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Germany 'teetering on edge of recession'; US yield curve inverts - business live Germany 'teetering on edge of recession'; US yield curve inverts - business live
(32 minutes later)
Rupert Thompson, head of research at wealth manager Kingswood, believes the European Central Bank will be forced to act to fight a German recession.
He writes:
“German GDP fell 0.1% q/q in Q2. While this contraction followed a 0.4% gain in Q1, the underlying picture is that Germany is perilously close to falling into recession.
Indeed, German investor economic confidence nose-dived in August, suggesting there will be no early reprieve. German manufacturing has been hit hard by the US-China trade war and the woes of the auto sector is the main area of weakness. GDP in the Eurozone overall, by contrast, fared rather better in Q2 with a 0.2% gain. Even so, with the risks to growth skewed to the downside, the ECB still looks all but certain to cut rates next month and a re-start of its quantitative easing programme is also quite possible.”
This chart shows how the difference between longer-dated and shorter-dated US and UK government bond yields have fallen steadily in recent months -- leading to today’s worrying inversion.
The BBC’s Faisal Islam fears that the bond yield gyrations show the global economy is in trouble - just as the Brexit crisis intensifies.
Gilt curve inverted Klaxon... first time since the financial crisis —- In English, UK Government can currently borrow from markets more cheaply over a decade than it can over 3 months or two years... Rare - normally signals market expectation of weak growth/ recession.
Last occurred in UK in mid 2008 (pre Lehman) and then for most of 2007 (ahead of start of crisis)Also seen in US today for first time since 07...if these signals are right, a storm is brewing in global economy, just at the very time UK political crisis resumes: (via @business ) pic.twitter.com/7vkPnbMzOP
Not quite at German levels yet, which as I was explaining on Today last week means the German government is being paid by international markets to borrow money from them - even over many years.
European stock markets are heading further south, worried by the drama in the bond market.European stock markets are heading further south, worried by the drama in the bond market.
Germany’s DAX is now down 1.6%, while the UK’s FTSE 100 is down 0.9%. Italy’s FTSE MIB (also hit by political instability in Rome) has lost almost 2%.Germany’s DAX is now down 1.6%, while the UK’s FTSE 100 is down 0.9%. Italy’s FTSE MIB (also hit by political instability in Rome) has lost almost 2%.
The UK yield curve has also inverted in the last few minutes, according to Reuters.The UK yield curve has also inverted in the last few minutes, according to Reuters.
That’s the first time since the financial crisis that Britain’s two-year government debt has traded at a higher yield than the 10-year option.That’s the first time since the financial crisis that Britain’s two-year government debt has traded at a higher yield than the 10-year option.
James Mackintosh of the Wall Street Journal suggests British policymakers shouldn’t panic too much -- it doesn’t always herald a UK recession.James Mackintosh of the Wall Street Journal suggests British policymakers shouldn’t panic too much -- it doesn’t always herald a UK recession.
Yield curve has inverted in UK and US in the region markets usually watch, 10 year minus 2 year govt bond yields. Three things:1. Terrible record of false warnings in the UK: yield curve forecast recession constantly from 1997-2001, recession finally arrived in 2008. 1/3Yield curve has inverted in UK and US in the region markets usually watch, 10 year minus 2 year govt bond yields. Three things:1. Terrible record of false warnings in the UK: yield curve forecast recession constantly from 1997-2001, recession finally arrived in 2008. 1/3
2. Yield curve has been a good warning sign of recession in US, but best track record from 10 year minus 3 month. https://t.co/sYcRlcF3at2/32. Yield curve has been a good warning sign of recession in US, but best track record from 10 year minus 3 month. https://t.co/sYcRlcF3at2/3
Oh and a bonus point is that (in US) period between yield curve inversion and recession can be very long: eg ~2 years before the last US recession for 10y-3mo, hard to hold a bearish position for that long in face of rising equity market.4/3Oh and a bonus point is that (in US) period between yield curve inversion and recession can be very long: eg ~2 years before the last US recession for 10y-3mo, hard to hold a bearish position for that long in face of rising equity market.4/3
The inversion of the US yield curve is a ‘massive red warning light’ for the US economy, says Neil Wilson of Markets.com.The inversion of the US yield curve is a ‘massive red warning light’ for the US economy, says Neil Wilson of Markets.com.
He points out that this is often (but not always) a harbinger of recession:He points out that this is often (but not always) a harbinger of recession:
It’s the first time it’s happened since 2007. Meanwhile the 30-year has slumped to a record low. The market is saying the risks are tilted very much to the downside. We are in a new phase of the cycle for markets now.It’s the first time it’s happened since 2007. Meanwhile the 30-year has slumped to a record low. The market is saying the risks are tilted very much to the downside. We are in a new phase of the cycle for markets now.
