Key events
European shares have turned negative.
The FTSE 100 index in London is trading 0.1% lower at 7,615 while Germany’s Dax and France’s CAC have also slipped 0.1% and the Italian market is trading 0.3% lower.
AJ Bell investment director Russ Mould said:
An escalation of tensions in the Red Sea amid US and UK strikes on Houthi rebels raises the prospect of renewed inflationary pressures as the resulting disruption to global shipping pushes up freight costs. Oil prices continued to bubble but are below the $80 per barrel levels reached last week.
There was some positive news on inflation on Friday thanks to an unexpected contraction in producer price inflation in the US – so called factory gate prices are often a leading indicator for consumer prices so this offers some encouragement.
There was mixed performance and messaging from US banks as the latest earnings season across the Atlantic got underway – with some signs of stress in consumer debt.
The jobs market is often a good barometer of economic conditions as firms hire when they’re feeling confident and retrench when times are tough – so PageGroup becoming the latest recruiter to warn on profit is a slight worry.
This is a mild warning, suggesting the end of last year saw the outlook suffer significant deterioration. Profit is only expected to be slightly below previous guidance but the signs certainly weren’t encouraging in the final quarter of 2023. The company’s decision to let go a good chunk of its own workforce tells its own story.
A modest move higher in PageGroup’s fees for temporary placements, alongside a big drop in fees for permanent positions, suggests companies are looking to retain some flexibility with staffing needs.
Ludovic Subran, chief economist at Allianz, said:
German #GDP fell by -0.3% q/q in Q4 2023, but the previous quarter was revised up to 0.0%. Thanks to the upward revision of Q3, #Germany has managed to avoid a recession in the second half of 2023. Annual GDP growth printed at -0.3% in 2023 vs. 2022 (as expected in our latest…
— Ludovic Subran (@Ludovic_Subran) January 15, 2024
Carsten Brzeski, global head of macro at ING, said:
Now it’s official. The German economy shrank by 0.3% year-on-year in 2023. What’s worse, however, is that there is no imminent rebound in sight and the economy looks set to go through the first two-year recession since the early 2000s.
The year 2023 was another turbulent one, with the economy in permanent crisis mode. In fact, since 2020, there has been a long list of crises and challenges facing the German economy: supply chain frictions resulting from the pandemic lockdowns and war in Ukraine, an energy crisis, surging inflation, tightening of monetary policy, China’s changing role from being a flourishing export destination to being a rival that needs fewer German products, and several structural shortcomings…
All in all, we expect the current state of stagnation and shallow recession to continue. In fact, the risk that 2024 will be another year of recession is high. We expect the German economy to shrink by 0.3% year-on-year this year. It would be the first time since the early 2000s that Germany has gone through a two-year recession, even though it could prove to be a shallow one.
Here’s some instant reaction. Oliver Rakau, chief Germany economist at Oxford Economics, tweeted:
The German economy contracted by 0.3% q/q in Q4 based on what @destatis said at its press conference on the annual GDP release and relying on limited data. A touch better then the -0.4% I budgeted, but given the very weak monthly data wouldn’t be surprised by small revision. 1/3
— Oliver Rakau (@OliverRakau) January 15, 2024
Claus Vistesen, eurozone economist at Pantheon Macroeconomics, tweeted:
German GDP estimated down 0.1% in 2023, working day-adjusted. That looks like a small increase in Q4 GDP to me, likely due to net trade, but let’s see. The December data could still swing the estimate to zero or even a slight fall.
— Claus Vistesen (@ClausVistesen) January 15, 2024
German economy shrinks 0.3% in 2023 but avoids recession
Germany’s economy, the largest in Europe, shrank 0.3% last year, in line with economists’ expectations.
According to a preliminary estimate from the Federal Statistical Office (Destatis), the price adjusted gross domestic product (GDP) was 0.3% lower in 2023 than in the previous year. After adjustment for calendar effects, the decline in economic performance amounted to 0.1%. In 2022, the German economy had grown by 1.8%.
Ruth Brand, the statistics office’s president, said:
Overall economic development faltered in Germany in 2023 in an environment that continues to be marked by multiple crises. Despite recent price declines, prices remained high at all stages in the economic process and put a damper on economic growth. Unfavourable financing conditions due to rising interest rates and weaker domestic and foreign demand also took their toll. Therefore, the German economy did not continue its recovery from the sharp economic slump experienced in the pandemic year of 2020.
