BE ABOUT 1 PERCENTAGE POINT HIGHER IN 2014 AS FISCAL STRAINS EASE – SPEECH TEXT

03-Oct-2013 15:00 – LAGARDE SAYS U.S. FAILURE TO RAISE DEBT CEILING COULD ‘VERY SERIOUSLY’ HURT U.S. AND GLOBAL ECONOMY, CRITICAL TO RESOLVE AS SOON AS POSSIBLE

03-Oct-2013 15:00 – LAGARDE SAYS MARKET TURBULENCE SINCE MAY OVER PERCEIVED END TO U.S. EASY MONEY POLICIES COULD REDUCE GDP IN MAJOR EMERGING MARKETS BY 0.5 TO 1 PCT

Christine Lagarde urges US politicians to end budget row

Breaking: Christine Lagarde, head of the International Monetary Fund, has urged politicians in Washington to act quickly to resolve the government shutdown before the global economy is hurt badly.

Speaking in Washington right now, Lagarde is warning that a failure to raise the debt ceiling could “very seriously hurt” the US and global economy.

It is critical to resolve the crisis soon, she said.

More to follow

Updated

The yield on America’s one-month debt has risen to the highest level in 10 months, suggesting investors are getting worried about the looming debt ceiling and selling bonds which mature at the end of October.

This has pushed the yield up to 0.129%, from just 0.028% a week ago. That’s still a very ‘safe’ level, of course, but it’s a sign that the US budget deadlock is starting to make traders more nervous, with the debt ceiling looming.

The cost of insuring US bonds against default is also up:

Updated

Some reaction to the Cyprus gas drilling results:

Updated

Cyprus gas results are in

Cyprus’s hopes of receiving a huge windfall from offshore reserves of natural gas received a knock today, after new drilling results found there is less recoverable gas at one field than hoped.

The Nicosia government announced the results of exploratory drilling off its coast a few minutes ago. Texas’s Noble Energy, which did the drilling in the Cypriot Aphrodite concession, also updated its shareholders.

And the news is that Noble Energy has estimated there is 5 trillion cubic feet of natural gas (or between 3.6trn and 6trn) to be recovered at that particular gas field south of the Mediterranean island. That’s a disappointment, as earlier drilling in 2011 indicated there was 7 trillion cubic feet (or between 5trn and 8trn).

The Cypriot government is still pushing on with its plans to exploit the reserves, though:

Cypriot energy minister Yiorgos Lakkotrypis told reporters:

It’s important to state from the outset that, despite the lower quantities we announce today compared to those of 2011, the confirmed reserves affirm a particularly important reserve of natural gas.

Keith Elliott, Noble Energy’s senior vice president for Eastern Mediterranean, also remained upbeat:

Results from the Cyprus A-2 well have confirmed substantial recoverable natural gas resources and high reservoir deliverability.

Cyprus has talked about recovering 60 trillion cubit feet of gas from its reserves – although some analysts are skeptical.

Separately, there are reports from Cyprus that the country is considering withdrawing from Eurovision as part of its financial plight.

Can we come too?

Updated

Here’s a handy graph putting today’s US jobs data into some context:

US initial jobless claims rise slightly

The weekly US jobless claims data is out…and it shows a small rise in the number of people signing on for unemployment benefit last week.

The initial jobless claims total rose by 1,000 last week to 308,000. That’s close to the recent six-year low, and better than expected.

The four-week average fell, to 305,000 – which is the lowest since May 2007.

That won’t include the effect of the US government shutdown (as this data runs to 28 September and the shutdown began at midnight on 1 October).

Oil giant BP helped push the FTSE 100 higher this morning, after a US court ruled in its favour in a case about compensation payments following the Deepwater Horizon diasaster.

BP share are up 1.5% in London, and are expected to rise a similar amount in New York. Last night, judges ruled that the company should not be forced to pay billions of dollars in compensation to those not directly affected by the environmental damage following the oil rig explosion in which 11 men died.

Angela Monaghan explains:

The British oil company welcomed a ruling by the US court of appeals which will force a rethink on how compensation claims related to the disaster will be assessed.

The supreme court also ordered that payments must be stopped to people who did not suffer “actual injury traceable to loss” from the spill until cases have been properly heard and decided through the judicial process.

More here: BP welcomes US court of appeal ruling on Gulf of Mexico oil spill payouts

Here’s the situation in Europe’s stock markets this lunchtime:

(I was incorrect to say the DAX was closed today for Germany’s Unity Holiday — but given it’s down 0.02% it may as well be :) )

Plenty of chatter in the City today about whether America will raise its debt ceiling in time.

Gary Jenkins of Swordfish Research reckons Washington DC will get its act together, before the US crashes into the $16.7bn borrowing limit, probably around 17 October.

He writes;

After all, would politicians really be so stupid as to go through a process in which the potential unintended consequences could be so harmful, where there is no precedent for their actions and where there is no clear plan of what exactly they are trying to achieve? (Unless it’s to do with military action…).

Jenkins adds, though, that the US should be careful about appearing so blasé about its priorities:

 If the US were a company and the shareholders were openly discussing whether or not they should pay their bills or not then I find it hard to believe that the agencies would be taking such a relaxed view of the matter.

So, even if the politicians step back from the abyss, unless the debt ceiling dynamic is dealt with we could see a recurrence of current events. I do not know what the unintended consequences will be, but then again nor do the politicians. What I do know is that if I had the major economic and political advantage of having the world’s reserve currency and most wanted debt instrument is that I wouldn’t play around with it.

There’s talk in Washington of carving out a ‘Grand Bargain’ (a wide-ranging fiscal program designed to lower America’s long-term borrowing needs). That’s a tough task, though, especially when the two sides can’t agree to reopen the government.

Louise Cooper of Cooper City reckons any deal will just be a temporary patch-up job

While Ishaq Siddiqi, market strategist at ETX Capital, isn’t 100% convinced Washington will manage a deal in time.

The fact that US lawmakers are tied in a game of political brinkmanship over a fresh budget leaves traders not feeling too confident that lawmakers will be able to find common ground on raising the debt ceiling.

Indeed, failure to do so could see a US default. President Obama warned Wall Street last night that a conservative faction of the Republicans is willing to allow the US to default on its debt, lifting fears in the market that such a scenario could be played out.

The euro has risen around 0.2% against the US dollar to $1.360, while Europe’s stock markets are pretty calm.

Another Golden Dawn MP in court

Back to Greece, another Golden Dawn MP has arrived in court as the courtroom drama over the last two days continues to reverberate.

Michaloliakos’ right hand man, Christos Pappas, was also arrested on charges of overseeing a criminal organisation. His hearing was due to start at 1pm local time, or 11am BST.

Earlier this week anti-terror units discovered “a heap” of Nazi paraphernalia in Pappas’s home, including a book titled “Hitler by my side”.

Golden Dawn itself is furious that judges decided to jail its leader, Nikos Michaloliakos, ahead of a trial over charges that the party is a criminal gang. It issued a statement calling the move “wretched plot” and blaming it on ”foreign centres.”

From Athens, Helena Smith reports:

In a move that has stunned Greeks, Ilias Kasidiaris, the party’s spokesman who emerged from court yesterday kicking and shoving journalists, has now used the media to denounce the imprisonment of Michaloliakos.

“The detention of our general secretary is totally unjust, unconstitutional and has been dictated by foreign centres of power,” he has told reporters gathered outside the court.

Yesterday’s courtroom drama (and the violence seen outside court afterwards) also gets plenty of coverage in today’s newspapers.

Reuters flags up:

“The leader’s in, the gang’s out!” top-selling daily Ta Nea wrote on its front page. “It is the state’s duty to go to the end: The criminals need to be revealed, they need to be tried, and they need to pay,” the newspaper said.

Kathimerini makes an important point. This is a live criminal trial, Due process needs to be followed.

The fact that certain Golden Dawn deputies were released from pretrial custody – conditionally – does not in any way represent evidence of their innocence, just as their being remanded to appear before a magistrate had not meant that they were guilty of the crimes being leveled against them.

Updated

More good news for the European economy: retail sales were much stronger than expected in August.

Eurostat reported that retail sales volumes rose by 0.7% in the euro area, and 0.4% across the wider European Union in August. July’s data was also revised higher, showing consumers weren’t as cautious about spending as first thought.

Eurostat’s data shows that non-food shopping was strong, rising by 0.6% in the eurozone. That covers items such as computers, clothing and medical products.

The data also showed an increase in fuel purchases, suggesting a rise in motor journeys. Spending on “automotive fuel in specialised stores” (that’s petrol stations to you and me) was up by 0.9% across euro members.

Nice result for Spain in the bond markets this morning, suggesting the political tensions in the euro area have eased following yesterday’s Italian confidence vote.

Spain sold its maximum target of debt in a strong auction, in which borrowing costs hit their lowest level in three years.

The auction saw the Spanish treasury shift €1.18bn of 10-year bonds at a yield (the rate of return on the debt) of 4.269%, a drop on the 4.5% paid last month.