To recap well-worn turf, this inversion been a reliable indicator of recession many times in the past, calling seven out of the last nine. There is undoubtedly a chance of this, although we must caution that so far the US data has been pretty sturdy in the face of global headwinds and the trade policies of the White House.To recap well-worn turf, this inversion been a reliable indicator of recession many times in the past, calling seven out of the last nine. There is undoubtedly a chance of this, although we must caution that so far the US data has been pretty sturdy in the face of global headwinds and the trade policies of the White House.
This yield curve inversion is a sell signal for risk assets and should put extra pressure on equities. Futures in the US had been tracking Europe lower and are extending their declines. Yesterday’s bounce is proving short-lived.This yield curve inversion is a sell signal for risk assets and should put extra pressure on equities. Futures in the US had been tracking Europe lower and are extending their declines. Yesterday’s bounce is proving short-lived.
Gold pushed up higher on the news, spiking through $1506, as it cemented its recovery after yesterday’s selloff.Gold pushed up higher on the news, spiking through $1506, as it cemented its recovery after yesterday’s selloff.
Newsflash: The US yield curve has inverted, intensifying fears that America’s economy could be falling into recession.Newsflash: The US yield curve has inverted, intensifying fears that America’s economy could be falling into recession.
For non-bond experts... that means that the interest rate on 10-year American government debt has now fallen below the rate on the 2-year equivalent. Right now, two-year Treasuries are trading at a yield of 1.634%, while 10-year T-Bills only offer 1.628%.For non-bond experts... that means that the interest rate on 10-year American government debt has now fallen below the rate on the 2-year equivalent. Right now, two-year Treasuries are trading at a yield of 1.634%, while 10-year T-Bills only offer 1.628%.
In normal times, longer-dated government debt should offer a better rate of return - as there’s simply more time for something to go wrong before the money is due to be repaid.In normal times, longer-dated government debt should offer a better rate of return - as there’s simply more time for something to go wrong before the money is due to be repaid.
So an inverted yield curve is a worrying sign -- it implies that investors are more pessimistic about future growth prospects. In the past, an inverted US yield curve has been followed by a recession.So an inverted yield curve is a worrying sign -- it implies that investors are more pessimistic about future growth prospects. In the past, an inverted US yield curve has been followed by a recession.
BREAKING:*U.S. 10-YEAR YIELD BELOW 2-YEAR RATE FOR FIRST TIME SINCE 2007The last three times this happened, U.S. recessions soon followed.https://t.co/FLWU7cF1L1 pic.twitter.com/n3cQf0yKyDBREAKING:*U.S. 10-YEAR YIELD BELOW 2-YEAR RATE FOR FIRST TIME SINCE 2007The last three times this happened, U.S. recessions soon followed.https://t.co/FLWU7cF1L1 pic.twitter.com/n3cQf0yKyD
Back in the markets, shares are selling off again as investors worry about the global economy.Back in the markets, shares are selling off again as investors worry about the global economy.
Fears of a German recession, and news overnight that Chinese industrial production growth has hit a 17-year low, are driving the selloff.Fears of a German recession, and news overnight that Chinese industrial production growth has hit a 17-year low, are driving the selloff.
The burst of optimism of a breakthrough in the US-China trade talks, after America delayed some tariffs, may also be fading.The burst of optimism of a breakthrough in the US-China trade talks, after America delayed some tariffs, may also be fading.
Margaret Yang of CMC Markets explains:Margaret Yang of CMC Markets explains:
The relief-rebound on trade optimism is fading quickly given weaker fundamentals (Germany, China data), the frustration from inconsistent policy making and the fact that delay in partial tariff is not solving any problems at all. pic.twitter.com/GZFvWCJzmEThe relief-rebound on trade optimism is fading quickly given weaker fundamentals (Germany, China data), the frustration from inconsistent policy making and the fact that delay in partial tariff is not solving any problems at all. pic.twitter.com/GZFvWCJzmE
Here the damage:Here the damage:
FTSE 100: Down 49 points or 0.7% at 7,200FTSE 100: Down 49 points or 0.7% at 7,200
German DAX: Down 125 points or 1% at 11,624German DAX: Down 125 points or 1% at 11,624
French CAC: Down 51 points or 0.95% at 5,312French CAC: Down 51 points or 0.95% at 5,312
Andrew Kenningham from Capital Economics has warned that a no-deal Brexit would hurt German exporters, making a recession even more likely.Andrew Kenningham from Capital Economics has warned that a no-deal Brexit would hurt German exporters, making a recession even more likely.
He says:He says:
“The bottom line is that the German economy is teetering on the edge of recession.”“The bottom line is that the German economy is teetering on the edge of recession.”
