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The Guardian - UK
The Guardian - UK
Business
Lauren Aratani (now) and Julia Kollewe (earlier)

Deutsche Bank shares tumble as fresh banking sell-off grips Europe and US – as it happened

Bank of England Andrew Bailey United States Inflation The Bank of England
German giant Deutsche Bank in Frankfurt am Main.
German giant Deutsche Bank in Frankfurt am Main. Photograph: Armando Babani/AFP/Getty Images

US stock markets just closed slightly up after another tumultuous week for the market. US stocks seemed to shake off hits to shares of Deutsche Bank, which were down over 8% by the end of the day and sparked concern over banking fear contagion. Still US stocks closed higher on Friday, with Dow up 0.41%, S&P 0.5% and Nasdaq 0.3%.

Coming up next week, top federal bank officials will be testifying in two back-to-back hearings in front of the Senate and House, on Tuesday and Wednesday respectively, as lawmakers dig into what happened with the collapse of Silicon Valley Bank.

We’re closing this blog for the rest of the day. Thanks for reading.

A group of Citibank analysts said that the fall of Deutsche Bank shares today was “irrational”.

“We view this as an irrational market,” the note said. “The risk is if there is a knock-on impact from various media headlines on depositors psychologically, regardless of whether the reasoning behind this was correct or not.”

The statement hits at the nature of panic in the banking industry – a lot of it bred on feelings of fear over substantive reasoning. This is why officials, including German chancellor Olaf Scholz, spent much of today trying to maintain trust in the banking system.

“Deutsche Bank has fundamentally modernized and reorganized its business model,” Scholz said. “It is a very profitable bank, and there is no reason for concern.”

Next week, Congress is set to hold back-to-back hearings in both chambers where federal officials will testify on the collapse of Silicon Valley Bank (SVB). Expected to testify are Federal Deposit Insurance Corporation (FDIC) head Martin Gruenberg, along with officials from the Federal Reserve and Treasury.

What likely will be a major talking point in the closely watched hearings are reassurances from officials that the US will keep bank deposits safe as the banking industry tries to stay on its feet after SVB’s collapse. Treasury secretary Janet Yellen told the House earlier this week that the treasury “have used important tools to act quickly to prevent contagion”.

“These are tools we could use again for an institution of any size if we judged its failure would pose a systemic risk,” she said.

At the close of European markets, Deutsche Bank recovered some of their losses, closing at 8.6% on Friday afternoon. At one point during the day, the bank was down 14%.

The bank has lot about a fifth of its market value this month. Other European banks were also down at closing, including Deutsche Bank German rival Commerzbank, which was down 9%. Credit Suisse and its new parent company, Barclays and Societe Generale were all down y over 6% on Friday.

EU leaders, including German chancellor Olaf Scholz and European Central Bank president Christine Lagarde, on Friday all voiced assurances in the stability of the banking system.

“Generally, I think we are in good shape,” said Dutch prime minister Mark Rutte

We’re a few hours away from the closing of the US stock market after another tumultuous day for investors. By midday, the US indexes had been trending slightly downward, with the S&P 500, Dow Jones and Nasdaq exchanges all down between 0.3% and 0.6%, according to the Wall Street Journal. Banks, expectedly, saw the biggest drops: JPMorgan is down 2.3%, Citigroup by 2.4% and Morgan Stanley by 3.4%.

Deutsche Bank saw shares listed in the US fall 5%. First Republic Bank, which has lost 90% of its market value this past month, continued to fall another 1.6%.

The market is predicting that the Fed will ultimately lower interest rates this year, even while Fed officials say they are probably not done with rate hikes given the current level of inflation.

Treasury yields – which signal what the market thinks interest rates will become – fell over 1% this month from just over 5% to around 3.75%, where it currently stands.

This is a mismatch from Fed officials, who on average predict that interest rates will be at 5.1% at the end of the year. Rates currently stand at 4.75% and 5% after a quarter-point hike on Wednesday.

When announcing the rate hike on Wednesday, Fed chair Jerome Powell said that officials are concerned about the stickiness of inflation, especially after economic data at the beginning of the year showed consumer spending and the labor market were still growing.