Updated

UK service sector on a charge

The UK’s service sector has revival continues, with the strongest quarterly growth in 16 years - driven by the upswing in the housing market.

The monthly PMI survey shows that September was another strong month — with a reading of 60.3, close to August’s seven-month high of 60.5 and deep into expansion territory.

However, firms dependent on consumer spending aren’t doing quite as well as financial firms, it appears….

Reuters handily provides more details:

The sector saw jobs growth in September, something mirrored in surveys of manufacturing and construction earlier this week.

Over the third quarter as a whole, the index – measuring the change in activity, including income and chargeable hours worked, from the previous month – averaged its highest level since the second quarter of 1997, Markit said.

“Growth is being led by financial services – linked in part to increased housing market activity – and the business sector,” said Chris Williamson, chief economist at survey compilers Markit.

“Consumer-facing services continue to struggle, reflecting the ongoing squeeze on incomes due to weak pay growth and high inflation.”

Around half of firms surveyed in the service sector – which makes up more than three quarters of Britain’s output – expected even brisker trade in a year’s time, with the outlook index rising to 71.8.

Service providers reported that a jump in new business last month placed strain on resources, with backlogs of work rising at the fastest pace in more than 13 years.The workload, along with firms’ optimism about future business, led to a solid rise in employment and some pay rises.

Updated

Eurozone private sector output hits 27-month high

The eurozone recovery is gathering pace, with its private sector firms reporting the biggest leap in activity since June 2011 last month.

Data firm Markit’s monthly surveys of companies across the single currency showed a solid rise in activity.

New business has picked up, and the rate of job cuts may finally be slowing to a halt.

Markit’s monthly survey of activity came in at 52.2, up from August’s 51.5. Both service sector firms and manufacturers said conditions were better.

Here’s some key factoids from the report (online here)

Ireland: 55.7 2-month low
Germany: 53.2 2-month low
Italy: 52.8 29-month high
France: 50.5 20-month high
Spain: 49.6 2-month low

The news comes hours after China’s service sector output hit a 6-month high.

Chris Williamson, chief economist at Markit, said the eurozone data showed Europe’s recovery on track, despite Spain’s private firms faltering after a better August.

The final PMI confirms the message from the earlier flash reading that the eurozone enjoyed its strongest quarter of expansion for just over two years in the third quarter. With the rate of expansion picking up in September, the survey bodes well for ongoing growth in the final quarter of the year.

Growth is being led by Germany, but France has also now returned to growth. Even more encouraging are the upbeat survey data for Ireland and Italy, both of which show signs of returning to robust growth, and Spain has also stabilised, as ongoing weakness in the domestic economy is offset by a strong upturn in exports.

But don’t get the bunting out yet — this only suggests a weak recovery.

Williamson explains:

Growth remains only modest – the Eurozone PMI is consistent with GDP rising by just 0.2% on the third quarter, and the political instability that has reared up in Italy is a reminder that there remains plenty of scope for recoveries to be derailed.

Updated

Italian service sector finally growing

Good news from Italy this morning – its service sector has burst back into growth for the first time in 28 months.

This may suggest the Italian economy has finally stopped shrinking, a new boost a day after prime minister Enrico Letta faced down Silvio Berlusconi’s revolt.

Data provider Markit says it’s a welcome sign that the economic recovery could be underway, with the monthly PMI jumping to 52.7 in September, from 48.8 in August. It’s not been over the 50-point mark (which separates contraction from expansion) since May 2011.

Here’s the key points:

• Business activity lifted by increase in new work

• Job shedding continues, but at slower rate

• Future expectations highest in more than two years

Credit Agricole’s Frederik Ducrozet is encouraged:

Phil Smith, economist at Markit, said the data shows “the first signs” of recovery in the Italian economy after some grim months. But without political stability, he warned, it could quickly deteriorate.

He explained:

Should the data hold up, however, there may also be a return to growth in service sector employment, which showed its slowest fall for 16 months in September.

A significant improvement in businesses’ expectations for the year ahead will have no doubt also helped on this front.

The data, alongside those for manufacturing, show Italian GDP at least stabilising in Q3 and perhaps even rising slightly for the first time in more than two years. Political stability is key to this forward momentum being sustained into the later stages of the year and beyond.

Updated

Overnight in Greece, the head of the far-right Golden Dawn party was remanded in custody, hours after three of his MPs were released pending trial.

Another MP, Yannis Lagos, was also detained, as was Giorgos Patelis, the head of Golden Dawn’s local office in the area west of Athens where hip-hop star Pavlos Fyssas was stabbed two weeks ago. <updated, many thanks to reader Kizbot>

All the men faces charges of running a criminal gang, which they deny.

From Athens, Helena Smith reported:

Armed police led Nikos Mihaloliakos away from the courthouse in handcuffs in the early hours of Thursday after testimony lasting more than six hours.

His wife and daughter, also party members, and other Golden Dawn MPs, stood outside the building and shouted words of encouragement to him as he was led away.

“The ridiculous little men, they decided to jail the leader,” said party MP Michalis Arvanitis.

Golden Dawn leader jailed pending trial after Athens hearing

Updated

Just in – Spain’s service sector suffered a drop in activity in last month. Its PMI index has fallen into contraction territory again — at 49.0 in September, down from 50.4 (showing slight growth) in August.

Markit, which compiles the PMI data, also reported that new order growth slowed. On the upside, optimism hit a 41-month high.

Spain’s government ministers have been boldly declaring that the recession is over. This data doesn’t suggest much of a recovery yet.

Andrew Harker, senior economist at Markit, commented:

The Spanish service sector failed to show much sign of a recovery during September as activity fell back in response to weaker new order growth which itself had been supported by further sharp discounting.

One bright spot from the latest survey was that companies were at their most optimistic about the future for nearly three-and-a-half years, suggesting that Spanish service providers are seeing some light at the end of the tunnel.

Markets edge higher

Shares are edging a little higher in early trading — suggesting China’s strong service sector data is trumping US deadlock woes.

Here’s the early prices: (German’s DAX is closed for a public holiday)

FTSE 100: up 20 points at 6458, + 0.3%

French CAC: up 7 points at 4,165, + 0.18%

Italian FTSE MIB: up 98 points at 18,191, +0.5%

Spanish IBEX: up 21 points at 9,371, +0.23%

Mike van Dulken, head of research at Accendo Markets, reckons there’s some “cautious optimism” in the City this morning, despite the lack of progress in Washington DC. He argues that, with America on track to smash into its debt ceiling on 17 October, there’s little chance of the Federal Reserve turning down its bond-buying stimulus programme soon:

Sentiment is still not quite ignoring, but nor is it pricing in the worst case scenario – which is no agreement until debt ceiling deadline, and possible sovereign default.

The possible assumption is that default won’t be allowed, but the longer the budget takes to sort out, the longer the Fed is held off from tapering. Happy days for easy money policy lovers and risk appetite.

Updated

Michael Hewson of CMC Markets says traders will be hoping for encouraging data from Europe’s service sector this morning:

As we enter the third day of the shutdown of the US government the various positions seem as inextricably entrenched as ever. On the plus side at least we don’t have to worry about the soap opera playing out in Italy as Silvio Berlusconi negotiated what could be politely called a tactical withdrawal and agreed to support Enrico Letta’s government after it became apparent he didn’t have his party’s support with respect to the confidence vote.

While he may have run into a brick wall on this occasion Berlusconi has never lacked the capacity to surprise, so I would doubt that we have heard the last of him in this regard.

In any case while the political uncertainty in Italy may have subsided for now it still remains quite likely that any type of reform is still set to remain slow and problematic.

As for the rest of Europe’s markets while the FTSE may get a slight boost from a positive China services PMI, they continue to have one eye on events in the US, finishing lower yesterday along with US markets, though after yesterday’s non event of an ECB press conference, todays focus is on the latest services PMI data for September for Italy, Spain, France and Germany. All are expected to show positive readings above 50, with the exception of Italy, which is expected to come in at 49.2, raising expectations of a continued recovery.

Chinese service sector output hits six-month high

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

Looks like a mixed day ahead . Growing concern over the US government shutdown have taken the shine of some encouraging Chines economic data earlier today.

While in Europe, Italy is waking up to front pages dominated by Silvio Berlusconi’s humiliating defeat in the Senate yesterday, where prime minister Enrico Letta swept home in his confidence vote. More on this shortly.

First the good news — growth in China’s service sector has surged to a six month high. Activity jumped to 55.4 in September, from 53.9 in August, as measured by the official Purchasing Managers Index (anything over 50 points = growth).

That suggests that Beijing’s efforts to pep up the Chinese economy is bearing fruit this autumn.

Craig Erlam, analyst at Alpari, explained:

This is just another sign that the government’s targeted stimulus efforts, which were announced a few months ago in order to combat the slowing growth in the economy and achieve its minimum 7% growth target, are having the desired effect on the economy.

That might normally give stock markets a boost, especially with more service sector data due from the eurozone and UK this morning.