GDP was 0.7% higher in 2023 than in 2019, the year before the Covid-19 pandemic hit.
Germany also contracted by 0.3% in the final quarter of last year following stagnation in the third quarter, thereby avoiding recession (defined as two consecutive quarters of contraction).
You can read the full report here.
Oil prices slip; UK to ‘wait and see’ on strikes against Houthis
Oil prices have just turned negative. Brent crude is slipped 0.15% to $78.17 a barrel while US crude is down 0.2% at $72.52 a barrel.
The UK’s defence secretary said Britain would “wait and see” before launching further strikes against Houthi militia in Yemen. Grant Shapps told Sky News:
Let’s wait and see what happens, because it’s not that we want to be involved in the Red Sea. But ultimately freedom of navigation is an international right that must be protected.
But he said that Britain was keeping a close eye on the situation.
They should be aware that if it doesn’t stop then of course we will then have to take the decisions that need to be taken.
Crest Nicholson warns on profits again
Crest Nicholson, the UK housebuilder has warned on profits for the third time in six months. This sparked speculation that the company could become a takeover target if its shares continue to fall.
In an unscheduled trading update, the builder warned that full-year adjusted profit before tax would come in at £41m after it identified additional costs. This is far below the previous year’s profit of £137.8m. Its share price dropped 3.7%.
Crest said:
The recent reduction in mortgage rates has provided a more constructive backdrop for house buyers and the wider housing market. Although it is too early to gauge customer behaviour, we have been encouraged by an increase in customer interest levels and inquiries this calendar year.
Anthony Codling, head of European housing and building materials at the investment bank RBC Capital Markets, said:
It has been a tough year for Crest and unfortunately for the group and its investors the bad news continues. In our view if today’s trading update leads to further share price weakness, it could increase the chances of Crest being viewed as an attractive acquisition for another housebuilder.
Crest is due to release its full-year results next week, on 23 January.
Hunter has also looked at the US:
Markets continued their hesitant start to the year as mixed corporate earnings offset a positive slant arising from the latest inflation reading.
The fourth quarter earnings season comes with high expectations, especially given the current impasse between investors and the Federal Reserve on the timing of any interest rate cuts. By the same token, any slight misses look likely to be dealt with harshly, as evidenced by the market reaction to the first batch of earnings at the end of the week.
The banks were caught in these uncertain crosshairs as their updates met with mixed reactions. Bank of America shares fell over 1% following a decline in quarterly profit, while Wells Fargo dipped by more than 3% despite posting higher profit for the period. JP Morgan Chase revealed a drop of 15% but in earnings but shares were relatively unaffected, while Citigroup edged higher after revealing a 10% cut to its workforce and a quarterly loss. Outlook comments maintained that the consumer remains resilient, although there was a concerning trend in increased loan defaults.
More positively, the inflation outlook received a boost as the latest producer price index reading showed an unexpected fall in prices in December.
European stock markets have opened cautiously higher.
The UK’s FTSE 100 index has edged up 9 points to 7,634, a 0.1% gain. Germany’s Dax and France’s CAC are also up 0.1%, while Spain’s Ibex has gained 0.2%, Portugal’s PSI 20 rose 0.5% and the Italian borsa is flat to slightly lower.
Richard Hunter, head of markets at interactive investor, said:
UK markets stayed undecided in opening trade in the absence of any major news and with the likelihood of a lighter trading day given the closure of Wall Street later. A broker upgrade lifted Sainsbury shares after last week’s partially disappointing update, while the banks showed some signs of life despite the lack of a concrete read across from those which reported in the States on Friday.
The fourth quarter reporting season is yet to get into full swing in the UK as yet and in terms of economic releases there are readings on the unemployment and inflation rates to come this week, as well as a retail sales reading which should provide further colour on trading over the festive period. In the meantime, the main indices have been unable to build any momentum so far this year, with the FTSE 100 down by 1.3% and the FTSE 250 already languishing by 2.3%.
Oil prices nudge higher as traders eye Middle East
Oil prices are heading higher again as traders watch for any supply disruption in the Middle East following US and UK air strikes to stop Houthi militia in Yemen attacking ships in the Red Sea.