“inflation remains too high and the labor market continues to be very tight. My colleagues and I understand the hardship that high inflation is causing and we remain strongly committed to bringing inflation back down. To our 2% goal,” Powell said on Wednesday.

Of course the market has been focused on the impact of the banking crisis, and likely expects that the Fed will ultimately be loosening up rates in response to it. On the other hand, Fed officials say instability in the markets could ease up in the next few weeks of months, with inflation remaining high by the end of the year, necessitating higher interest rates.

Yellen calls for closed meeting with key economic officials

The US Treasury secretary Janet Yellen called today for an unscheduled meeting of the Financial Stability Oversight Council (FSOC), which would gather top economic officials including the head of the Federal Reserve and chair of the Federal Deposit Insurance Corporation (FDIC). The meeting is closed to the public.

Yellen last called a council meeting March 12 after the collapse of Silicon Valley Bank (SVB). After the meeting, the treasury department and the Federal Reserve announced a new facility that secured the deposits of SVB and Signature Bank, which also fell that weekend.

It is unclear why Yellen called the meeting today or if the council will release a statement after.

Updated

James Bullard, president of the Federal Reserve Bank in St. Louis, told reporters today that he expects interest rates to be around 5.625% by the end of the year, showing Fed officials’ belief that even with the banking crisis causing turmoil in global markets, inflation in the US will still remain.

“Continued appropriate macroprudential policy can contain financial stress,” Bullard said, referring to the measures the Fed has taken to ease the banking crisis. “While appropriate monetary policy can continue to put downward pressure on inflation.”

Bullard said there is an 80% chance that the financial stress seen in the banking sector will ease in coming weeks and months.

The Fed on Wednesday increased interest rates by a quarter-point, bringing rates up to 4.75% to 5%. Economic projections released on Wednesday also showed that Fed officials, when averaged, believe interest rates will reach 5.1% by the end of the year.

Hello, this is Lauren Aratani in New York taking over for Julia Kollewe.

Research firm Autonomous, a subsidiary of AllianceBernstein, said in a report today that Deutsche Bank is in “robust shape” and that it is not the next Credit Suisse, despite the bank’s stock tumbling today.

Autonomous said the German bank has “robust capital and liquidity positions”. Unlike Credit Suisse, which had seen years of problems before its fall, Deutsche Bank has had 10 consecutive quarters of profit and is in a much stronger position than Credit Suisse when the Swiss bank was targeted by market panic.

“We have no concerns about Deutsche’s viability or asset marks,” the report said. “To be crystal clear – Duetsche is NOT the next Credit Suisse.”

Europe has taken the right steps on banking regulation, according to German chancellor Olaf Scholz. He said in a press conference today:

For many years now, we have taken very correct decisions with regard to the stability of our banks in Europe — by the way, faster and clearer than in many other countries of the world. The European Union and the euro zone are quite ahead when it comes to having clear rules.

Olaf Scholz, Germany’s chancellor talks during a press conference at the end of the European Union Council Meeting on March 24, in Brussels, Belgium.
Olaf Scholz, Germany’s chancellor talks during a press conference at the end of the European Union Council Meeting on March 24, in Brussels, Belgium. Photograph: Pier Marco Tacca/Getty Images

The prime minister of Estonia, Katja Kallas, who also attended the meeting of EU leaders in Brussels, tweeted:

Updated

On Wall Street, US banking stocks are also falling, with JPMorgan down 2.2% and Bank of America slipping 1.6% while Morgan Stanley tumbled 4%.

Regional lenders were also in the red, with First Republic Bank, PacWest Bancorp, Western Alliance Bancorp and Trust Financial Corp falling between 1% and 2%.

Banking stocks slide as contagion fears flare up, Deutsche Bank hammered

Banking stocks are sliding again today, with Germany’s biggest lender Deutsche Bank hardest hit, as fears of contagion flared up following the collapse of three US banks and UBS’s rescue of Credit Suisse in recent weeks.

The cost of insuring against bank defaults surged, while the pound and the euro fell against the dollar and bond yields sank (they move in inverse relation to prices) as investors sought refuge in safe-haven investments, such as the dollar and government bonds.

The Euro Stoxx banks index is down 4.6% and the UK’s banks index lost 3.7%. Barclays is the biggest faller on the FTSE 100 in London, down 5.4%, after HSBC cut its price target on the stock.