But now the bad news — Wednesday was another day of deadlock in Washington, despite US bank chiefs urging politicians on Capitol Hill to get a grip before it’s too late.

Obama meets bank chiefs as economists warn of ‘deep and dark recession’ 

So it’s probably going to be a nervy day in the markets….

Updated

guardian.co.uk © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.

Eurozone, Japan, United States, England,  FTSE, Dow Jones, S&P500, DAX, Nikkei,  Bank of Japan, Bank of England FOMC, Federal Reserve, Fed,  ECB, European Central Bank, JPY, yen, USD, US dollar, euro, EUR, GBP, British pound,  Forex, FX

ECB keeps rates at record low 0.5% as the 17-nation economy recovers from the prolonged recession. Italian Prime Minister Letta survives as Berlusconi caves in. Letta: A new election would be a disaster. Anger in Greece as Golden Dawn MPs released…

 


Powered by Guardian.co.ukThis article titled “Berlusconi backs Italian prime minister in crunch confidence vote – live” was written by Graeme Wearden, for theguardian.com on Wednesday 2nd October 2013 12.11 UTC

It will be fascinating to see what Mario Draghi, head of the European Central Bank, makes of the Italian situation when he begins a press conference in 20 minutes time (as expected, they have left interest rates unchanged)

Our Southern European editor John Hooper says Berlusconi has saved face, but lost influence:

Enrico Letta definitely looked less than euphoric as Berlusconi yanked hard on the political handbrake, and declared with palpable understatement:

we have decided, not without some internal strife, to support the government.

The general view among Italian political journalists is that Letta would be much better off without Berlusconi around at all. Instead, Letta remains the prime minister of a shaky coalition.

Having said that, Berlusconi is damaged by the antics of the last few days. The remarkable political gymnastics must have taken their toll — and an optimist might argue that PdL is irrevocably on the path to a new future….

Updated

Why Berlusconi caved in

What drama!

So, here’s the position. By sensationally dropping his opposition to Enrico Letta, Silvio Berlusconi has guaranteed that the Italian government survives.

Add all Berlusconi’s PdL senators to Letta’s existing support — his PD party, plus small parties and senators for life — and it’s a healthy majority.

So why did Berlusconi do it? Clearly, he concluded that he could not keep enough of his PdL party onside. The photo I included in the blog earlier showed a long list of rebels.

If Berlusconi hadn’t pulled such a SCREECHING u-turn, then he would presumably have seen his group shatter. The moderates would have followed Letta, and he’d have been left nursing a rump faction.

Updated

The Italian stock market jumped as the news came in, pushing the FTSE MIB up 1.4% today.

Italian government debt prices remain high, with the yield on 10-year bonds down at 4.38% (from 4.46% yesterday).

Here’s the key quotes from Berlusoni, before he threw his support behind Letta a few moments ago.

Updated

Berlusconi himself buried his head in his hands after announcing that the PdL party will support Letta — which means today’s confidence vote is a WIN for the prime minister.

It was not the speech of a winner — rather of a man whose long grip on his party may be slipping .

There’s applause in the Senate as Berlusconi says he will support Enrico Letta — although I think I saw Letta pull a rather rueful grin.

BERLUSCONI BACKS LETTA

BERLUSCONI SAYS HE AND HIS PEOPLE OF FREEDOM PARTY WILL SUPPORT LETTA.

Berlusconi

Berlusconi is addressing the Senate in an atmosphere of silence, trying to sound statesmanlike….

Berlusconi’s got the microphone!

Former technocratic prime minister Mario Monti just gave a brisk speech, in which he urged senators not to risk Italy falling into the troika and its “neocolonial oversight”. If Italy is forced to take a bailout, it could take years to recover, Monti warned.

Updated

While we wait for that vote, here’s Reuters’ report on Letta’s second speech to the Senate:

Italian Prime Minister Enrico Letta said on Wednesday his government could achieve reforms even with a smaller majority, as he wound up a debate on a confidence vote in which he has been boosted by dissidents from Silvio Berlusconi’s centre-right party.

“Our government can reach its objectives despite the fact that the majority’s numbers have changed,” Letta said as he formally put a confidence motion to the Senate, which is expected to complete the vote in the early afternoon.

Letta spoke at length about Italy’s role in the European Union and his goal to push for greater integration during the country’s rotating presidency in the second half of 2014, suggesting he sees his government lasting at least until 2015.

The vote hasn’t actually started yet. Senators are continuing to give their views. The latest word from Rome is that Berlusconi isn’t expected to speak (but given today’s twists and turns, let’s see).

Rome correspondent Lizzy Davies reports that two distinguished honorary senators, architect Renzo Piano and conductor Claudio Abbado, are both absent because they are out of the country.

Confidence Vote has been called

To repeat, Enrico Letta has called for a vote of confidence.

After a dramatic couple of hours in the Senate, we still don’t know what’s going to happen. There have been rumours that Berlusconi will back Letta, and also that he will order the entire PdL party to vote against. Speculation abounds.

We do know that there is a solid bunch of ‘dovish’ PdL senators who are unlikely to bow to pressure from Berlusconi, and are highly likely to back Letta. But we do not know if it will be enough.

As John Hooper flagged up the Berlusconi rebels are talking about creating a new party called ”Popolari per l’Italia”.

Wolf Piccoli, managing director at Teneo Intelligence, is as reliable as any, and he reckons Letta might get 171 votes — that’s a win, as he needs 160 for victory.

A briefer speech from Letta this time — his main message to the Senate is that today is a historic opportunity. Tomorrow the government must get back to work.

Amid applause from some members of the senate, Letta calls for a confidence vote:

Updated

Letta still looks calm:

Updated

Letta speaks again as vote looms

Italian prime Enrico Letta is beginning his second speech to the Senate, explaining that he didn’t sleep last night as he worked to hold the government together.

He’s initially heard in silence (gosh it’s tense), but there’s some heckling as Letta bluntly tells the Senate that he’s not prepared to keep taking “lessons in morality” from those who are holding him to ransom.

Letta then tells Senators that he needs their support. A smaller majority will make it even hard for him to govern.

Letta back on his feet

Enrico Letta is speaking again in the Italian parliament. Reminder: it’s being streamed on RAI News.

Updated

The rumour mill keeps swirling in Italy ahead of this lunchtime’s confidence vote. One insider reckons Berlusconi is going to back Letta, the next says he’s not. Confusion reigns (not for the first, or last time).

John Hooper, our Souther Europe editor, reports that Berlusconi’s rebels are talking of creating a new party called “Popolari per l’Italia” – even if the loyalist wing of PdL join them by supporting Letta.

Plenty of concern in Greece that three Golden Dawn MPs were released from court this morning, and promptly kicked and shoved their way through the assembled media .

Here’s a flavour:

Three Golden Dawn MPs released on bail – lash out at press

Breaking away to Greece briefly.

Four of the Golden Dawn MPs who were arrested as part of the clampdown on the neo-Nazi party appeared in court today. Three of the men were promptly released pending a future trial, while party leader Nikolaos Michaloliakos is due back in court later today.

TV footage from the scene shows one cameraman being pushed out of the way, while another man is kicked as the MPs and their supporters leave the scene.

Here’s the video clip showing the aggressive scenes:

And here’s Kathimerini’s early take:

Only one of four Golden Dawn deputies arrested last week on charges of heading a criminal organization responsible for a range of felonies, including murder, assault, blackmail and money laundering, among others, was remanded in custody on Wednesday, while another three were released pending trial, one of them posting a 50,000 euro bail.

Yiannis Lagos was expected to be transferred to a local jail on Wednesday following a unanimous decision reached by two investigative magistrates and two prosecutors.

Party spokesman Ilias Kasidiaris was ordered to post a €50,000 bail and not to exit the country. Deputies Ilias Panayiotaros and Nikos Michos were also ordered not to leave the country.

The clampdown followed the death of 34-year-old rapper Pavlos Fyssas two weeks ago. A Golden Dawn member was subsequently arrested over the stabbing.

More to follow

Updated

Here’s a photo that appears to show the list of Senators from the People of Freedom party who are considering backing Enrico Letta:

Rumours flying:

It is increasingly likely that Enrico Letta has enough votes for victory, even if Berlusconi decides to back him.

Letta needs 161 votes for victory – although he would like more. Vincenzo Scarpetta of Open Europe reckons that he currently has 170 senators behind him, based on the latest reports and public statements.

Here’s how Barclays summed it up this morning:

Letta has the numbers to survive the vote today. The Government needs the support of 161 Senators, and can count on 137.

With the support of the life Senators, and defectors from the smaller parties (including M5S) it is likely to get to around 147-149. Letta therefore only needs around 12-14 PdL Senators to defect in order to survive. With the PdL split he is likely to get this.

More reaction to the reports that Berlusconi is considering throwing his support behind Enrico Letta in the confidence vote:

It would be a stunning u-turn from Silvio Berlusconi if, as reports suggest, he has now decided to back Enrico Letta in today’s vote of confidence.

