Sterling near 2021 low as Fed hints at faster tapering; Covid wave hits German consumer confidence – business live

Germany’s economy grew more slowly than previously thought over the last quarter, in another sign that its recovery is faltering.

German GDP rose by 1.7% in July-September, updated data show, down from 1.8% previously reported — with household spending providing the only boost to growth.

That’s a slowdown compared with Q2, when Germany’s economy grew by 2.0%. It’s weaker than the wider eurozone, which grew by 2.2% in Q3, but faster than the UK’s 1.3% growth.

Statistics body Destatis reports that German household spending rose by 6.2% during the third quarter of the year. That shows consumers drove the recovery over the summer, as hospitality venues such as bars and restaurants reopened.

However company investment and government spending both declined, while imports and exports both fell quarter-on-quarter, and net trade weighed on growth.

Here’s Victoria Scholar, Head of Investment at interactive investor, on today’s German economic data:

“The GfK consumer sentiment index in Germany slumped to -1.6 in December while the previous reading was revised from negative to positive. The latest confidence reading, which was the lowest since June highlights consumer concerns about inflation and impact on purchasing power combined with fears about restrictions and lockdowns as COVID-19 cases rise.

Meanwhile Germany’s third quarter GDP grew by 1.7%, less than initially estimated and below analysts’ consensus with growth still 1.1% below pre-pandemic levels. The figure was softened by a decline in government spending, exports, and a drop in investment. Entertainment and recreation remain the bright spots growing 13.5%, while supply chain bottlenecks delayed deliveries in the auto sector.”

German consumers are also less willing to make purchases, just as they head into the festive season.

GFK’s survey found that people’s propensity to buy has fallen to a nine-month low, with the indicator halving to 9.7 points.

This weakness is likely to weigh on Germany’s economy this quarter, especially as yesterday’s IFO survey showed a drop in business confidence.

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America’s central bank could wrap up its stimulus programme and raise interest rates earlier than expected, with inflation at a 30-year high and the jobs market improving.

The minutes of the Federal Reserve’s most recent meeting, released last night, show that some policymakers are moving towards ending its bond-buying scheme sooner, given the US’s high inflation rate which hit 6.2% last month.

The Fed started tapering its $120bn/month asset purchase scheme this month, cutting it by $15bn per month — at which rate it would end by next June.

But the minutes drop a clear hint that tapering could be speeded up:

“Various participants noted that the (policy-setting) Committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher than levels consistent with the Committee’s objectives.”

Some more dovish Fed members stressed they should take a “patient attitude” toward incoming data given supply chain problems and the pandemic.

However…

Participants noted that the Committee would not hesitate to take appropriate actions to address inflation pressures that posed risks to its longer-run price stability and employment objectives.

The prospect of the Fed tightening policy faster than expected has weighed on the pound and the euro in recent weeks. Last night, sterling touched its lowest level of 2021, trading at just $1.3325 to the US dollar.

© Provided by The Guardian
The pound against the US dollar this year Photograph: Refinitiv

The euro is even weaker – at its lowest against the US dollar since July 2020, and near a 21-month low against the pound.

The FOMC Minutes suggested the doves on the committee are “in retreat”, says Jeffrey Halley, senior market analyst at OANDA:

The committee noted that inflationary expectations in the near term could exceed forecasts and that a faster tapering is not out of the question.

It is probably the last item that weighed on markets the most. Once again, currency markets were the pressure relief valve, with the US Dollar spiking once again, helped along by a soggy German IFO [business climate survey], fears of virus lockdowns and ECB officials pouring cold water on rate hikes.

The news yesterday that US jobless claims have plunged to the lowest level since 1969 could also encourage the Fed to tighten policy faster.

Related: US jobless claims fall to lowest level since 1969 as US economy grows 2.1% – as it happened

Deutsche Bank expect the Fed to press down on the taper accelerator in December, by doubling the cuts to its purchases of US government debt (Treasuries) and mortgage-backed securities.

That would wrap the scheme up three months sooner than planned, as DB strategist Jim Reid explains:

This would bring monthly reductions in Treasury purchases to $20bn [up from $10bn] and MBS purchases to $10bn [up from $5bn], which would bring the end of taper forward to March.

In line, they’re bringing their call for liftoff forward a month to June 2022.

Something for investors to ponder. Although…Wall Street is closed for Thanksgiving, while European stocks are expected to open higher despite concerns about the fourth wave of Covid-19.

The agenda

• 8.30am GMT: Swedish central bank interest rate decision
• 9.30am GMT: Weekly real-time indicators of economic activity and social change in the UK
• 11am: CBI distributive trades survey of UK retail sales in October