Nordea chief analyst Jan von Gerich told Reuters:

Underlying sentiment is still cautious and in this environment no one wants to go into the weekend risk-on.

It’s very volatile and it’s too early to say things will calm down.

Deutsche Bank shares fell for a third day by as much as 15% and are currently trading 10% lower, after a sharp jump in the cost of insuring its bonds against the risk of default to a four-year high.

Paul van der Westhuizen, senior strategist at Rabobank, said while the German giant has had its problems, there are fundamental differences between Deutsche and Credit Suisse:

Deutsche is a bank that has had its own issues with regulators, it has also seen profit volatility and gone through a restructuring.

There is a fundamental different in that Deutsche has returned to profitability over the last few quarters, whereas Credit Suisse did not have a profitable outlook for 2023 at all.

The sell-off came at the end of a turbulent week, and despite attempts by German chancellor Olaf Scholz, French president Emmanuel Macron and European Central Bank president Christine Lagarde to assure investors and the public that the banking system is stable.

Lagarde told EU leaders, according to Reuters, which spoke to EU officials who attended the meeting:

The euro area banking sector is resilient because they it has strong capital and liquidity positions.

The euro area banking sector is strong because we have applied the regulatory reforms agreed internationally after the global financial crisis to all of them.

The ECB is fully equipped to provide liquidity to the euro area financial system if needed.

Updated

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said:

Just as hopes had risen that contagion would be contained, banking stocks in Europe have been battered again by fears that fresh problems could be lurking. More worries about the fragilities in the US banking sector emerged after US Treasury Secretary Janet Yellen said she was prepared to take more action to ensure deposits were safe.

Revelations that white knight UBS, which had ridden to the rescue of Credit Suisse, is being investigated by the US Department of Justice has shaken sentiment further. The probe centres around allegations that staff helped Russian oligarchs evade sanctions.

Concerns are also deepening around Deutsche Bank after the cost of insuring against defaults on its debt spiked, with credit default swap prices soaring. Worries about contagion are again rearing up even though more deposits appear to have been flowing into the German lender since the banking scare erupted, and it is thought to have capital reserves well in excess of regulatory requirements. These fresh problems are bubbling up in a cauldron of worry about the implications of the rate rises we’ve seen over the past week, given that earlier hikes appear to have caused breakages in parts of the banking system. There are worries that the fresh round of rate rises could make a precarious situation worse for some smaller banks, particularly those sitting on large bond holdings which have lost value as monetary conditions have been dramatically tightened.

Waves of bad news keep hitting the banking sector and the tide doesn’t look like it’s set to turn any time soon. However, the European Central Bank has made it clear that it is standing by ready to deploy fresh tools to boost liquidity should the situation deteriorate and president, Christine Lagarde, has again reassured EU leaders in Brussels that the banking sector remains resilient with strong capital positions. The message from the Bank of England has been on repeat over the past fortnight. Although it’s monitoring the situation it’s stressing that there is still no systemic risk and that the UK banking system remains safe and sound.

Updated

Naeem Aslam, chief investment officer at Zaye Capital Markets, has sent us his thoughts on Deutsche Bank.

As of now, Deutsche Bank’s stock price has dropped by more than 13%. Concerns about the soundness of the European financial system have returned to the minds of traders. This week, European banking shares had a little respite thanks to UBS’s forced purchase of Credit Suisse, but that reprieve has quickly evaporated as the prospect of a new crisis has emerged.

Deutsche Bank has made the unexpected statement that it would redeem its tier 2 subordinated bonds in an effort to reassure its depositors. Nevertheless, a major sell-off in Deutsche shares occurred when problems with the yield on its AT1 bonds (a hugely popular asset class this week after Credit Suisse’s AT1 were marked down as part of the rescue plan) emerged.

The credit default swap index for banks jumped to a terrifying 173 points today. The CDS of this and other European banks are rising, which is an intriguing development. There hasn’t been a single event or development that can be pinpointed as the cause of the significant shifts in the DB’s CDS, but if this bank fails, Credit Suisse’s failure size will very much look like SVB’s collapse. This is because DB is too big to fail, and if this goes to a bailout situation, it will pave the way for many more in the very near future.