But it wouldn’t exactly be out of character — and a number of political journalists and analysts were suggesting yesterday that this might happen, once we learned that his party were rebelling.

Remember, it was Berlusconi who triggered this crisis by threatening to bring the government down last week — by withdrawing his PdL party from the Letta coalition.

If he backs Letta today, then he could still trigger a crisis in future.

As Serena Ruffoni of the WSJ put it to me:

I don’t think the Letta government is any stronger even if it survives this confidence vote.

Updated

Reports: Berlusconi’s Party to back Letta

Important: Sky Italia is reporting that the People of Freedom party are going to BACK Enrico Letta in the confidence vote.

If true, that means Letta would win a solid majority. It would also suggest that Berlusconi has decided that he cannot bring his rebels back into line, and has decided to fall in with them.

That is NOT the best result for Letta, though. While he’d still be in power, he’d also still be lumbered with the Berlusconi problem.

Market reaction

The Italian stock market surged during Enrico Letta’s speech, hitting a new two-year high as the PM sat down.

Italian government bonds are also strengthening, which has pushed the yield on its 10-year debt down to 4.37% . It as as high as 4.74% on Monday after Berlusconi launched his bid to bring the Letta government down.

Senators are now speaking, with one tearing into Silvio Berlusconi — calling the former prime minister “‘a simple story of criminality”.

The BBC’s Gavin Hewitt reckons the gloves are off, as the battle for Italy’s future continues:

Updated

Letta speech: instant reaction

How did he do?

Five months isn’t enough time to build a track record of leadership success — and much of Letta’s time as prime minister has been overshadowed by Berlusconi’s legal defeats.

It was a speech of vision — asking Senators to choose between future of a more competitive, thriving Italy, or a future of political strife, fresh elections, and the prospect of another divided parliament at the end of it.

Letta isn’t the most thrilling orator in European politics, but he has a mature, sensible style.

Highlights of his speech start here.

Updated

Letta’s speech over

Worth noting that Berlusconi didn’t applaud Letta as he ended his speech – so he’s not thrown in the towel yet….

Enrico Letta concluded his speech by urging those in the chamber to give him their ”courage and confidence”. “A confidence that is not against anyone; a confidence that is for Italy” (quotes via Lizzy).

He also urged senators to search their consciences, and avoid a result that would leave them feeling “shameful regret”.

While Letta was speaking, Berlusconi could be seen holding discussion with some of his allies. I grabbed a picture:

Oh the drama….

There’s also a European theme to the speech — with Letta speaking of the need to dream of a “United States of Europe” one day. That fits with his tradition of being a solid Europhile (he was an MEP at one stage of his career)

Letta is outlining his vision for Italy — saying that growth and jobs must be the focus in 2014.

Apparently Berlusconi has told Italian media that he will listen to Letta’s speech and then decide whether to support him or not.

Enrico Letta’s speech is turning into a solid defense of his government’s record in the five months since he took over (colleague Lizzy Davies dubs it a “ very level-headed and systematic defense”.

But will that be enough to persuade PdL members to back him? As explained earlier — Letta would like to see 30 rebels jump the fence. He needs more than 20 (I think 24 is the magic number).

Letta also cited three priorities – support economic recovery; cutting taxes on workers, and increasing competition in Italy’s economy.

Letta is continuing to defend his government’s record on the economy — part of the strategy to persuade moderate members of the Berlusconi camp to back him.

It is on ordinary people suffering in economic crisis that our actions will have biggest effect, he said.

A better webfeed

Berlusconi’s just arrived! He also looks weary, probably due to late night efforts to corall rebelling members of his PdL party into line.

No sign of Silvio Berlusconi at the start of Letta’s crunch speech. Angelino Alfano (deputy PM) is there, and there’s a consensus that he looks nervous.

(see 8.22am for a blurry snap of Dudu not being walked)

Looks like the confidence vote will come at midday — earlier than the previous indications.

And how many rebels will there be?

Lizzy Davies writes:

It’s all about the numbers today. Giovanardi claimed yesterday there were “more than 40″- believed to be as many as 44- PdL MPs prepared to vote for the confidence vote. But the Italian press reports that Berlusconi’s hawks told him the rebels were much- much- less numerous. Who’s right?

We’ll find out soon. Letta needs over 20 rebels. He’d be happier with more than 30.

Updated

Letta went on to warn that a new election could cause the same gridlock as last time:

Enrico Letta is urging parliament to give him a mandate for a “real and new” pact to tackle Italy’s problems.

(a reminder — Italy’s last election, in February, resulted in deadlock — with no party winning a majority in the Senate. Eventually a coalition was agreed between the centre-left PD and Berlusconi’s centre-right PdL, with Letta (a senior member of PD) as leader)

Here’s the key early quotes from Letta’s speech:

Letta speech begins

Prime minister Enrico Letta has begun to give one of the speeches of his political life, in a bid to win enough support to continue as the head of Italy’s shaky coalition government.

Before he started, there was a standing ovation for the country’s veteran president, Giorgio Napolitano.

Letta began his speech in the Italian parliament by urging its members to “seize the moment”. And, as expected, he insisted that the legal troubles of Silvio Berlusconi cannot be an excuse to bring the country’s government down.

But can he persuade enough of Berlusconi’s PdL party to back him?

Lizzy Davies is tweeting the key points, so I’ll be embedding them in the blog now….

Watch the speech here

Enrico Letta has begun speaking in the Italian parliament.

There’s a live stream here. However, it’s very flaky.

Key points from his speech will follow!

Update: the latest word from Italy is that we might get the confidence vote around midday, not this evening as I initially thought. 

Markets down

Europe’s stock markets are all in the red today, with the FTSE 100 shedding 73 points. There’s nervousness about the situation in Italy, and also a knock-on effect from a bad day in Asia. The US Federal government shutdown isn’t exactly helping sentiment.

Overnight, the Nikkei tumbled 2% after the latest stimulus package from prime minister Abe failed to excite investors.

Updated

Tesco shares lead fallers in London

In the City, Tesco’s shares are leading the fallers on the FTSE 100 after issuing a trading statement, down over 3%.

Britain’s biggest supermarket reported zero growth in like-for like UK sales, excluding fuel and VAT sales tax, in the 13 weeks to 24 August.

Tesco also warned that it faced ‘challenging economic conditions’ overseas. Europe was particularly tough, with profits down almost 70% and like-for-like sales down by 5% in the first half of the year.

Sainsbury posted stronger figures in the UK (as expected) – sales at British stores open at least a year were up 2%. Its shares are also suffering, though, down 1.5%. More here.

Wolf Piccoli, managing director at Teneo Intelligence, agrees that it could be a long day in the Rome parliament:

Analysts at Nordea Markets say it’s “fight night” in Italy, and possibly Berlusconi’s final bout.

In the red corner, we have PM Letta, who has probably worked hard – together with the President – to convince some of Berlusconi’s senators that new elections at this point is in no one’s interest.

A vote for a continuation of the current government and later on a vote for a budget and a new electoral law would make for a fresh start after spring elections. In the blue corner, we have Berlusconi. Media are full of stories about Berlusconi’s outstanding merits when it comes to winning tight political battles. But this time it seems that even members of his own party believes he has gone too far. Even Alfano – who has been seen as the crown prince in the PDL – said that he might vote for a continuation of the government.

Furthermore, it may be the old Champs last fight, if he is stripped of his senatorial seat on Friday. It will be a close call. Italy, and to a lesser extent Spain, will sell off if the government falls.

Jeremy Cook of World First agrees:

What might Letta tell parliament in his speech this morning?

Lizzy Davies explains that his speech is likely to focus on the socio-economic suffering of Italy, and tell deputies that they cannot just let its government fall.

His strategy will be to ram home the idea that the judicial woes of one man* have to be kept separate from the interests of the country – in an effort to split the doves in Berlusconi’s party from the hawks.

• – that man being Berlusconi himself, of course, who is on the brink of being expelled from the Senate after his tax fraud conviction.

In the comments section, regular reader mrwicket has outlined the potential scenarios from tonight’s vote.

As he flags up, we’re not 100% certain that a confidence vote will actually be called — Enrico Letta will probably judge the mood of the Senate first, and if he feels he can’t win then he might simply resign.

So, Django Alfano is standing his ground and wants to support Letta in the vote of confidence, as do the other maybe ministers and a chunk of the party.

Berlusconi says he wants the government to fall and to have new elections.

The two will meet again this morning at 9’30 so things could change.

Marina Berlusconi is said to be ready to enter into politics.

I asked yesterday how you could have a vote of confidence in a government that didn’t exist. On Monday, Letta’s office said the resignations were irrevocable but yesterday afternoon, it announced that it had refused to accept them. The ‘maybe ministers’ will walk into parliament today as ministers.

Giovanardi claimed yesterday that there were 40 PdL senators ready to vote for Letta (some reports in the evening said that number was dwindling). He even spoke of a new party called Nuova Italia

There were some nasty exchanges last night between Sallusti, editor of Il Giornale and Cicchitto, an important PdL dissident. Sallusti said they were cowards, hitting the man when he was down and that they had forgotten what had happened to Fini. “They are stabbing him in the back in his moment of weakness. They are cowards because they didn’t have the courage to do it when he was strong.”
“No! You are the coward!” etc…

Letta has said he will refuse to govern with a weak majority.

