LIVE – Updated at 10:44
UK economy has proved ‘more resilient than many expected’ says chancellor Jeremy Hunt, while problems at Silicon Valley Bank knock FTSE 100 down 2%.
Back in the UK, the NIESR thinktank is hopeful that the economy will only suffer a shallow contraction at worst in the current quarter (January-March).
After the economy grew by a better-than-expected 0.3% in January, Paula Bejarano Carbo, associate economist at NIESR, says:
GDP grew by 0.3% in January relative to December, driven by growth in services; in particular, education services grew by 2.5% in January as school attendance levels picked up following a December drop. While this appears to be good news for the UK economy, the broader picture is more ambiguous: GDP was flat in the three months to January relative to the previous three months and also flat compared to January 2022.
Despite this, the outlook for the first quarter of 2023 continues to improve as higher-frequency data, including the services and construction February PMIs, indicate that activity will continue to pick-up in February, suggesting that any contraction we might see over Q1 is likely to be shallow.”
Demand for US dollars in the currency derivative markets has risen to its highest since mid-December.
The selloff in US banking stocks last night, and the ripple effect in Europe today, is reigniting a wave of investor risk aversion.
Three-month euro/dollar cross currency basis swap spreads traded as negatively as -17 basis points, the most since December 14, reflecting a pickup in demand for hard cash.
The pound, though, has gained half a cent against the US dollar to $1.1978.
Traders are suspecting that the US Federal Reserve will be less keen to raise interest rates, as this would add to the pressure on the prices of bonds held by banks.
Shares in SVB Financial Group are set to tumble again when Wall Street opens.
They’re down around 38% in pre-market trading, at $67.70.
That would be on top of Thursday’s 60% slide to $106, after Silicon Valley Bank announced a share sale to shore up its capital position after losing $1.8bn on its sale of government securities.
European stock markets are all in the red, with Germany’s DAX and France’s CAC both down around 1.4%.
Jochen Stanzl, head market analyst at CMC in Frankfurt, says the news that Silicon Valley Bank had lost around $1.8bn following the sale of a portfolio of securities valued at $21bn has put pressure on European lenders.
Stanzl explains (via Reuters):
“German banks are now also being targeted by the sellers because the start-up financier SVB Financial has revealed something that could also concern them: unrealized losses in the bond portfolio.
“The background is that many banks hold bonds, some of which have collapsed in price at an unprecedented rate. What the market now fears is an implosion on banks’ balance sheets.
“Investors are now waiting for clarifications from the big banks as to whether and to what extent SVB Financial’s problems also apply to them.”
The problems at Silicon Valley Bank are a reminder that many banks are sitting on “large, unrealised losses” on their bond holdings, explains AJ Bell investment director Russ Mould:
“Lending to tech start-ups is at the racier end of finance and in that context Silicon Valley Bank’s announcement of a $2.25 billion rescue share issue, after a period when appetite from lenders and investors towards this part of the market has dried up, should not have come as a major surprise.
“However, in a heavily interconnected banking industry it’s not so easy to compartmentalise these sorts of events which often hint at vulnerabilities in the wider system. The fact SVB’s share placing has been accompanied by a fire sale of its bond portfolio raises concerns.
“Lots of banks hold large portfolios of bonds and rising interest rates make these less valuable – the SVB situation is a reminder that many institutions are sitting on large unrealised losses on their fixed-income holdings.
BP CEO Looney’s pay packet doubles
The pay package of the BP chief executive, Bernard Looney, has more than doubled to £10m after a year in which the oil and gas giant posted record profits linked to the war in Ukraine.
His package included a salary of £1.4m, a bonus of £2.4m – down fractionally on 2021 – and a £6m share award, as well as benefits. The total package was 120% more than the £4.5m he received in 2021.
BP last month reported annual profits of £23bn after its earnings jumped because of soaring wholesale gas prices, sparked by Russia’s invasion of Ukraine and cuts to supplies into Europe.
Looney could have received a bonus of up to £11.4m under a three-year share award plan that was devised in 2020, when the Covid pandemic punctured oil demand and forced BP to cut 10,000 jobs.
Related: BP boss Bernard Looney’s pay package more than doubles to £10m
Bloomberg reports that Founders Fund, the venture capital fund co-founded by Peter Thiel, has advised companies to pull money from Silicon Valley Bank amid the concerns about its financial stability, according to people familiar with the situation.