Is another financial collapse imminent?

The current level of credit default swaps for European banks is just a little lower than it was during the height of the European financial crisis in 2013. The current level is above the CDS reached back in the 2008 financial crisis. If these CDS do not normalise, it is highly likely stock market may continue to suffer for many days as a result of this.

Updated

US durable goods orders in surprise 1% decline

In the US, durable goods orders unexpectedly fell by 1% in February from the month before, indicating that investment in business equipment was weakening even before the banking turmoil started.

Andrew Hunter, deputy chief US economist at Capital Economics, said:

With business confidence likely to have taken a hit in recent weeks and banks tightening lending standards further, we suspect business investment has further to fall.

The headline weakness was partly the result of aircraft, with Boeing booking only two orders last month resulting in a 6.6% m/m fall in the value of commercial aircraft orders. Those orders should see a big rebound soon, however, once the bumper order recently announced by Air India is finalised. Motor vehicle orders fell by 0.9%, while orders were also dragged down by an 11.1% drop in defence aircraft…

While the extent of the drag from events over the past couple of weeks remains to be seen, it would be a surprise if it didn’t deal a further blow to investment, particularly for small firms more reliant on bank financing. The regional manufacturing surveys, which had already been pointing to declines in capital goods orders, have so far supported that idea – with the capex intentions component of the March Philly Fed index in particular falling to its weakest since 2009. The upshot is that we expect the weakness in equipment investment to intensify from here, which is likely to help drag the wider economy into recession soon.

Is Deutsche Bank the next ‘sick bank of Europe’?

Holger Zschäpitz, economics editor of the German newspaper Die Welt, has tweeted:

Updated

UK business activity holds up, inflationary pressures ease

UK business activity held up in March, led by the service sector, while firms’ costs fell to a two-year low.

The flash reading from the S&P Global/CIPS monthly survey showed a drop in the main index to 52.2 from 53.1 in February, but indicated further expansion as it remained above the 50 no change mark. The services business activity index weakened slightly to 52.8 from 53.5 while the manufacturing sector dipped into negative territory, with the index falling to 49 from 50.9.

The survey pointed to a sustained increase in UK private sector output, largely reflecting a strong performance by the service sector. New business received by service sector firms rose at the sharpest pace for 12 months, although staff shortages acted as a drag on growth.

Manufacturing production dipped in March and was once again held back by subdued order books.

Input price inflation eased to a two-year low in March, mostly reflecting a considerable softening of cost pressures in the manufacturing sector. Many firms noted that lower commodity prices and falling freight rates had been passed on by suppliers.

Manufacturers continued to report improving supply conditions, with delivery times shortening the most since April 2009.

Swiss authorities and UBS are racing to complete the takeover of Credit Suisse with a month, Reuters reported.

Separate sources told the news agency that UBS has promised retention packages to Credit Suisse wealth management staff in Asia to stem an exodus.

Meanwhile, Bloomberg News reported that Credit Suisse and UBS are among banks that are being investigated by US authorities over whether financial professionals helped Russian oligarchs evade sanctions.

Deutsche Bank shares hammered, credit default swaps hit four-year high

Shares in Deutsche Bank, Germany’s biggest bank, have lost a fifth of their value this month and the cost of its credit default swaps – a form of insurance for bondholders – hit a four-year high today, based on data from S&P Market Intelligence.

Stuart Cole, head macro economist at Equiti Capital, said:

Deutsche Bank has been in the spotlight for a while now, in a similar way to how Credit Suisse had been. It has gone through various restructurings and changes of leadership in attempts to get it back on a solid footing but so far none of these efforts appear to have really worked.

The global banking sector has been rocked by the collapse of the tech lender Silicon Valley Bank and two other US banks, and the rescue of Credit Suisse by fellow Swiss bank UBS.

Chris Beauchamp, chief market analyst at IG, told Reuters:

We are still on edge waiting for another domino to fall, and Deutsche is clearly the next one on everyone’s minds – fairly or unfairly.

Looks like the banking crisis hasn’t been entirely put to bed.

Updated

Bank stocks slide amid fears of global crisis

Banking stocks have tumbled in the UK and the rest of Europe at the end of a turbulent week dominated by fears of a global banking crisis.