The UK and Germany - Europe’s largest economies - were also its worst-performing members in the second quarter of this year.The UK and Germany - Europe’s largest economies - were also its worst-performing members in the second quarter of this year.
They, along with Sweden, were the only countries to suffer a contraction in April-June.They, along with Sweden, were the only countries to suffer a contraction in April-June.
Italy performed poorly too, with no growth, while France and Belgium managed lacklustre growth of 0.2%Italy performed poorly too, with no growth, while France and Belgium managed lacklustre growth of 0.2%
Here are some highlights from today’s growth report from Eurostat (which includes today’s German GDP data, and last week’s UK GDP)Here are some highlights from today’s growth report from Eurostat (which includes today’s German GDP data, and last week’s UK GDP)
Poland: Grew by 0.8% in Q2, quarter-on-quarterPoland: Grew by 0.8% in Q2, quarter-on-quarter
Portugal: Grew by 0.5%Portugal: Grew by 0.5%
Spain: Grew by 0.5%Spain: Grew by 0.5%
Netherlands: Grew by 0.5%Netherlands: Grew by 0.5%
Belgium: Grew by 0.2%Belgium: Grew by 0.2%
France: Grew by 0.2%France: Grew by 0.2%
Italy: StagnatedItaly: Stagnated
Sweden: Contracted by 0.1%Sweden: Contracted by 0.1%
Germany: Contracted by 0.1%Germany: Contracted by 0.1%
The UK: Contracted by 0.2%The UK: Contracted by 0.2%
The Eurozone: Grew by 0.2%The Eurozone: Grew by 0.2%
The EU: Grew by 0.2%The EU: Grew by 0.2%
NEWSFLASH: Growth across the euro area halved in the last quarter, from 0.4% to 0.2% in Q1, as Germany’s contraction held the region back.NEWSFLASH: Growth across the euro area halved in the last quarter, from 0.4% to 0.2% in Q1, as Germany’s contraction held the region back.
That’s according to data firm Eurostat, and matches its initial estimate of eurozone GDP released at the end of July.That’s according to data firm Eurostat, and matches its initial estimate of eurozone GDP released at the end of July.
The wider EU also only grew by 0.2%, down from 0.5% in January-March.The wider EU also only grew by 0.2%, down from 0.5% in January-March.
More to follow...More to follow...
The jump in UK inflation to 2.1% last month could spur the Bank of England to raise interest rates, despite Brexit uncertainty.The jump in UK inflation to 2.1% last month could spur the Bank of England to raise interest rates, despite Brexit uncertainty.
My colleague Richard Partington explains:My colleague Richard Partington explains:
City economists had forecast CPI to fall to 1.9% - instead, it’s now over the Bank’s target of 2%.City economists had forecast CPI to fall to 1.9% - instead, it’s now over the Bank’s target of 2%.
The unexpected rise could pile pressure on Threadneedle Street to raise interest rates, even as economic growth falters, in a potential sign the UK could begin to mirror the stagflation of the 1970s - when growth stalled yet inflation continued to rise.The unexpected rise could pile pressure on Threadneedle Street to raise interest rates, even as economic growth falters, in a potential sign the UK could begin to mirror the stagflation of the 1970s - when growth stalled yet inflation continued to rise.
The Bank has said it could be forced to raise interest rates if Britain leaves the EU without a deal, saying the pound would plunge to drive up the cost of imports.The Bank has said it could be forced to raise interest rates if Britain leaves the EU without a deal, saying the pound would plunge to drive up the cost of imports.
However, most analysts believe it would need to cut rates to support jobs and growth.However, most analysts believe it would need to cut rates to support jobs and growth.
Sterling has come under intense selling pressure since the elevation of Boris Johnson to No 10, however the ONS said it was still too early to identify whether the weakness in the pound had started to push up the cost of living. It said the rising price of computer games, consoles and hotel prices rising more than they did last year had pushed up the rate of CPI from 2% in June.Sterling has come under intense selling pressure since the elevation of Boris Johnson to No 10, however the ONS said it was still too early to identify whether the weakness in the pound had started to push up the cost of living. It said the rising price of computer games, consoles and hotel prices rising more than they did last year had pushed up the rate of CPI from 2% in June.
In an ironic twist amid the public anger over British rail fares, the ONS said that little change in the price of an international train ticket over the past year prevented UK inflation from rising by a greater extent in June.In an ironic twist amid the public anger over British rail fares, the ONS said that little change in the price of an international train ticket over the past year prevented UK inflation from rising by a greater extent in June.
A reminder of how Germany’s economy has stumbled over the last year, including this morning’s disappointing drop in GDP.