SVB, though, is advising clients to remain calm:
The firm told portfolio companies that there was no downside to removing their money from the bank, according to the people, who asked not to be identified because the information isn’t public.
Shares of SVB Financial Group, the bank’s parent, plunged on Thursday after announcing a stock offering, selling substantially all of the available-for-sale securities in its portfolio and updating its forecast for the year to include a sharper decline in net interest income.
SVB Chief Executive Officer Greg Becker held a conference call on Thursday advising Silicon Valley Bank clients to “stay calm” amid concern about the bank’s financial position, according to a person familiar with the matter.
SVB is a major lender to fledgling companies, so worries about its financial health is causing concern across the startup world, they add.
Here’s Mark Dowding, CIO at RBC BlueBay Asset Management, on the jitters over the value of bank bond portfolios:
In the past 24 hours, newsflow from Silicon Valley serves as an example of where we have thought caution is needed with respect to investments in private assets.
As and when assets are marked to market, losses may be expected to accumulate in this space with the private equity industry slowly realising how dependent it has been on cheap money and leverage in order to juice returns.
In discussions with policymakers, a degree of stress in this space is expected and we don’t see anything to alter the Fed’s path, unless losses act as a trigger for a much more broad-based tightening in financial conditions.
The selloff is gathering pace in London, where the FTSE 100 index is now down 2% or 158 points, at 7722.
That would be its biggest one-day fall since last July.
Ackman says US should mull SVB bailout as possibility
Billionaire investor and hedge fund manager Bill Ackman says the US government should consider a “highly dilutive” bailout of Silicon Valley Bank to stem the crisis.
Ackman tweeted overnight that if a private capital solution can’t be found, the government should step in.
Ackman explained that companies backed by venture capital use SVB both for loans and to hold their operating cash, so a failure of the firm could destroy a crucial long-term driver or economic growth.
Otherwise, Ackman warns, there is a risk that ‘the dominoes continue to fall’ if other banks come under pressure.
Silvergate Capital Corp.’s abrupt shutdown and Silicon Valley Bank’s hasty fundraising have sparked chatter about whether this could be the start of a “much bigger problem”, Bloomberg reports.
The issue at both of the once-highflying California lenders was an unusually fickle base of depositors who yanked money quickly. But below that is a crack reaching across finance: Rising interest rates have left banks laden with low-interest bonds that can’t be sold in a hurry without losses. So if too many customers tap their deposits at once, it risks a vicious cycle.
Across the investing world, “people are asking who is the next one?” said Jens Nordvig, founder of market analytics and data intelligence companies Exante Data and Market Reader. “I am getting lots of questions about this from my clients.”
Indeed, amid deposit withdrawals at SVB, its chief executive officer urged customers on Thursday to “stay calm.”
The immediate risk for many banks may not be existential, according to analysts, but it could still be painful. Rather than facing a major run on deposits, banks will be forced to compete harder for them by offering higher interest payments to savers. That would erode what banks earn on lending, slashing earnings.
Economics writer Frances Coppola has a very good blog post about the situation in the banking sector, which is here.
Coppola says that the death of Silvergate Bank (a Californian bank focused on crypto) this week should give other banks pause for thought.
Silvergate is far from the only bank that is backing volatile demand deposits with government securities that are falling in value as central banks raise interest rates.
Related: Crypto bank Silvergate announces liquidation amid sector turmoil
The value of those government securities (bonds) held by banks has been falling, as rising interest rates made those bonds less valuable.
[The price of a government bond moves inversely to the yield, or effective interest rate. Those yields have risen as central banks lift interest rates. A 10-year US Treasury bill yields 3.8% today, up from 0.6% in 2020].
Coppola explains that “fair value losses can be concealed by means of accounting devices such as classing securities as held-to-maturity and carrying them at amortised cost”.
But, if a bank is forced to sell such assets, because its depositors are withdrawing their funds, then they will take a loss on them.
That’s what happened to Silicon Valley Bank, whose shares tumbled 60% yesterday after it lost around $1.8bn on the sale of about $21bn of securities, prompting a $2.25bn stock sale to shore up its balance sheet.
…unrealised fair value losses on assets marked as held-to-maturity are not reported in the income statement. In fact they are not reported anywhere except in the notes to the accounts. So they don’t affect the bank’s capitalisation.