————

Possible scenarios;

Letta wins vote of confidence with sufficient votes to continue in government.

Letta wins vote of confidence with insufficient votes to continue in government and Napolitano sets up a technical government.

Letta wins vote of confidence by a narrow margin and continues to govern

Letta loses vote of confidence and Napolitano sets up a technical government.

Letta doesn’t call for a vote of confidence and Napolitano sets up a technical government.

————

With regard to policy, there would be very little to distinguish between a Letta government and a technical government so we will be as we were after this dramatic little interlude. The change is likely to be inside the PdL.

Lisa Jucca, Reuters chief financial correspondent in Italy, agrees that this could be the moment that Angelino Alfano, Berlusconi’s right-hand man for so long, finally rises up:

How Letta can win

Silvio Berlusconi is facing an unprecedented rebellion, opening up the possibility that Letta can surge to victory tonight. As our Rome correspondent, Lizzy Davies, explains:

To win the confidence vote in the senate, Letta needs to attract extra votes from either the centre-right PdL or the anti-establishment Five Star Movement (M5S) to reach the magic number of 161. He has said, however, that he has no interest in continuing at the head of a government that only sneaks in by a handful of votes.

His chances appeared to have been significantly boosted on Tuesday, when Carlo Giovanardi, a long-time ally of Berlusconi, struck the first major blow when he announced that “more than 40″ PdL MPs were prepared to vote to keep the government afloat.

Then, in a stunning move likened by one observer to an “Et tu, Brute?” moment, Angelino Alfano, the deputy prime minister long seen as Berlusconi’s political heir, appeared to solidify the mutiny. “I remain firmly convinced that all our party should tomorrow back the confidence vote in Letta,” he said, according to Ansa.

Here’s the full story: Silvio Berlusconi’s allies turn on him to keep Italy’s grand coalition alive

Make-or-break confidence vote for Italian PM

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

After yesterday’s foray into the US shutdown , we’re back in familiar territory today – the political crisis in Italy, with a monthly meeting of the European Central Bank on top.

Enrico Letta, Italy’s prime minister, is heading to parliament this morning for a make-or-break confidence vote. It was triggered by Silvio Berlusconi’s decision last Saturday to ordered his ministers out of the coalition, to bring Letta down.

Does Letta still have the support of the lower house, and the Senate? If not, Italy could be plunged deeper into chaos.

But Letta could win, and wins well, if Berlusconi’s centre-right party defy their disgraced leader and through their support behind the PM. Yesterday, key members of the People of Freedom party (PdL) said they would support the coalition [an alliance between Letta's own centre-left PD and the PdL].

The big question is how many PdL members of the Senate decide to throw their support behind Letta today.

Letta is due to start giving his first speech at around 9.30am Rome time, or 8.30am BST. The actual confidence vote could be quite late (we’ll update with firm timings when we have them).

The other key event in the eurozone today is the monthly meeting of the ECB’s governing council. They’re in Paris today. We’re not expecting any change to interest rates. There’s also a press conference at 2.30pm Paris time (1.30pm BST), where Mario Draghi will be quizzed over a range of issues, doubtless including his homeland of Italy.

I’ll be tracking all the developments through the day…

Updated

guardian.co.uk © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.

House and Senate fail to reach deal before deadline. Estimated 800,000 federal workers told to stay at home. National parks and museums closed, Nasa affected. Signs of splits among Republicans over tactics. The President plans to make a statement today…

 


Powered by Guardian.co.ukThis article titled “US government shutdown begins as Congress fails to reach deal – live” was written by Tom McCarthy in New York, for theguardian.com on Tuesday 1st October 2013 16.12 UTC

Guardian Washington correspondent Paul Lewis (@PaulLewis) is in the streets of Washington DC, a city in which the government is not just the main employer, but the lifeblood of the city. The impacts of the shutdown were immediately visible, Paul writes:

By mid-morning, downtown Washington DC had the throng of a busy lunchtime, as furloughed workers from all the major government buildings trickled out onto the streets after closing down their offices.

Everywhere from obscure government agencies to the White House was operating on a slimmed-down staff, with all so-called ‘non-excepted’ employees ordered to return home after turning up to work on Tuesday morning.

DC’s mayor, Vincent Gray, immunised many staff working for the city’s government from the shutdown, by declaring them all ‘essential’ workers, a legally contentious measure. But it at least kept the city movement, and guarded America’s capital from less sightly impacts of the last shutdown, in the 1990s, when uncollected trash piled up on the street.

Later we’ll have Paul’s interviews with tourists and federal workers talking about how the shutdown is affecting them.

Updated

Veterans of World War II have stormed their own memorial on the National Mall, barricades be damned, reporter Leo Shane III of Stars and Stripes tweets:

Honor flight vets just knocked over the barriers at the WWII memorial to get inside, #shutdown or no.

No sign of folks leaving. The vets have control of the memorial. #shutdown

John McCain may be trying to make a point by publicizing polling showing Americans oppose the GOP strategy of tying the shutdown to health care cuts, but most national polls on who gets blamed are rather useless in understanding what’s going through the mind of the House GOP, Guardian polling analyst Harry J Enten (@ForecasterEnten) writes.

Harry argues that, district-for-district, Republicans really aren’t vulnerable to voter outrage in midterm elections in 2014 because the districts are rigged:

While there are a number of reasons why House Republicans were willing to shut down the government, no answer is probably as satisfying as the fact that majority of House Republicans don’t live in districts that look anything like the rest of the nation. Thanks to urban packing and gerrymandering, Republicans don’t have to worry about losing to a Democrat.

The average vote share for President Obama in 2012 in Republican House districts was only 40.4%. Only 17 members of the Republican House caucus are from districts that voted for Obama in 2012. More than half of Republicans in the House come from districts that are 10 points more Republican than the nation as a whole. The average Republican district is over a 11 points more Republican than the nation.

The thing that most worries most members is likely a primary challenge, not a general election. The fact that more Republicans support a shutdown to stop Obamacare, as Quinnipiac found, is what’s most important for them.

That analysis leaves open the question on whether blowback from the shutdown represents potential damage to a party’s national brand, with consequences for membership, fundraising, turnout, activism, public support in hard policy fights and more.

Shut down: Tweets from Voyager 2. 

Not to be confused with Voyager 1, which recently entered interstellar space. Voyager 2 is only 15.37bn km away, according to the Nasa site that tracks it, which interestingly is still online here.

Updated

Shut down: the US Census Bureau online. 

You can’t visit the web site here, but you can read a shutdown notice.

(h/t @kennelliott)

Updated

Senator Mike Lee of Utah, who with Ted Cruz of Texas led the charge to tie stopgap spending legislation to changes to Obamacare, is delivering a speech on the Senate floor calling for a focus on people whose livelihoods will be damaged by the government shutdown. “I want to focus our attention in the coming days and hours on those people,” Lee says, gravely.

It turns out however that mostly Lee wants to continue his critique of the Affordable Care Act. “I’d like to turn for a moment to people who are and for a number of months have been already [hurting],” he says. “Obamacare happens to be the No.1 job-killer in the country.”

Threatened by shutdown: airport efficiency(!).

Here’s a question from the comments:

Can someone tell me will airport be affected? Ie will take ages to get through security?

Answer, in short: Yes, expect some delays, but security will remain tight. The Transportation Security Administration, part of the department of Homeland Security, is expected to furlough certain nonessential employees, but those do not include most screeners. Air traffic controllers will report for work as usual.

John McCain, Republican of Arizona, argued Monday against the House Republican shutdown strategy, telling the House to accept fate and pass a “clean” spending resolution.

This morning McCain indulges in a preliminary bit of “I told you so,” directed at Republican colleagues:

From the Bloomberg story:

By 72 percent to 22 percent, Americans oppose Congress “shutting down major activities of the federal government” as a way to stop the Affordable Care Act from going into effect, the national survey from Quinnipiac University found. [...]

A majority of the public, 58 percent, is opposed to cutting off funding for the insurance program that begins enrollment today. Thirty-four percent support defunding it.

Note that the poll featured in the story McCain links to is from last week; while the Bloomberg story is from today, it does not reflect new polling from today.

Updated

Here’s the tabloid view, then and now:

Shut down: Freedom of Information Act requests.

The justice department claims it can’t meet FOIA deadlines in an Electronic Frontier Foundation lawsuit over phone metadata collection because of the shutdown, Politico’s Josh Gerstein reports:

Just hours after the partial government shutdown kicked in, Justice Department lawyers filed a motion Tuesday morning with a federal judge in Oakland, Calif. seeking to postpone all deadlines in connection with a suit brought by the Electronic Frontier Foundation.

The motion submitted to U.S. District Court Judge Yvonne Gonzalez Rogers (and posted here) says the government will be unable to continue reviewing documents for release because both DOJ lawyers and intelligence community personnel involved in the process are being furloughed.

