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Markets await US GDP report, as UK mortgage approvals rise - business live
US economy smashes forecasts with 3.2% growth, but spending cools - business live
(about 2 hours later)
As the lunchtime gong rings across the City, the markets remain subdued ahead of the US GDP report.
Jason Furman, who chaired President Obama’s Council of Economic Advisers, also urges caution about the growth figures:
The FTSE 100 is lagging behind the rest of Europe, down 14 points (0.2%). Royal Bank of Scotland (-4.5%), Glencore (-3.3%) and Just Eat (-3.2%) are the top fallers, for reasons already discussed....
First quarter GDP is 3.2% but the underlying data is much weaker and is consistent with a slowing economy.
Otherwise the Stoxx 600 index of top European shares is up just 0.1%, with Germany’s DAX flat and the French CAC up 0.15%.
GDP is volatile so this is weak signal. But to the degree today’s data has any info it is that the underlying trend of consumption and investment is weakening. And no reason to believe we’ll get lucky again next quarter with inventories, NX, and govt.
Back in the markets, mining giant Glencore is under pressure after revealing it is under investigation over potential ‘corrupt practices’.
Paul Ashworth of Capital Economics isn’t impressed with the blowout US growth report.
It’s not clear exactly what America’s Commodity Futures Trading Commission suspects Glencore of doing, beyond violating parts of the Commodity Exchange Act.
He argues that the underlying picture is weaker than the 3.2% headline growth figure suggests, once you strip out certain elements:
But the investigation is closely linked to an existing probe by the Department of Justice, into whether Glencore bribed foreign officials to win contracts.
Taking out the over-sized boosts from net trade, inventories and highways investment, which will all be reversed in the coming quarters, growth was only around 1.0%.
Glencore shares are down 3.5% this morning following this extra headache, which could potentially lead to additional fines (although that this stage, who knows?...)
Under those circumstances, we continue to expect that overall growth will slow this year, forcing the Fed to begin cutting interest rates before year-end.
Here’s Howard Archer of the EY Item Club on the surprise pick-up in UK mortgage lending last month:
The bottom line is that today’s US growth report appears better than expected, but there are some concerns under the surface - mainly due to falling consumer spending, and the inventory build-up already discussed.
UK Finance somewhat surprisingly reported that mortgage approvals for house purchases rose to a 9-month high of 39,980 in March from 39,207 in February; this took them to the top of the 38,000-40,000 range that has largely held since the beginning of 2018.
Here are the key points:
The March mortgage approvals data look pretty resilient given recent heightened Brexit uncertainties. It may well be that housing market activity has gained some support from recent improved consumer purchasing power and robust employment growth.
US real GDP: Grew at an annualised rate of 3.2%, stronger than expected.
Nevertheless, conditions still look pretty challenging for the housing market. Despite recently improved real earnings growth, house prices are still relatively expensive relative to incomes, while latest surveys largely point to consumer caution over making major purchases. The overall performance of the housing market is being dragged down by weakness in London and parts of the South East
Consumer spending: Growth slowed to just 1.2%
It is possible that the avoidance of a “no deal” Brexit at the end of March could provide a modest boost to the housing market through easing some of the immediate uncertainty and concerns
Business investment: Up by +2.7%, thanks to spending on intellectual property.
However, we suspect it is more probable that with Brexit most likely being delayed until 31 October, prolonged uncertainty will weigh down on the economy and hamper housing market activity. Consequently, we suspect house prices will rise only 1% over the year and would not be at all surprised if they stagnate.
Residential construction: Fell by 2.8%, the fifth decline in a row.
UK warehouses are groaning after factory bosses stockpiled at a record rate in the last three months.
Government investment: Up by 2.4%, due to higher spending by states and local governments
So says the CBI, whose latest survey of UK industry shows that Brexit uncertainty has had a big impact this year.
Net trade: Added 1% point to the growth rate, due to rising exports and falling imports.
The report says:
Inventories: stockpiling added 0.65% points to the growth rate
The three months to April saw an unprecedented acceleration in the growth of stocks held by the manufacturing sector....
Gregory Daco of Oxford Economics sums it up:
Stocks of raw materials (+39%), work in progress (+21%), and finished goods (+25%) all grew at their fastest respective paces on record (since 1958 for raw materials and finished goods, and since 1977 for work in progress).