This is fine as long as the bank doesn’t experience a liquidity crisis. When a bank needs liquidity, it pledges or sells securities on the open market or at other banks (including the Federal Home Loan Bank and the Federal Reserve) for cash. Selling securities crystallises fair value losses, and as we saw with Silvergate, standing ready to sell securities to meet an unknown volume of deposit withdrawal requests forces the bank to mark its held-to-maturity assets as available-for-sale.
As a result, the fair value losses on held-to-maturity assets immediately go through the income statement: realised losses are deducted from headline profits, and all losses, realised and unrealised, are deducted from shareholders’ equity.
You can read the full piece here.
FTSE 100 drops 1.5% as bank shares tumble
The UK stock market has fallen sharply at the start of trading, as the heavy selloff in US bank shares last night worries investors.
The UK’s FTSE 100 index has tumbled by 1.5% or 120 points to 7760, led by Barclays (-6%), NatWest (-4.4%), Lloyds Banking Group (-4.5%) and Standard Chartered (-4%).
European bank shares are also sliding:
The selloff follows a rout of some US bank shares last night, as problems at small lender Silicon Valley Bank worried Wall Street.
Silicon Valley Bank reported that it made a $1.8bn loss on the sale of a $21bn bond portfolio consisting mostly of U.S. Treasuries (government debt), whose values has dropped as interest rates have risen.
That prompted SVB to announce a $2bn share sale to shore up its capital position.
The steep losses on the sale of the SVB securities las left investors wondering what risks may be lurking in the huge bond portfolios held by other banks.
Ipek Ozkardeskaya, senior analyst at Swissquote Bank, explains:
SVB bank launched a stock offering of around $2bn to strengthen its balance sheet, because the bank needed to close a hole due to the sale of around $21bn loss-making assets to ensure that they could pay depositors in the actual environment of rising interest rates.
And the SVB’s portfolio had a lot of US Treasuries and mortgage-backed securities in it. This is an issue that could hit all the banks, including the big banks, because the banks amassed a lot of assets since the 2007/2008 financial crisis at rising prices, and they had to pay nearly no compensation for bank deposits, as interest rates have been near zero for such a long time.
And in theory, the rising interest rates would’ve been a boon for the banking sector as it would top their net interest income, as they would start making money on deposits, yet again.
But the problem is that the interest rates rose too fast. The Fed raised the rates by 450bp since last year.
And now, with inflation hanging at multi-decade highs, bank depositors ask higher compensation for their deposits, and to pay them, banks could be brought to sell their assets. But the assets must be sold at a severe loss, because the asset valuations sank severely from their all-time-high levels as a result of an aggressive Federal Reserve (Fed) tightening.
Premier League resumption lifted recreation sector
The return of the Premier League after the pause for the men’s World Cup also lifted the economy in January, today’s GDP reports shows.
The sports, amusements and recreation activities grew by 8.9% in a month where Premier League football returned to a full schedule following fixtures being postponed until Boxing Day.
Barret Kupelian, senior economist at PwC, says:
“The UK economy grew by 0.3% month on month in January this year, slightly ahead of expectations after reporting a contraction in the prior month.
“Economic activity was boosted with school attendance returning to normal levels, the return of postal employees to work following strikes and the resumption of the Premier League to a full schedule following the World Cup.
“The big picture story, however, remains that of stagnation with output seemingly unable to break through its pre-pandemic level.
Return to school helped economy
Children returning to school after an illness-ravaged December helped the economy to grow in January.
School attendance levels returned to normal levels following a significant drop in December 2022, the ONS says.
That lifted activity in the education sector (as more children were being educated).
UK GDP: the details
The UK’s services sector drove growth in January, by expanding by 0.5% during the month.
The main contributing sectors were education (2.5%), as school attendance returned to November 2022 levels, and arts entertainment and recreation following the resumption of Premier League football.
But the UK’s production sector shrank by 0.3% while construction output decreased by 1.7%.
Here are the details:
The services sector grew by 0.5% in January 2023, after falling by 0.8% in December 2022, with the largest contributions to growth in January 2023 coming from education, transport and storage, human health activities, and arts, entertainment and recreation activities, all of which have rebounded after falls in December 2022.
Output in consumer-facing services grew by 0.3% in January 2023; this follows a fall of 1.2% in December 2022.
Production output fell by 0.3% in January 2023, following growth of 0.3% in December 2022.