Read the full piece here.

Senate minority whip John Cornyn, Republican of Texas, says Democrats are “whistling past the graveyard” in asserting that the Affordable Care Act is not negotiable:

“This is the law of the land. It’s perfect. Couldn’t be better,” Cornyn, on the Senate floor, ridicules his Democratic colleagues as saying. “That’s like whistling past the graveyard.”

Then Cornyn accuses Democrats of engineering the shutdown because polls show Republicans will take the blame:

They’re looking at polls…They’re willing to risk shutdown of the federal government just to gain political advantage… The Democrats have doubled down on their strategy, hoping to gain political advantage at the expense of people hurt.

Part of the difficulty this morning for 2m federal workers is that many did not find out until they showed up for work as usual whether they were part of the “essential” core that would be kept on the job. Some were told to stay. Others were sent home.

The Guardian’s Paul Lewis (@PaulLewis) and Dan Roberts (@RobertsDan) are watching the shutdown unfold in Washington:

Some federal workers were reportedly instructed to switch off their BlackBerry smartphones to prevent them from working remotely, a disciplinary offence.

From 7am, forlorn-looking commuters could be seen heading to government buildings and agencies across Washington DC, where they would learn their fate. The city, where the government is a huge employer, will feel the impact of the federal shutdown more acutely than anywhere else in the US. The White House said it estimates a one-week shutdown would cost the wider US economy $10bn.

Read the full piece here.

Dan also has the inside story of how the shutdown played out in the halls of Congress last night:

Unfortunately, much of Washington acted as if it had seen this movie before. The metaphorical tumbleweed blowing down the corridors of Capitol Hill reflected not a fear of being caught in the crossfire, but a cynical war-weariness that left many lawmakers on the sidelines until it was too late. After three years of similar standoffs over the federal budget that were resolved at the last minute, no one could quite believe that this one would finish with shots fired.

Read the full story here.

The Senate has killed the House GOP request for a budget conference, again along party lines, 54-46.

Senate majority leader Harry Reid is on the floor of the Senate decrying the House request as a cynical 11th-hour ploy meant to portray the GOP as being serious about making a budget deal when in fact the party has, Reid says, ignored six months’ worth of Senate requests for a conference. Here’s Reid:

Sen. Murray [Patty Murray, D-Washington, budget committee chairwoman] has asked to go to conference 18 times. [McCain] has asked eight times himself. This has gone on for six months.

But it’s a clock tick past midnight… Boehner demanded the very conference they shunned us with for six months.

This display I hope would be embarrassing for House Republicans and Senate Republicans… what a deal!

If the House passes the piece of legislation they have over there… to reopen government, we’re happy to go to conference – why wouldn’t we? We’ve been asking to do that for months and months.

Updated

Senator John McCain, Republican of Arizona, sees the shutdown as a boon to the president because it distracts from the administration’s woes elsewhere:

“Obamacare is going to have a lot of problems in its rollout… the president’s poll numbers are falling in every category,” McCain told MSNBC. “Yet the story to the American people is Republicans are fighting Republicans – that’s not helpful.”

The president plans to make a statement today at 12.25pm ET in the Rose Garden, the White House advises.

As the two parties try to reach a spending agreement, they also are trying to pin the blame for the shutdown on the other side. In a statement in the briefing room yesterday afternoon the president said Republican maneuvers resulting in a government shutdown would be the “height of irresponsibility.” Expect the president to expand on that theme this afternoon.

Last time the government shut down, the Republican Congress caught the blame and the Democratic president emerged the stronger. That fact is not lost on the Obama administration, which is using president Clinton’s playbook, Bloomberg reports:

Five administration officials, including Treasury Secretary Jack Lew and budget director Sylvia Burwell, were central figures during the shutdowns of 1995 and 1996. That two-stage battle pitted a House Republican majority against Democratic President Bill Clinton and resulted in a public relations defeat for the Republicans.

Now, Like Clinton, Obama is casting his Republican rivals as partisan warriors willing to put the country’s economic future at risk to score political points with their base.

While Clinton chided Republicans for putting “ideology ahead of common sense” in a 1995 address, Obama told reporters yesterday that “House Republicans continue to tie funding of the government to ideological demands.”

Read the full piece here.

Updated

Are you a federal employee forced to stay home because of the shutdown? Is one of your family members an essential employee who has to work without pay? We want to hear from you:

* Where do you work? What is your role?

* What have your supervisors told you to expect in coming weeks? Please be specific. How will furloughs or payment delays affect you and/or your family?

* Is there anything you’d say to members of Congress? to President Obama or House Speaker John Boehner? Do you see the shutdown as necessary? Is there a silver lining?

Please share your views in the comments or reach out to us directly at ruth [dot] spencer [at] theguardian [dot] com. We’ll be featuring your comments here. Thanks for writing!

Welcome to our live blog coverage of the partial government shutdown, which went into effect at midnight. America is waking up to shuttered parks, silent call centers for veterans’ services, empty Pentagon offices and skeleton crews in White House and congressional offices. It’s the first government shutdown in 17 years.

The president signed a bill late on Monday defending against one of the most painful effects of a shutdown: the bill ensured there would be no delay in delivering paychecks to active-duty military personnel. The core services of other big government programs, including Medicare and social security, were expected to operate as usual.

The House and Senate played ping-pong on Monday with stopgap spending resolutions that would have kept the government open if they were able to agree on one. The last House resolution retained delays in the rollout of the Affordable Care Act that the Senate leadership had made clear would be rejected. The resolution was rejected, and at about 11.40pm ET the office of management of the budget sent out a memo ordering agencies to “execute plans for an orderly shutdown due to the absence of appropriations.” Read Jim Newell’s play-by-play of last night’s action here, and Graeme Wearden’s early-morning updates here.

Just before the shutdown, House Republicans made a significant move on the overall budget issue, electing to join a conference with the Senate to cut an actual budget deal, a step the House leadership had been resisting. Senate majority leader Harry Reid said he would not bargain over the current spending measure at a budget conference.

Updated

guardian.co.uk © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.

Polling data shows that Sunday’s German elections will be close, and could determine eurozone economic policy for the next stage of the crisis. Tight fight expected. Latest polling shows election is neck-and-neck. Grand coalition probably the most likely option…

 


Powered by Guardian.co.ukThis article titled “Markets await German elections; India surprises with interest rate rise – live” was written by Graeme Wearden (earlier) and Nick Fletcher (now), for theguardian.com on Friday 20th September 2013 16.11 UTC

Here’s some Friday night ratings action:

On Malta Fitch said:

There has been significant fiscal slippage. Malta’s general government deficit was 3.3% of GDP in 2012, well above both the government’s target (2.2%) and Fitch’s September 2012 forecast (2.6% of GDP). This slippage has carried over to 2013, when Fitch forecasts a deficit of 3.6% of GDP, compared with 2.7% in the original 2013 budget. The European Commission has re-opened the excessive deficit procedure (EDP) against Malta, with the deadline for correcting the excessive deficit set for 2014. In its previous rating review (September 2012), Fitch identified material fiscal slippage in 2012 as a negative rating trigger.

And on Croatia being cut to junk:

Croatia’s fiscal outlook has deteriorated since Fitch’s previous sovereign rating review in November 2012. The agency has revised up its forecast for this year’s general government deficit to 4.7% in 2013 from 3.9%, while general government debt/GDP is now expected to peak at 66% of GDP in 2016, up from our previous forecast of 62%.

A structurally weak growth outlook has impaired the prospects for fiscal consolidation and the attainment of public debt sustainability.

A look at the possible problems facing Angela Merkel should she win the German election this weekend, courtesy of the Wall Street Journal. A taster below with the full story here:

Angela Merkel has become Europe’s most popular leader by telling Germans they don’t need to change, and by shielding them from much of Europe’s debt-crisis pain at the same time.

But as Ms. Merkel heads into a likely third term as Germany’s chancellor, there are increasing calls from the business community, which she has counted among her most loyal supporters, and others for her to move more quickly to confront simmering domestic problems that they worry will eventually endanger German prosperity.

The time to fix the problems—energy costs, worn-out roads and gaps in education among them—is now, they say, while the economy is healthy.

In the corporate world, Vodafone has received clearance from the European Commission for its takeover of Kabel Deutschland, and with that final hurdle passed, the deal is expected to be completed on 14 October.

Eurozone consumer confidence rose to a two year high in September, according to new figures from the European Commission, but is still in negative territory.

The index rose to -14.9 from -15.6 in August, compared to expectations of a figure of around -15. The news that strong German and French growth had helped pull the eurozone out of recession clearly helped sentiment, although the recovery remains fragile, as evidenced by Italy cutting its growth forecasts earlier today. Annalisa Piazza at Newedge Strategy said:

Consumer confidence is expected to have supported by the relative good news on the development of the EMU economy (that has finally emerged from a 6-quarter recession). News that the ECB is willing to maintain the current accommodative policy might have also played a role as households see reduced risks to their disposable income in the future. On the other hand, the still high unemployment rate and geopolitical uncertainties are likely to have put a lid on a more pronounced uptick in September.

