Tony Blair’s old theme song “Things can only get better” seems to have been taken up by the Bank of England’s Ben Broadbent.
Yesterday the Bank hinted strongly that interest rate rises were on the way, sooner perhaps than people expected. This of course fed into the markets’ current concerns about dearer borrowing costs and the withdrawal of central bank stimulus measures.
Today Broadbent has told the BBC’s Wake up to Money that the worst of the squeeze on real wages was over and the economy is improving:
The worst of the squeeze was about a year ago and if you look at what happened to real household incomes during the second half of last year they were flat, and if you ask me what’s happening right now in the first quarter, they are starting to rise.
The squeeze from that depreciation is coming off, the path from higher important prices is probably at its peak and we are starting to see wage growth improve.
So things will get better from that point of view.
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
It’s grim start to the day weatherwise in London and it looks like its going to be a grim start for European stock markets, as the sell-off which began in earnest a week or so ago looks set to continue.
If you’re just joining us, Wall Street and Asian markets suffered renewed falls as the concerns about rising interest rates continues to spook investors. With signs of inflation returning, central banks are increasingly withdrawing the measures – low interest rates, quantitative easing – which have been supporing markets since the financial crisis. And markets do not like it.
The sell off has been exacerbated by the growing prevalence of programme trades which exaggerate market moves, and a number of bets on the volatility index staying low which have gone wrong.
So the Dow Jones Industrial Average suffered its second biggest one day points fall, down 1,032.89, while the S&P 500 hit correction territory, ie a 10% decline from its recent peak.
In Asia the Nikkei 225 index lost 2.32% while the turmoil spilled over into China, with the Shanghai Composite closing down 4.1% in one of its worst days for two years.
Positive economic data and hints from the Bank of England that interest rates could rise in May put pressure on bond prices, and in turn equities.
Here’s our overnight blog giving all the developments:
And our latest markets story:
It would appear that the brief respite for stocks seen in the middle of the week turned out to be the eye of the storm as once again rising bond yields prompted a further bout of selling across the board, not only in the US last night but in Asia again this morning.
Concerns about rising interest rates weren’t helped by an unexpectedly hawkish inflation report from the Bank of England yesterday, while the latest Chinese trade data suggested that the Chinese economy appeared to be ticking along nicely, even if the trade surplus did shrink quite sharply as a result of a big jump in imports.
US weekly jobless claims also dropped sharply to 221k, once again reinforcing the tightness of the US labour market which in turn could well put further upward pressure on wages in the months ahead.
As a result US bond yields started edging higher again with the 10 year yield once again looking to retest the 2.9% level and a four year high, with the 3% level now a very realistic probability. A US government shutdown which started at midnight isn’t helping sentiment either.
While this continued optimism about how the US economy is likely to perform is a good thing, for US stocks whose valuations are still at elevated levels, they may not be particularly good news given that yield differentials are no longer working in their favour, unlike in Europe where dividend yields are still higher than the yields on government debt.
This may help explain why the Dow and S&P500 once again closed sharply lower again, with the Dow losing over 1,000 points, and in the process closing in correction territory, while the VIX once again popped higher.
As a result of last night’s sell-off in the US, and this morning’s weakness in Asia, European markets look set to follow suit this morning and open lower, while the Nikkei 225 also slid into correction territory as it tested its long term 200 day moving average.
So here are the opening calls for Europe from IG:
Almost incidentally there are a few bits of economic data due, including UK trade and industrial production figures.
9.30 GMT: UK industrial productoin
9.30 GMT: UK trade figures
9.30 GMT UK construction output
12.00 GMT: NIESR economic growth forecast