The construction sector fell by 1.7% in January 2023 after being flat in December 2022.
Yael Selfin, chief economist at KPMG UK, fears a UK recession is “still on the cards” despite the brightening economic outlook.
“The marked fall in wholesale gas prices and easing of supply chain disruptions provided a welcome boost to economic prospects at the start of 2023. But this may not be sufficient to stave off a recession in the first half of this year, as consumer spending remains weak with households continuing to be squeezed by elevated prices and higher interest rates.
“However, we expect the current downturn to be shallower and shorter than previously thought, with stronger business sentiment and a steady fall in inflation expected to support the recovery in the second half of the year. Although our latest forecasts see the UK set for a 0.4% fall in GDP this year and only 0.6% growth in 2024 overall due to the weak start and the lack of fiscal momentum and business investment to bolster medium term recovery.
UK GDP report a boost to Hunt
The return to growth in January indicates the UK may avoid falling into a recession, says Victoria Scholar, Head of Investment at interactive investor:
“UK GDP came in flat year-on-year in the three months to January, above expectations for a drop of 0.1%. The monthly figure rose by 0.3% following a fall of 0.5% in December and topping forecasts for a rise of 0.1%.
Driving January’s gain was an uptick in the service sector output which grew by 0.5% following a drop of 0.8% in December with education and a return to normal levels of school attendance as well as a pick up in postal and courier activities. Real estate activities however was the only services subsector in negative territory amid the rise in mortgage rates and subdued housing market activity.
Consumer-facing services grew by 0.3% in January recovering from a drop of 1.2% in December thanks to the resumption of Premier League football which strengthened demand for sports and recreation. However they are stuck 8.6% below their pre-covid levels from February 2020.
While services improved, manufacturing shrank falling by 0.4% with over half of its subsectors in decline and construction also fell sharply by 1.7%.
Heavy industrial action weighed on education and postal service activity in December, with a reduction in strikes in January prompting a rebound in activity to start the year. The end of the FIFA World Cup and the resumption of the Premier League also helped drive demand for football related spending.
For now it looks like the UK is on track to avoid a recession with January’s monthly growth figure landing fractionally above zero. When combined with the government’s unexpected budget surplus in January, the data is well timed for the Treasury and could give Chancellor Jeremy Hunt some wiggle room around his Budget plans next Wednesday.
In light of the data, the pound is gaining some strength against the US dollar going against the decline over the past year. An appreciating sterling helps to provide a natural offset to UK inflationary pressures.”
It is “encouraging” that the economy expanded a little as we entered the New Year, following the contraction in December, says Kitty Ussher, chief economist at the Institute of Directors.
Ussher points out that the economic picture is better than feared last November, which could give Jeremy Hunt more ‘room to manoeuvre’ in the Budget next Wednesday.
The data has been helped by a resumption of business-as-usual in the education and postal sectors, and a return to the full Premier League schedule following the end of the World Cup. It is also encouraging that the retail sector demonstrated growth, albeit slight, given pressures on household budgets.
“While a flat economy overall is not usually grounds for celebration, the fact that these results are more positive than was expected at the time of the Chancellor’s Autumn Statement in November gives him more room for manoeuvre in next week’s Budget. The priority now is to use that flexibility to help put Britain on a sustainable growth path for the rest of the year and beyond.”
Hunt: UK economy has proved more resilient than many expected
The UK economy has been “more resilient” than expected, chancellor Jeremy Hunt says, after growing by a better-than-expected 0.3% in January.
“In the face of severe global challenges, the UK economy has proved more resilient than many expected, but there is a long way to go.
“Next week, I will set out the next stage of our plan to halve inflation, reduce debt and grow the economy – so we can improve living standards for everyone.’’
There was a bounceback in activity in postal activity in January, after Royal Mail staff held a series of strikes in December.
Transport and storage services grew by 1.6% in January; the main contributor was an increase of 6.4% in postal and courier activities.
“This growth comes after a fall of 10.5% in December 2022, which was partly because of the impact of postal strikes,” the ONS says.
ONS: Zero growth over last 12 months
The economy “partially bounced back from the large fall seen in December” in January, says ONS director of economic statistics Darren Morgan.
But, Morgan also points out that the UK economy has stagnated over the last year.
“Across the last three months as a whole and, indeed over the last 12 months, the economy has, though, showed zero growth.