Dow Jones opens lower after Fed taper comments

Wall Street has opened lower, not surprisingly given Fed official James Bullard’s comments that tapering might begin in October. The Fed gave markets at boost following Wednesday’s surprise decision by the US central bank to maintain its $85bn a month bond buying programme.

But after Bullard’s hint, the Dow Jones Industrial Average is down 22 points or 0.14% in early trading. However the Nasdaq had edged higher, up 0.15%, helped by a near 3% rise in Apple shares on the day queues form for the tech giant’s latest iPhones.

More German polling figures, showing the SPD and AfD edging up:

Updated

Across the Atlantic, observers are still trying to get their heads around Ben Bernanke’s decision on Wednesday not to start scaling back the US Federal Reserve’s $85bn a month bond buying programme.

Most economists had expected a move to wean the markets off the quantitative easing fix this month, but Bernanke pointed to the US economy still being too fragile.

But today Fed official James Bullard suggested to Bloomberg that the so-called tapering might now start in October. So we have all the “will-they-won’t-they” speculation to look forward to for another few weeks yet.

Updated

Budget airline Ryanair has promised to mend its ways, after being rebuked about its “abrupt” culture by shareholders today.

Reuters writes:

Ryanair, Europe’s biggest budget airline, has promised to transform its “abrupt culture” in a bid to win customers from costlier rivals, admitting for the first time that a reputation for treating its passengers badly might have become a problem.

The Irish firm, this week voted the worst of the 100 biggest brands serving the British market by readers of consumer magazine Which?, said on Friday it would become more lenient on fining customers over bag sizes and overhaul the way it communicates.

“We should try to eliminate things that unnecessarily piss people off,” chief executive Michael O’Leary told the company’s annual general meeting, after several shareholders complained about the impact of customer service on sales.

That’s the spirit.

More here: Ryanair must stop ‘unnecessarily pissing people off’, says O’Leary

And on that note, I’m going to fly home. Nick Fletcher has the controls. Thanks for reading and commenting.

Maybe see you online on Sunday night for the election excitement? Our foreign team will be all over it, and I’ll be on Twitter as @graemewearden as usual.

Updated

Forsa: German election is neck-and-neck

New polling data from Germany has just been released, showing that Sunday’s election is neck-and-neck with neither side on track for a clear majority.

The poll from Forsa found that the current CDU/CSU-FDP coalition would win 45% of the vote, as would their main rivals. Another key point, the eurosceptics Alternative For Germany would not hit the 5% threshold.

  • CDU/CSU 40%.
  • SPD 26%. 
  • Greens 10%.
  • LINKE 9%. 
  • FDP 5%
  • AfD 4%
  • Pirates 2%

I didn’t mention earlier, but the SDP has ruled out forming a government with the more left-wing Linke party, given its views on foreign affairs and its opposition to NATO. That could change in the heat of coalition talks, of course.

Today’s UK public finance figures mean George Osborne is on track to hit his fiscal targets for this year.

My colleague Katie Allen explains all:

A drop in government spending helped cut Britain’s borrowing last month, prompting economists to forecast that the chancellor is on track to meet his fiscal target for this year.

Borrowing for the last financial year as a whole was also revised down slightly by the Office for National Statistics as it published data on the public finances.

As mentioned earlier, Britain ran a deficit of £13.2bn in August – smaller than last year’s £14.4bn.

Katie continues:

The government’s progress on cutting Britain’s deficit – the gap between the government’s income and spending – was described as “painfully slow” by one business group. But analysts said the public finances appeared to be on an improving trend.

More here: Osborne on track to meet fiscal target as UK public borrowing falls

In the City, the Foxton’s estate agent chain continues to enjoy a stellar first day on the stock market. Its shares are up 20% this morning, at 277p from the 230p it floated at.

The FT says it shows “a recovery in both share offerings and the residential property market in the UK”.

Joshua Raymond, chief marketing strategist of Cityindex.co.uk, calls it a “hugely impressive” debut, and deliciously timed, too.

With London house prices shooting in the midst of a pricing bubble thanks in part to the Help to Buy Scheme, investors are trying to gain exposure to firms that directly benefit from this and as such the Foxtons IPO could not have been better timed in terms of its attractiveness.

Or as one fund manager puts it:

Updated

Thanks to BigBlue80 for flagging up the polling data which suggests Angela Merkel’s current CDU-CSU/FDP coalition would not get enough votes to return to power.

In the past, the most reliable of the large pollsters was the Institut für Demoskopie (IfD) Allensbach

They predict the following:
CDU/CSU 39,0%
SPD 26,0%
Grüne 11,0%
Linke 9,0%
FDP 6,0%
AfD 3,5%
Piraten 2,0%
Sonstige 3,5%

I.e. 45% for the current CDU/FDP coalition and 46% for the three major left parties.
It’s quite certain that Merkel stays chancellor although I would not completely discount the option of a SPD-Left-Green coalition. Which sounds like change but would mainly lead to too much instability to get anything done.

AfD might only influence politics in the sense that Merkel will have to watch her right-flank in the next few years. While these one-trick ponies usually don’t last long, they would have 4 years to embarass Germany abroad.

Updated

Speaking of eurosceptics….

Italy cuts growth targets

The Italian government has bowed to the inevitable today, tearing up its growth targets and admitting that its budget deficit is heading over target.

Enrico Letta’s government cut its forecast for 2013 to a contraction of -1.7%, down from -1.3% before. In 2014, it expects growth of 1%, down from 1.3%.

Both forecasts remain more optimistic than the IMF’s own targets — the Fund expects a 1.8% contraction in 2013 and a 0.7% expansion in 2014.

That difference could matter — on Letta’s calculations, the Italian deficit is on track to hit 3.1% this year. That’s over the EU’s target, and econony minister Fabrizio Saccomanni told reporters that it will be “corrected quickly”.

Sounds like the EU are putting pressure over the deficit too:

Saccomanni also predicted that Italy’s two-year recession will end soon, with GDP flat this quarter and then rising in the last three months of this year.

Updated

Tony Connelly, Europe Editor for RTE News, reports that the eurosceptic Alternative für Deutschland party are in good spirits ahead of Sunday’s election.

Party loyalists are confident they’ll win enough support to claim seats in the Bundestag. They’re also looking ahead to next year’s European elections.

Emma Tunney, an intern with Open Europe, attended one of Angela Merkel’s campaign rallies this week, and writes that Europe was only raised late in the chancellor’s speech:

Here her stance was clear – Germany must hold the course. Germany’s continued commitment to help its friends is necessary, that said she was quick to add that Germany had every right to expect those receiving assistance make meaningful changes to their financial systems.

Her assertion of a CDU rejection of the possibility of mutualizing European debt was well received, and was perhaps the most definitive statement on what we could expect should she become Chancellor once again.

Parish notice: my colleagues on the foreign desk have been tracking the twists and turns of the German general election in their own blog: German Elections Blog 2013.

Updated

From Berlin, my colleague Philip Oltermann flags up that the unfolding story of how US intelligence have been accessing Europe’s electronic communications was raised by Peer Steinbrück yesterday,

The NSA affair became a German election issue on Thursday when Social Democrat candidate Peer Steinbrück accused Angela Merkel of “negligent” treatment of the issue.

He said the revelations of US internet surveillance represented a “far-reaching interference with our basic democratic rights and personal self-determination”, and that Merkel had failed to “protect German citizens’ freedoms and interests”.

More here: Peer Steinbrück accuses Angela Merkel of negligence over NSA revelations

Electionista has crunched the recent polling data and concluded that Angela Merkel’s CDU-CSU/FDP coalition has just a 50.5% chance of winning a majority on Sunday:

On that point….

Updated

AP: Tight fight in Germany

Here AP’s latest dispatch from the German political frontline. It explains how the Free Democrat party are battling to hit the crucial 5% mark to get into the Bundestag.

Chancellor Angela Merkel’s conservatives and her struggling coalition partners were fighting over votes Friday in the final stretch of campaigning for Germany’s election as polls pointed to a tight outcome.

Merkel is heavily favored to emerge from Sunday’s election with a third term, but her hopes of continuing the current coalition of her conservatives and the pro-market Free Democrats are in the balance.

A ZDF television poll conducted Wednesday and Thursday showed a statistically insignificant one-point lead for the alliance over the combined opposition in line with other recent surveys showing a dead heat.

The Free Democrats are pushing hard for Merkel supporters’ votes after being ejected from Bavaria’s state legislature in a regional vote last weekend. In national polls, they’re hovering around the 5 percent support needed to keep their seats in Parliament.

Merkel and her conservative Union bloc are pushing back, saying they have no votes to give away. If the coalition loses its majority, the likeliest outcome would be a “grand coalition” between Merkel’s party and the center-left Social Democrats and the conservatives want to be as strong as possible.