#Germany's GDP contracted for the second time in the last four quarters. Q2 2019 GDP growth -0.1%, YoY growth -0.4%, slowest in 6 years pic.twitter.com/ZQfRfxvFpD
Sharp decline in manufacturing production -6% YoY in JuneThe car production has nose dived to 2009 levels pic.twitter.com/J5tTGFYUQm
Brexit uncertainty may also be having a chilling impact on UK house prices - at least in the South of England.
Figures just released shows that the average property price fell in London, again, by 2.7% compared to a year ago. London house prices have now been falling over the year since March 2018.
Prices also dropped by 0.6% in the South East, and by 0.2% in the South West.
But.... the picture is brighter elsewhere, with prices 3.2% higher in the East Midlands.
Overall prices rose by 0.9% per year, according to the Office for National Statistics.
Newsflash: the latest UK inflation data is out, showing that the cost of living keeps rising.
Britain’s consumer prices index rose by 2.1% in the year to July, up from 2%. That’s higher than expected -- economists thought CPI would drop to 1.9%.
However, real wages are still rising - we learned yesterday that basic pay grew by 3.9% over the last year.
Another inflation measure, the Retail Prices Index, dropped to 2.8% in July from 2.9% in June.
That will be used to set UK rail ticket prices next year, meaning commuters face higher costs.
Fare rises will drive passengers from railway, unions warn
Katharina Utermöhl of Allianz has written about the growing risk of a German recession:
After a good start to the year, the German economy has gone in reverse gear. In the second quarter, seasonally adjusted GDP shrank by 0.1%.
The weak foreign trade performance and declining construction investment proved sufficient to bring the German economy to its knees, despite continued positive consumption impulses. In view of the subdued outlook for world trade and the automotive industry and lingering elevated political uncertainty around trade, Italy and Brexit, at best mini-growth rates can be expected in the coming quarters.
It is particularly worrying that the weakness in industry is increasingly affecting domestic demand. After all, the German economy has so far been kept afloat primarily by private consumption and construction investment. Due to the very weak start to the third quarter, the recession risk is now at a high level.
In better news for the eurozone, French joblessness has hit its lowest level since the financial crisis.
Reuters has the details:
France’s unemployment rate fell to 8.5% in the second quarter from 8.7% in the first, according to data from the INSEE national statistics office, marking the lowest jobless rate in the euro zone’s second-biggest economy since the end of 2008.
Six economists polled by Reuters had forecast on average an unemployment rate of 8.7% for the second quarter.
A steady improvement in the jobs market has offered French President Emmanuel Macron some relief in the face of months of street protests against government policies often criticised for favouring the wealthier members of society.
Just in: The Netherlands economy outperformed Germany in the last quarter.
Dutch GDP increased by 0.5% in April-June, new government figures show, as it shook off the impact of the global slowdown and the US-China trade dispute.
Growth was supported by strong exports and consumer spending.
#Netherlands #GDP Growth Rate QoQ Flash at 0.5 https://t.co/8woVJeZF2Q pic.twitter.com/LF4vDVgjYy
Germany’s weak (non) growth report has dampened the mood on the Frankfurt stock exchange.
The DAX index of top German companies has fallen by 33 points, or 0.3%, in early trading to 11,713.
Banks and industrial groups are among the top fallers, with Deutsche Bank losing 2.2%, tyremaker Continental down 1.7% and conglomerate ThyssenKrupp shedding 2.7%.
France’s stock market is also down 0.4%, while Britain’s FTSE 100 is flat this morning.
Matthias Weber, economist at the University of St.Gallen, argues firmly that Germany should increase government spending to shore up growth -- especially as borrowing costs are so low.
Given the current economic situation at the beginning of a recession, now would be the perfect time for Germany to support the economy by investing in its future.
Public investments in railways, roads, bridges, childcare centres, public schools, and renewable energy are much needed. Such investments could currently be made at an extremely low (even negative) interest rate and they would boost the slowing aggregate demand. It is unfortunate that some politicians cling to an economically unsound “concept” of zero debt and therefore miss out on these investment opportunities for Germany.
German government bonds prices have jumped to fresh record highs this morning, driving down the yield (or interest rate) on the debt to new record lows.
The yield on Germany’s 10-year bund has now hit MINUS 0.62%, the lowest ever - meaning traders are paying MORE than the face value of the bonds.
That means:
Strategist Andreas Steno Larsen of Nordea Markets says Germany’s woes aren’t a surprise, given all the grim economic data recently:
German Q2 growth at -0.1% q/q. It always surprises me how everyone gets surprised by recessions.It has been pretty clear for a while that Germany was on the brink of a recession. Just look at PMIs, Sentix Survey or the IFO. Next up, the Euro area as a whole? pic.twitter.com/sKxD8fgdjT