“The main drivers of January’s growth were the return of children to classrooms, following unusually high absences in the run-up to Christmas, the Premier League clubs returned to a full schedule after the end of the World Cup and private health providers also had a strong month.
“Postal services also partially recovered from the effects of December’s strikes.”
Monthly GDP was broadly flat in January 2023 compared with the same month last year, the ONS says.
That means the UK economy has not managed to grow over the last 12 months.
Despite growing in January, the UK economy is still 0.2% smaller than in February 2020, when the Covid-19 pandemic hit.
UK GDP: economy grew by 0.3% in January
Newsflash: The UK economy has returned to growth.
The Office for National Statistics reports that GDP grew by 0.3% during January, after shrinking by 0.5% in December.
That’s a faster recovery than expected after the economy stalled in the final quarter of 2022.
Analysts had expected modest growth of just 0.1% (see opening post), as strike action and the cost of living crisis prevented a recovery in consumer and business activity.
The latest GDP figure could give the chancellor, Jeremy Hunt, a slight boost before next week’s budget, when he will set out the government’s tax and spending policies.
Looking at the broader picture, though, GDP was flat in the three months to January 2023.
Alvin Tan of RBC Capital Markets predicts the UK grew by 0.1% in January – but that might not stop the economy shrinking during the current quarter….
January’s UK dataflow has been somewhat mixed, but the details of the January PMIs, the services PMI in particular, painted a more positive picture than the headline readings suggested in our view. We look for January GDP (Friday) to grow at 0.1% m/m.
Although such an outcome would still mean it is possible for Q1 GDP as a whole to fall, it equally means that any contraction will be small and likely temporary.
Introduction: UK GDP report today after bank share selloff
We’re about to discover if the UK economy has returned to growth after struggling at the end of last year.
January’s GDP report, due at 7am, will show if the economy expanded or not in the first month of 2023. It’s the final healthcheck on the economy before next Wednesday’s budget.
Economists predict UK GDP may have crept up by 0.1% in January, after the economy stagnated in the final quarter of 2022.
A month ago, we learned that in December alone, the economy shrank by 0.5% as strikes in the public sector, rail and postal services.
Related: UK narrowly avoids recession after figures show growth flatlining
There have been signs that the economy might be a little stronger than feared.
The British Chambers of Commerce (BCC) forecast on Wednesday that the UK economy is on track to shrink less than expected this year and avoid the two quarters of negative growth which mark a technical recession.
And last week, the Bank of England’s chief economist said Britain’s economy is showing slightly more momentum than expected.
As Huw Pill put it:
“Survey indicators that have become available since the publication of the forecast have surprised to the upside, suggesting that the current momentum in economic activity may be slightly stronger than anticipated.”
Also coming up today
A heavy selloff in US bank shares last night has sent jitters through the financial markets today.
European stocks are expected to fall over 1% when trading begins:
Last night’s sell-off in JPMorgan Chase (-5.4%), Bank of America (-6.2%), Citigroup (-4%) and Wells Fargo (-6.2%) came after a small technology-focused lender called Silicon Valley Bank announcd a capital raise, which sent its stock collapsing by 60%.
SVB, which does business as Silicon Valley Bank, launched a $1.75 billion share sale on Wednesday to shore up its balance sheet. It said in an investor prospectus it needed the proceeds to plug a $1.8 billion hole caused by the sale of a $21 billion loss-making bond portfolio consisting mostly of U.S. Treasuries. The portfolio was yielding it an average 1.79% return, far below the current 10-year Treasury yield of around 3.9%.
Investors in SVB’s stock fretted over whether the capital raise would be sufficient given the deteriorating fortunes of many technology startups that the bank serves. The company’s stock collapsed to its lowest level since 2016, and after the market closed shares slid another 26% in extended trade.
Another California bank, Silvergate Capital Corp, had announced a voluntary liquidation this week, after mass withdrawal of deposits after collapse of FTX exchange.
Related: Crypto bank Silvergate announces liquidation amid sector turmoil
The latest US Non-Farm Payroll is expected to show that around 205,000 new jobs were created in America last month, down from the unexpectedly strong 517,000 in January.
7am GMT: UK GDP report for January
1.30pm GMT: US Non-Farm Payroll report
3pm GMT: European Central Bank president Christine Lagarde visits German Federal Chancellor Olaf Scholz