“I would advise us all in the final hours before the election to fight our political opponents and not argue over each other’s votes,” Bavarian governor Horst Seehofer, who led Merkel’s conservative bloc to victory there, told the daily Die Welt.

The Free Democrats have “potential of well over 5 percent,” he was quoted as saying. They won nearly 15% at the last election.

“I think it’s a very strange understanding of democracy when the impression is raised that citizens’ votes belong to the chancellor,” the Free Democrats’ general secretary, Patrick Doering, shot back on n-tv television.

ZDF’s poll of 1,369 people gave Merkel’s conservatives 40 percent support and the Free Democrats 5.5%. Challenger Peer Steinbrueck’s Social Democrats polled 27%, their Green allies 9% and the hard-line Left Party with which the center-left parties say they won’t work 8.5%.

The poll showed a new anti-euro party, Alternative for Germany, at 4% not enough to win parliamentary seats. It gave a margin of error of plus or minus up to three percentage points.

But do note the caveat from earlier – some analysts think AfD are doing better than that…..

Looking back at the German election… here’s a handy graphic showing how last night’s polling data would translate into seats in the Bundestag:

The CDU’s 266 seats,plus the FDP’s 37, would give the current coalition a small majority –which could make for some tight votes on future eurozone policy.

Updated

On a lighter note, there’s a correction in the Financial Times today that deserves a wide audience (with many thanks to Luke Baker of Reuters)

Updated

Britain’s public finances were a little better than expected in August. The monthly deficit came in at £13.157bn, compared with estimates of around £13.3bn. Government revenues rose by 1.4%, and spending dipped by 2.2%.

So far this year, the UK had borrowed £46.8bn to balance the books, compared to £50.5bn for the first eight months of 2012. More to follow.

Updated

Corporate news

In the UK business world, the Office for Fair Trading has launched an investigation into possible price fixing on sports bras.

More here: OFT probes sports bra price fixing

And everyone’s favourite (?!) estate agent, Foxtons, has launched on the London stock market. Floated at 230p a share (valuing the firm at nearly £650m), its shares have leapt to 280p. Even London house prices aren’t going up that fast.

More here: Foxtons share price soars on debut

Adidas profits warning pushes DAX down

European stock markets are mostly lower today, but there’s not much afoot.

The initial rally sparked by the Federal Reserve’s decision on Wednesday not to taper its stimulus package has worn off, and traders appear to be hunkering down ahead of the German election.

The German stock market has been pulled down by a profit warning from Adidas last night.

Adidas blamed adverse currency effects, a distribution problem in Russia and poor trading at its golf business.

• FTSE 100: down 6 points at 6618, down 0.1%

German DAX: down 9 points at 8681, down 0.12%

French CAC: down 5 points at 4200,-0.12%

Italian FTSE MIB: down 1 point at 18056, – 0.01%

Spanish IBEX: up 11 points at 9,165, +0.13%

Updated

Here’s some early reaction to India’s surprise interest rate decision, which I’ve taken from Reuters.

Anjali Verma, chief economist at PhillipCapital:

Hiking the repo rate was unexpected. The governor is clearly worried about inflation. He is saying the improved international conditions will take care of the current account deficit funding and his focus will shift to fiscal deficit and inflation, which were taking a backseat.

Anubhuti Sahay, economist at Standard Chartered:

The statement clearly has a strong hawkish bias as it states that with a relatively more stable exchange rate, monetary policy formulation will be determined once again by internal determinants viz inflation and fiscal deficit.

Abheek Barua, chief economist at HDFC Bank:

The long-term signal is that the RBI is still concerned with inflation.

Easing short end of the curve, which it has done by cutting the MSF (marginal standing facility), reducing CRR requirements and etc. is a strong pro-growth signal. I think it (MSF) might be reduced even further.

India battles inflation with surprise rate hike

India’s new central bank governor Raghuram Rajan made a splashy debut in the monetary policy world this morning.

The Reserve Bank of India surprised the markets by announcing a quarter-point rise in India’s headline interest rate, from 7.25% to 7.5%.

However, the RBI also announced that it will unwind some of the “exceptional measures” put in place to support the Indian Rupee, after it slumped to record lows against the US dollar this summer.

Rajan’s message with today’s rate hike is that the RBI will make fighting India’s inflation problem its top priority. The cost of living is rising at 6.1% in India.

As Rajan put it in today’s statement:

Bringing down inflation to more tolerable levels warrants raising the repo rate by 25 basis points immediately.

The RBI raised rates despite recognising that the Indian economy is weakening, with “continuing sluggishness in industrial activity and service.”

Clearly, Rajan is showing that he’s taking price stability as his mantra. The minutes point out that that the RBI has struggled with this in the past:

What is equally worrisome is that inflation at the retail level, measured by the CPI, has been high for a number of years, entrenching inflation expectations at elevated levels and eroding consumer and business confidence. Although better prospects of a robust kharif harvest will lead to some moderation in CPI inflation, there is no room for complacency.

A rate hike usually pushes currencies up. However, the rupee promptly dived as the news hit the wires, as traders realised that the RBI was also cutting some of the exceptional measures introduced to support its currency. The rupee fell from 61.7 to the dollar to as low as 62.55.

Stocks also fell on the Indian stock market — with the Sensex sliding over 2.1% so far today.

* – for the record, the RBI trimmed its marginal standing facility rate by 75 basis points from 10.25 to 9.5 per cent, and cut the minimum proportion of the cash reserve ratio that banks must maintain at the RBI from 99 per cent to 95 per cent.

Updated

Interest in the German election extends to the Asian markets, reports IG’s man in Melbourne, Chris Weston.

There’s no panic, but investors are calculating how the result will affect eurozone crisis policy. He writes:

The market sees the election really going one of two ways; either the status quo is resumed (i.e. CDU, CSU and FDP remain in power) or perhaps a grand coalition with the SPD party is put together after a short period of negotiations.

Given the SPD’s previous positive stance on backing a redemption fund, backed by Eurobonds, if they did help govern in future we could see a spike in EUR/USD on the prospect of a more euro-friendly government in place. On the other hand if the AfD (right wing, anti-euro party) get over 5% of votes and thus gain representation in parliament, we could see EUR and US futures gap lower on Monday.

Eurozone concerns have had limited influence on price action of late, but the prospect of having the AfD party having representation in parliament could have implications on eurozone policy going forward. The first thing that springs to mind is Greece.

We know the Greeks have a funding problem; the IMF talked openly about it July; highlighting a €4.4bn funding gap in its current program for 2014 and €6.5bn in 2015.

Given all new loans have to be fully agreed on in the Bundestag (German lower house of parliament); AfD representation in parliament could cause disruptions and uncertainty here.

Updated

On the campaign trail….

Angela Merkel and Peer Steinbrück, the SPD’s candidate for the chancellorship, held election rallies last night in a late drive to win votes before Sunday’s election (see opening post)

Both politicians attracted a healthy turnout of supporters, as these photos show:

Updated

German election looms

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

Germany’s general election has loomed over the eurozone for most of 2013. Finally, it’s all-but upon us.

Germans head to the polls on Sunday in a crunch poll that will determine how Europe’s largest countryeconomy is governed for the next four years. There’s no doubt that Angela Merkel’s CDU-CSU party will win the most votes. But there’s real uncertainty over whether her coalition with the Free Democrats can be repeated, or whether we’ll see a grand coalition with left-leaning rivals.

Poll after poll this week have confirmed that it’s just too close to call (do make your predictions in the comments).

The latest survey, released last night by FGW, suggested that Merkel’s coalition would just win enough votes to take power again.

It put CDU at 40%, the Social Democrats at 27%, FDP at 5.5%, Linke at 8.5%, the Greens at 9%, and then the eurosceptic Alternative for Deutscheland at 4% (not enough to win seats).

So, that’s the CDU-FDP on 45.5%, and other major parties at 44.5%.

The key factor is that a party needs 5% of votes to actually get into the Bundestag. And the whisper in Germany (and in the comments section of this blog this week) is the AfD might be doing better than the pollsters believe.

If AfD clear the 5% mark, as some polls have suggested, then German politics will be dramatically shaken up.

Here’s what some respected euro journalists have been tweeting:

So, the eyes of Europe could be on Germany this weekend, and for sometime after if it’s an unclear result.

Traders in the City are already watching with interest, as CMC’s Michael Hewson writes:

It still remains uncertain as to what the electoral maths will be with respect to any new coalition government.

A rising Eurosceptic movement in Germany could well complicate things significantly after a poll by German newspaper Bild showed that the AfD party could well be on course for more than 5% of the vote in the election this weekend.

A move above this threshold would mean that the party would gain seats in the Bundestag and as such would mean that they would have much greater influence over policy as well as make the likelihood of a less stable coalition a real possibility as neither the CDU, or the SPD would have enough votes to form a government with any prospective coalition partners.

I’ll be tracking events through the day as usual. We’ve already had one piece of interesting news outside Europe — India’s central bank has surprised the markets by raising interest rates. More on that shortly…. 

Updated

guardian.co.uk © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.