In reading this Q1 #GDP report, be careful: final sales were up more modest 2.5% (saar) w/ inventory accumulation adding 0.65pp. Risk is Q2 inventory drag.Overall, GDP momentum +3.2% y/y in Q1 -- faster than 3% y/y in Q4, but consumer, business, residential spend cooling pic.twitter.com/marznhhN7U
Manufacturers also reported a modest pick-up in output in the last three months, while business optimism continues to fall.
The New York Times’s Ben Casselman has dug into the GDP report, to show how US consumer demand is slowing (even as the headline growth rate picks up)
Ride-hailing company Uber has its critics (from workers who demand proper benefits to authorities who fear it is increasing congestion).
In fact, this was the weakest performance for final private demand since 2013. pic.twitter.com/BCOIJfZWmF
But you can’t accuse it of lacking ambition; the firm is now aiming to be the biggest tech flotation since Facebook.....
A fall in imports has also boosted US growth - perhaps a sign that the Trump trade war is dampening demand for overseas goods.
Uber aims for stock market debut value of up to $90bn
Here’s an excellent chart showing how net trade boosted US GDP:
Getting back to Royal Bank of Scotland’s latest results.... Russ Mould of AJ Bell reckons investors are disappointed that its net interest margin has fallen again.
Chart for the UK audience. US GDP growth of 0.8%q/q in Q1 2019, with half of the contribution to growth coming from inventories & net trade (predominantly via falling imports). Household consumption contributed 0.2% & private investment 0.1%. pic.twitter.com/qd6tjcTSv7
This is effectively the difference between the profit RBS makes on its loans, and the interest it pays to its own lenders (ie people who trust it with their savings).
Some of the initial excitement is fading, as analysts dig into the US growth report.
With interest rates so low, these margins are being squeezed, he explains:
The headline number is certainly stronger than expected....but there’s concern that inventory-building contributed to growth.
RBS is getting help here from central bank policies as low interest rates and Quantitative Easing keep borrowing costs low for consumers and corporations and make it easier for them to services their debts. But just as ZIRP (zero interest rate policies) and QE give with one hand, they are taking away with another, because the flat yield curve means banks are finding it hard to make a margin when they borrow money in the short-term and lend it out over the long term.
That’s a problem, because companies typically run those inventories down again, which hits growth.
“RBS’ net interest margin fell again and this weighed on profits once more. Nor does this situation look likely to change, given competition and central banks’ policy U-turn this year, with a slew of monetary authorities seemingly putting interest rate increases on hold until at least 2020, including the Bank of England.
Fab Q1 GDP print (3.2pc)...till you look under the hood and kick the tires. Inventory buildup will have to be unwound (which will drag on growth), imports were weak (everyone front ran the tariffs last year) and defence spending was strong (but rest of govt spending weak).
Newsflash: stricken retail chain Debenhams has revealed the first 22 stores which will close following its plunge into administration.
Wall Street is cheering these growth figures, as investors and analysts reassess the state of the US economy.
The closures will hit high streets across the country, from Kirkcaldy in Scotland to Folkestone on the English south coast, via Birmingham, London’s Wandsworth, Southport and Slough.
Futures pop after Q1 GDP reading blows past estimates https://t.co/tRW2nyzvBX pic.twitter.com/OtXHNtuIbF
Here’s the list:
Q1 #GDP much better than expected. What happened to “residual seasonality” and more importantly the negative effects of the government shutdown and US-China #tradewar? Could GDP have been over 4% if these factors were at play? https://t.co/ZhiS34Z7Az
Altrincham
America’s habit of using annualised growth rates can be confusing for the rest of us.
Ashford
But a 3.2% annualised growth rate simply means the US grew by 0.8% in the first quarter.
Birmingham Fort
That’s likely to be rather better than international rivals (we don’t have UK or eurozone growth figures for Q1 yet).
Canterbury
Good news for the US! "Real gross domestic product (GDP) increased at an annual rate of 3.2 percent in the first quarter of 2019" Or as we would put it GDP rose by 0.8% in the quarter putting the US in the front rank right now.