The Euro Stoxx banks index has fallen 5.4%. France’s Société Générale lost almost 7% and UBS, which orchestrated a rescue takeover of Credit Suisse this week, also slid 7%.

Deutsche Bank shares tumbled nearly 13% after a sharp increase in the cost of insuring the German bank’s bonds against the risk of default.

Here in London, the British banking index lost 4.5%, falling for a third day. The FTSE 100 index has lost almost 2% to 7,355, dragged lower by Barclays (down 5.2%), NatWest Group, Standard Chartered and the insurer Prudential. Analysts at HSBC cut their price target on Barclays.

Oil stocks BP and Shell fell about 4% as oil prices tumbled amid fears of oversupply. Brent crude is down $2.5 at $73.38, a 3.3% drop, while US light crude has slid 3.6% to $67.48 a barrel.

US energy secretary Jennifer Granholm said refilling the country’s strategic petroleum reserves may take several years, dampening demand prospects.

Yields on US government bonds have fallen sharply, as investors sought refuge in government debt, regarded as a safe haven in tumultuous times. Two-year Treasury yields dropped as much. as 23 basis points to 3.56%, the lowest level since September.

Updated

Unite: Bailey fails to understand 'depth of profiteering crisis'

Unite, the UK’s largest private sector union, has commented on Andrew Bailey’s interview with the BBC this morning in which he warned companies to be restrained when they consider increasing prices.

The Bank of England governor said he was concerned that companies would maintain high price increases, keeping inflation higher for longer and forcing the central bank to impose further interest rate rises.

The union said a “grudging acknowledgement” by Bailey that companies have played a role in rising prices was a “welcome development”.

But the union’s general secretary Sharon Graham said Bailey had failed to understand “the depth of the profiteering crisis”.

Graham said:

Andrew Bailey’s lacklustre acknowledgement of the role price rises are having on inflation is a step forward after years of targeting workers.

However, the Governor of the Bank of England is still refusing to acknowledge the depth of the crisis. The UK is in the grip of a profiteering epidemic - it is greedflation, not workers’ wages, that is fuelling the cost of living crisis.

The profits of Britain’s biggest firms have spiked 89 per cent: to claim that there is no evidence of excessive profiteering just isn’t credible.

Policy makers seem determined to remain prisoners of a broken economy. They need to wake up.

Our full story on Bailey’s comments is here:

General Secretary of Unite the Union, Sharon Graham, joins ambulance workers on the picket line at the North West Ambulance Service on January 23, 2023 in Chorley.
General Secretary of Unite the Union, Sharon Graham, joins ambulance workers on the picket line at the North West Ambulance Service on January 23, 2023 in Chorley. Photograph: Christopher Furlong/Getty Images

Updated

“A see-saw session on Wall Street overnight spoke to an edgy market mood and the FTSE 100 started the day firmly on the back foot on Friday,” said AJ Bell investment director Russ Mould. He’s summed up today’s main news.

Barclays topped the losers’ list [earlier, now it’s NatWest Group], reflecting the tricky position for the banks, with some European shares in the sector chalking up big losses on lingering fears of contagion and the threat of regulatory intervention. It is difficult to see a path through the current turmoil around inflation, rates, geopolitical tensions and the recent banking crisis which doesn’t involve some pain.

At best there is a good deal more uncertainty than there was a month ago and if there’s one thing which markets cannot stand it is uncertainty. We may be close to the end of the rate hiking cycle, certainly the Federal Reserve hinted as much earlier this week, but we are certainly not out of the woods yet.

UK retail sales topped expectations in February as they rose from January’s lows, though they were still weaker year-on-year, and despite some improvement consumer confidence could still be characterised as fragile at best.

European PMI data shows a big divergence between the services and manufacturing sector. It could be the latter is a canary in the coal mine for a more pronounced economic slowdown.

The next big economic announcement looks to be the PCE data in the US a week today – this is the Fed’s preferred measure of inflation and if it comes in higher than forecast it could lead to a sudden about-turn on the Fed’s recent shift in tone.

Here’s our full story on retail sales: There was a better-than-expected boost for retail sales in Great Britain in February as shoppers turned to discount department stores and secondhand shops, and chose to dine in more and cut back on eating and drinking in pubs and restaurants.