Brent crude remains below $80 a barrel, though, after surging through that level on Friday. The global benchmark has advanced 21 cents to $78.50 a barrel, up 0.3%, while US crude is 14 cents ahead at $72.82 a barrel. Both jumped more than 2% last week.
Warren Patterson, head of commodities research at ING, told Reuters:
There are supply risks for the market given in the escalation in the Red Sea.
However, for now we are not seeing any impact on oil supply. And I guess we would need to see significant escalation before that happens.
Yesterday, Houthi militia threatened a “strong and effective response” after the US carried another strike overnight.
Stephen Innes, managing partner of SPI Asset Management, has looked at Taiwan’s election and what it means for the country’s fraught relations with China.
Geopolitically, tension rises following more US airstrikes on Yemen over the weekend, and domestically, President Biden faces challenges in foreign policy on two fronts: the Middle East and Taiwan. Both of these issues could weigh negatively on Consumer Sentiment.
Xi Jinping might be grimacing after Taiwan elected Lai Ching-te for president, marking a third term for the Democratic Progressive Party. Voter turnout was 70%. Lai, who served as vice president since 2020, succeeds Tsai Ing-wen, who stepped aside due to term limits. Lai’s victory is seen as a rebuke to Beijing, as he has been labelled a “troublemaker” by pro-China factions and a supporter of Taiwan’s independence from The Chinese Communist Party.
Lai emphasises the preservation of democracy and is expected to follow Tsai’s approach in deepening Taiwan’s ties with Washington without actively seeking confrontation with Beijing. China may view the election results as a step toward conflict, as Xi Jinping maintains that reunification with Taiwan is a historical inevitability.
Introduction: UK house prices forecast to rise 3% in 2024; oil prices fall back below $80
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Business and political leaders as well as key players from charities, academia and other organisations are heading to the annual World Economic Forum in the Swiss ski resort of Davos, which will be held under the shadow of global crises.
Over here, UK house prices are forecast to rise 3% this year, beating estimates of a decline, a leading estate agent has said, amid a mortgage pricing war and expectations of Bank of England interest rate cuts.
The surge in oil prices on Friday following US and UK airstrikes against Houthi rebel sites in Yemen was short lived. Houthi rebel attacks on ships in the Red Sea have fuelled fears over disruption to trade.
Brent crude, which rose above $80 last week, is back at $78.32 a barrel this morning while US crude is at $72.63 a barrel.
Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said:
Friday’s producer price inflation came as a certain relief to inflation worries as the latest data showed an unexpected contraction in the monthly figure. The jump in oil prices, following the US and UK airstrikes in areas in Yemen controlled by the Houthis, which sent the barrel of American crude to past the $75 per barrel level, didn’t last long.
The risks are tilted to the upside as conflict news continues to flow in this Monday. Rishi Sunak will address parliament as his government is ready to intensify strikes on Houthi targets. Yet there is a strong barricade into the $74/75 per barrel level in the US crude and near $80 per barrel level in Brent, as the rising global supply, increasing competition to OPEC and the globally weak economic outlook weigh heavier and convince the bears to sell every geopolitically supported rallies.
China’s central bank left interest rates unchanged today despite expectations of a cut, while pumping more cash into the financial system. The operation resulted in a net 216bn yuan fresh fund injection into the banking system.
The reaction on the Chinese stock market was muted, with the Chinese CSI 300 index edging 0.15% higher.
A weakening Chinese currency has limited the room for the People’s Bank of China to reduce borrowing costs and rate cuts could be postponed until later this year. The yuan has weakened more than 1% against the dollar so far this year.
Economists at Capital Economics said:
We suspect the main reason the PBOC failed to deliver this time is a desire to avoid triggering renewed depreciation pressure on the renminbi.
Economists at ANZ said the central bank might have held off cutting rates as “authorities may be concerned about bank profitability”.
Wall Street is closed for Martin Luther King Day today. The US stock markets ended last week flattish (the S&P 500 and the Nasdaq rose slightly, while the Dow Jones slipped 0.3%).
The Agenda
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9am GMT: Germany 2023 GDP growth (forecast: -0.3%, previous: 1.9%)
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10am GMT: Eurozone trade for November