Chatham
A 3.2-percent first quarter GDP print shows that the United States remains the cleanest, meanest...dirty shirt in the global economy - slowing, but not as much as its major counterparts. The dollar's rally remains confoundingly intact.
Eastbourne
More key points from the US GDP report:
Folkestone
US Q'1'19 GDP: Top line up 3.2%, real final sales 2.5%, final sales to domestic purchasers 1.4% final sales to private domestic purchasers 1.3%. Driven by massive increase of $128.4 billion in inventories which is not sustainable. Trade deficit narrowed.
Great Yarmouth
#GDP imports fall sharply in quarter, drop adds 0.58 pp to GDP growth
Guildford
America’s growth in the last quarter was driven by a pick-up in trade, and a swelling in company inventories.
Kirkcaldy
The Commerce Department also reports that government investment also rise, which also helped to push growth up to an annual rate of 3.2%.
Orpington
Trade & inventories help Q1 real #GDP to top forecasts at 3.2%
Slough
However, consumers and companies seem to have throttled back.
Southport
Consumer spending growth slowed to 1.2%, from 2.5% in Q4 2018, while business spending on equipment only grew by 0.2% - the weakest growth since autumn 2016.
Southsea
Oh you beauty. US 1Q #GDP up 3.2% annualized. Above the top end of a very wide range of forecasts.
Staines
NEWSFLASH: America’s economic growth accelerated sharply in the first quarter of this year.
Stockton
GDP expanded at an annual rate of 3.2% in January-March -- up from an annual rate of 2.2% in the final three months of 2018.
Walton
That’s a much stronger result than the 2.2% which economists had expected. A good sign for the global economy?
Wandsworth
More to follow...
Welwyn Garden City
Wimbledon
Witney
Wolverhampton
And here’s Zoe Woods’ news story on what it means for shoppers, and more than a thousand staff:
Debenhams to close 22 stores: full list
Some snap reaction to the rise in UK mortgage approvals:
UK Finance reports 42k mortgage approvals for house purchase in March, up 9%y/y, though UKF notes Mar-18 was a weak month. Comes off the back of HMRC reporting UK transactions up 0.4%y/y in March & the various house price indices between 1%y/y & -1%y/y. Still just bumping along. pic.twitter.com/6mPav19Nuf
UK new mortgage approvals / RICS new buyers via @PantheonMacro One word: Yikes. pic.twitter.com/Iyil8Pv26Q
Newsflash: The number of new mortgages approved in the UK has hit a nine-month high.
UK Finance, which represents British lenders, reports that 39,980 loans for house purchases were approved in March.
That’s up from 39,207 in February, and 37,773 a year earlier.
#UnitedKingdom UK Finance Mortgage Approvals at 39.980K https://t.co/8XGCSGaZNz pic.twitter.com/8ooBETDHPm
They also report that consumer credit growth picked up in March, to an annual rate of 4.1% up from 3.5% in February. That’s the fastest gain since June 2018.
That doesn’t completely square with Royal Bank of Scotland’s warning today that Brexit uncertainty is hitting demand.....
Disappointing factory output data from Japan overnight is fuelling concerns over the global economy.
Industrial production fell by 4.6% year-on-year in March, the steepest decline since May 2015 (and the second monthly fall in a row).
Carmakers, machinery producers and metal fabricators all contributed to the fall.
Economist had expected a smaller annual decline, of around 3.8%.
Output fell by 0.9% month-on-month, also worse than expected.
Given the scale of Japan’s manufacturing sector, it’s not a great sign....
Japan Industrial production -4.6 YoY (expected -3.8%) fastest drop since May 2015. MoM -0.9% (expected 0.00%) Another bad news for Asia Export and domestic economies pic.twitter.com/a2avoZcgHE
Japan's stocks look pressured by a weaker USD and some poor data where industrial production dropped at the fastest pace since 2015.
Daimler isn’t the only carmaker struggling right now -- Volvo and PSA have also posted falling profits in the last quarter.
Here’s the FT’s take:
Daimler has reported a slump in first quarter earnings, as the German company joins other global carmakers plagued by falling sales in China and flat markets in the Europe and the US.
The Stuttgart-based parent of Mercedes-Benz said earnings before interest and tax fell 16 per cent to €2.8bn from €3.3bn a year earlier. The result was ahead of an analyst forecast, provided by Refinitiv, of €2.6bn.