The Office for National Statistics (ONS) said retail sales increased by 1.2% last month compared with January, well ahead of economists’ forecasts of a 0.2% rise, bouncing back to pre-pandemic levels despite the cost of living crisis.

In other news, just 1% of the estimated £1.1bn lost from the government’s Covid business support programme in England as a result of fraud and error has been recovered so far, the public spending watchdog has said in a report urging ministers to learn lessons from the scheme, reports the Guardian’s political correspondent Peter Walker.

The “overwhelming majority” of fraud and error occurred during the initial incarnation of the grant scheme launched in March 2020, which did not require prepayment checks, the National Audit Office (NAO) said in its report on the rushed-through efforts.

The total of £1.1bn lost in grants amounted to just under 5% of the total for the scheme, according to business department statistics. The latest figures of retrieved money, collated by the newly renamed Department for Business and Trade (DBT) and cited by the NAO, showed that only £11.4m of that has been recovered – 1% of the amount lost.

Service sector powers eurozone growth but factories struggle

In the eurozone as a whole, business activity rose strongly to the highest since last May, powered by a revival in the services sector.

The S&P Global PMI’s flash reading showed the composite index at 54.1, up from 52 in February. The services index strengthened to 55.6 from 52.7 in February, while manufacturing weakened, with the index dipping below the 50 mark that divides growth from contract (49.9 versus 50.1 in February).

This suggests that the economy is reviving after falling into decline late last year. Inflationary pressures have continued to ease, with input prices even falling sharply in manufacturing.

Jobs growth has accelerated and business confidence has remained resilient despite concerns stemming from recent banking sector stress and higher borrowing costs.

However, the overall rate of growth remains modest and driven solely by the service sector, with manufacturing suffering a further loss of new orders, meaning current output is only being sustained via backlogs of previously placed orders.

Also, despite easing further, overall input cost and selling price inflation rates remain elevated by historical standards.

Updated

German business activity at 10-month high

In Germany, Europe’s biggest economy, business activity also picked up to a 10-month high in March, with inflation falling but still high due to price pressures in the services sector, according to the flash reading from S&P Global.

Key findings:

  • Flash Germany PMI Composite Output Index at 52.6 (Feb: 50.7). 10-month high.

  • Flash Germany Services PMI Activity Index at 53.9 (Feb: 50.9). 10-month high.

  • Flash Germany Manufacturing Output Index at 50.1 (Feb: 50.2). 2-month low.

  • Flash Germany Manufacturing PMI at 44.4 (Feb: 46.3). 34-month low.

The rate of growth picked up in Germany’s private sector, but remained modest overall. The pace of job creation also picked up, though firms were a tad less optimistic about the year-ahead outlook.

Inflation, as measured by prices charged by firms, remained elevated due to stubbornly high pressures in the service sector. Overall inflation eased to a near two-year low, though, as raw material costs declined for manufacturers and supplier delivery times shortened.

French businesses expand at fastest pace since May

While French protests over plans to raise the pension age from 62 to 64 continue, as more than a million took to the streets yesterday and Bordeaux town hall was set on fire, there’s some good news on the French economy today.

Strong services activity growth in March has led the French economy to expand at the fastest pace since May, according to a closely-watched survey from S&P Global. Its purchasing managers’ index for the private sector was above the 50 mark that divides growth from contraction for a second month, and rose to a 10-month high.

Key findings:

  • Flash France PMI Composite Output Index at 54.0 (Feb: 51.7). 10-month high.

  • Flash France Services PMI Activity Index at 55.5 (Feb: 53.1). 10-month high.

  • Flash France Manufacturing Output Indexat 46.9 (Feb: 45.0). 2-month high.

  • Flash France Manufacturing PMI at 47.7 (Feb: 47.4). 2-month high.

S&P Global said:

France’s private sector saw a notable improvement in activity levels at the end of the first quarter. This marked the second successive month of growth, albeit one that was entirely driven by services businesses as factory production fell for a tenth month running. Supporting faster activity growth was a rejuvenation in demand, as seen through an expansion in new orders for the first time since mid-2022.