Revenue in the quarter eased slightly to €39.7bn from €39.8bn the same period a year earlier, and was higher that forecasts of €39.14bn. Net income fell 9 per cent to €2.1bn but also beat analysts’ estimates of €1.9bn.
RBS and Just Eat have helped to pull the FTSE 100 down this morning.
The blue-chip index has shed 18 points, or 0.25%, in a fairly subdued session so far.
The French and German markets are both flat, while Italy’s FTSE MIB is down 0.3%
Online takeaway firm Just Eat is also propping up the FTSE fallers this morning, after reporting slower growth in the UK.
UK takings only rose by 7% in the last quarter, down from 17% during 2018.
Just East blames several factors, including “unseasonably warm weather in February; and Easter falling entirely in Q2 this year.”
They’ve got a point about Easter. But does hot weather really deter people from ordering a kebab?!
Just Eat may also be suffering some indigestion after gobbling up rival HungryHouse at the end of 2017.
Outside the UK, orders surged by 40% to 29.5 million, helping Just Eat to pledge that trading is still on track. Shares are down 3% this morning, though.
Shares in Royal Bank of Scotland have fallen over 5% at the start of trading, after warning that Brexit uncertainty is hurting demand.
Despite beating forecasts this morning with profits of £707m in the last quarter (down from £808m) RBS is the worst-performing FTSE 100 stock, down 11.3p at 238.5p.
Investors may be concerned that the political crisis in Westminster is damaging confidence, after RBS told them that:
While we retain the outlook guidance we provided in the 2018 Annual Results document, we recognise that the ongoing impact of Brexit uncertainty on the economy, and associated delay in business borrowing decisions, is likely to make income growth more challenging in the near term.
RBS first-quarter income falls less than expected Bank says Brexit uncertainty will weigh on revenue in coming months
German carmaker Daimler has joined the ranks of auto firms suffering from weak demand in China, and a lacklustre global economy.
Daimler has reported that pre-tax earnings shrank 16% last year, from €3.3bn to €2.8bn. It’s been hit by a double-whammy of rising raw materials costs and weaker demand.
Total sales fell by 4% in the last quarter, with its Mercedes-Benz division suffering a 7% decline. Crucially, sales fell by 3% in China, a crucial markets for the company.
Daimler Chief Executive Officer Dieter Zetsche warned that conditions are tough:
“Achieving the financial targets for 2019 has not become easier since the first quarter.
“We now have to work hard to achieve our targets for 2019.
Good morning and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Donald Trump likes to boast about creating one of the greatest economies in America’s history. Today we discover how the US is actually performing on his watch.
New GDP figures for the first quarter of 2019 are expected to show moderate growth, at an annual rate of around 2.3% (or almost 0.6% on a pure quarter/quarter basis).
That would be fractionally higher than in Q4 2018, where growth was revised down last month, and rather short of Trump’s goal of 3% growth.
Growth could have been held back by the president’s belligerent trade policies, and by the Federal government shutdown at the end of last year. On the other hand, the sugar rush from Trump’s tax cuts may not have totally faded, supporting consumer spending.
The figures come out at 1.30pm BST, so markets may be quiet in the meantime.
America’s tech companies are certainly doing well. Last night Amazon reported that profits have doubled in the last quarter to $3.6bn, hours after Microsoft became the third US company valued at over $1tn following its own strong results.
Microsoft becomes third listed US firm to be valued at $1tn
Amazon makes $1bn a month as growth slows
But as today’s GDP report will show, there’s more to America than Silicon Valley....
Also coming up:
Royal Bank of Scotland is reporting results, a day after announcing the departure of CEO Ross McEwan.
It has posted a net profit of £707m - ahead of forecasts, but down on last year’s £808m. The bank also warns, though, that Brexit is clouding business.
RBS earnings: £707 million for Q1 net profit, vs £792 million last year https://t.co/rwX57UIKFW
UK Finance will report how many new mortgages were taken out in March. But the City may be wary after last month, when the industry body initially said demand had hit a five-year low, before discovering a blunder in the numbers.
Presumably today’s figures have been checked very carefully....
The agenda
9.30am BST: UK Finance mortgage approvals figures for March