Subsequently, surveyed companies saw their backlogs of work rise and raised staffing levels accordingly. A cooling of price pressures was also recorded in March, with rates of input cost and output price inflation slowing to 18- and seven-month lows respectively amid receding supply-chain frictions.

Updated

European stocks, oil prices, sterling fall

Stock markets are in the red again, with the FTSE 100 index down 67 points, or 0.9%, at 7,431, dragged down by banks NatWest Group, Barclays, Standard Chartered and the insurer Prudential, as concerns over the banking sector persist.

Germany’s Dax has lost 133 points, or 0.9%, to 15,076 while France’s CAC fell 65 points, or 0.9% to 7,072 and Italy’s FTSE MiB has tumbled 309 points to 26,173, a 1.2% drop.

Crude oil prices have also fallen, with Brent crude, the global benchmark, down 0.4% at $75.59 a barrel.

The pound is trading 0.3% lower against the dollar at $1.2250 but has edged up 0.1% versus the euro to €1.1353.

Updated

Bailey went on to say that the economic picture has brightened considerably.

The prospects for the economy in terms of growth are now better, considerably better, and it is reasonable to say that there’s a pretty strong likelihood that we will avoid a recession this year.

But we’ve still got to put in place the conditions for much stronger growth in the economy and sustainable growth in the economy.

We’ve got to build a new engine of growth in this country to grow the economy.

Michael Hewson, chief market analyst at CMC Markets UK, tweeted:

Updated

Here are more comments from Bank of England governor Andrew Bailey, speaking on BBC radio 4’s Today programme.

We’ve got to get inflation down. Inflation is too high at the moment. Now we think that it will fall sharply really from the early summer throughout the rest of the year. And we’re pretty confident about that.

But it hasn’t come down yet and we had some news earlier this week which was a bit higher than we expected it to be, there were probably some temporary factors in there. But there was a message in there that we’ve not got to the point where we’re getting the sharp fall that we expect. We weren’t expecting it immediately but we’ve got to see that happen. That’s my message, that’s what lies behind the [rate] increase [on Thursday].

Inflation “is way too high at the moment and we’ve got to get it back to the 2% target.”

I believe there are powerful forces that will bring it down because unless something really bad happens over the rest of this year, we’re going to see a reversal of what we saw last year in terms of energy prices.

In an appeal to businesses, he said:

I would say to people who are setting prices: Please understand if we get inflation embedded interest rates will have to go up further.

When companies set prices I understand that they have to reflect the costs that they face. But what I would say please is that when we are setting prices in the economy and people are looking forwards we do expect inflation to come down sharply this year and I would just say please bear that in mind.

Former Guardian journalist Tom Clark, a fellow of the Joseph Rowntree Foundation and a contributing editor to Prospect, tweeted:

Updated

Victoria Scholar, head of investment at interactive investor, has looked at consumer confidence and the wider economy.

Sentiment improved to a one-year high but remains gloomy by historic standards. The personal finance measure however remains low as inflation erodes take home pay and cost-of-living pressures persist.

Economic data, though still weak, has started to show incipient signs of improvement in the UK with house prices, retail sales, confidence and PMI figures picking up off the lows as the mini-budget chaos fades into the rear-view mirror and the Bank of England approaches the end of the rate hiking cycle. Inflation however remains a sticking point, having unexpectedly picked up again in February, going against recent months of improvement since October’s peak.

UK consumer confidence improves

The jump in retail sales came as consumer confidence improved slightly. GfK’s consumer confidence index rose by two points to -36 in March.

Joe Staton, client strategy director at GfK, said:

A small improvement in the overall index score this month masks continuing concerns among consumers about their personal financial situation. This measure best reflects the financial pulse of the nation and it remains weak, with the figure for the coming year down three to -21 and an unchanged score for the past 12 months of -26.

Forecasts that headline inflation will fall this year have proved premature, given Wednesday’s announcement of an unexpected increase. Wages are not keeping up with rising prices and the cost-of-living crisis remains a stark reality for most.

The recent budget will bring relief to some sections of the population, but for now many people are simply looking to survive day-by-day. Just having enough money to live right and pay the bills remains the number one concern for consumers across the UK.

Nicholas Hyett, investment analyst at the investment service Wealth Club, said:

The UK is finding its shopping habit hard to kick it would seem. Retail sales volumes have come in stronger than expected for the second month this year despite the cost of living squeeze.

But beneath that headline, there’s clear evidence that shoppers are being careful with their money. Growth in non-food sales was driven by discounters and second hand shops, while the rise in food volumes is attributed to people choosing to eat in and avoid pricey meals out. Shoppers may be more willing to spend, but only when there’s a bargain to be had.

Longer term, sales volumes remain lower than they were this time last year. With the Bank of England expecting the UK economy to hold up better than previously expected, that provides room for several months more sales growth. Whether shoppers find the confidence to return to the mid-market space though remains to be seen.

UK retail sales - food sales
UK retail sales - food sales Photograph: ONS

Updated

Aled Patchett, head of retail and consumer goods at Lloyds Bank, is more upbeat:

A rise in sales for February suggests that consumer confidence is heading in the right direction after a difficult few months. While inflation remains higher than hoped, retailers will be buoyed to see consumers spending on little luxuries and celebrations.

Those in the industry will be hopeful that warmer temperatures and a fall in gas prices will be the spark needed to free up disposable income amongst consumers and leads to a longer period of growth.

Despite a surprise uptick in inflation earlier this week, we still expect levels to wane later in the year. Retailers will be hoping it’s the shot in the arm consumers need to loosen their grip on purse strings.

Ashley Webb, UK economist at Capital Economics, said it’s too soon to conclude February’s rebound in retail sales will be sustained.

At face value, these data further add to the view that the recent resilience in activity is still holding up. But when households’ finances are under pressure, it is possible that any improvement in retail sales will be just be met by a softening in non-retail spending (such as restaurants).

And although the worst of the falls in real household incomes are in the past, the full drag on activity from higher interest rates has yet to be felt. As such, the coming months may still be a struggle for retailers as the economy tips into recession.

British retail sales stronger than expected, lifted by discount stores

Retail sales in Great Britain were much stronger than expected last month, as people turned to discount stores and cut back on eating out and takeaways because of cost-of-living pressures.

Retail sales volumes increased by 1.2% in February from the month before, compared with January’s 0.9% rise (revised higher from 0.5%) and analyst expectations of a 0.2% gain. It was the biggest monthly rise since October. The figures were released by the Office for National Statistics.

However, sales were down 0.3% in the three months to February when compared with the previous three months.

The ONS director of economic statistics, Darren Morgan, said:

Retail grew sharply in February with sales returning to their pre-pandemic level.

However, the broader picture remains more subdued, with retail sales showing little real growth, particularly over the last eighteen months with price rises hitting consumer spending power.

Updated

Introduction: Bank of England chief warns of further rate hikes if firms raise prices

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Andrew Bailey, the governor of the Bank of England, has appealed to businesses to avoid price rises but expressed confidence that the rises in the cost of living would slow sharply in the early summer.

Speaking on BBC radio 4’s Today programme, he admitted that inflation had not yet eased, after it unexpectedly rose to 10.4% in February. The Bank raised interest rates to 4.25% yesterday.

Companies should set prices in a way that do not embed inflation at current levels because it could hurt people and would mean higher interest rates, he said.

If all prices try to beat inflation then we will get domestic inflation that will start repeating itself. Higher inflation really benefits nobody and particularly hurts the least well-off in society.

Rising inflation hits the least well-off hardest because they spend a bigger proportion of their income on food and energy.

Bailey said he hasn’t seen evidence of profiteering by companies, but other policymakers are worried that after the pandemic and Brexit, businesses face less European competition, which makes the UK more inflation-prone.

Last year, Bailey called on workers not to ask for big pay rises, sparking a backlash from unions. As wage growth has evaporated, he’s now asking firms to stop raising prices further.

His comments came as government figures released on Thursday showed that the average council tax in the UK will exceed £2,000 for the first time next month.

As local authorities struggle under growing financial pressures, it emerged that the average bill for band D properties will go up by £99 to £2,065 for 2023-24.

In towns and cities areas outside London bills rise by 5.1% to an average of £2,059, while rural parts of the country will see an increase of 5% to just below £2,140.

The Agenda

  • 8.15am GMT: France S&P Global PMIs flash for March

  • 8.30am GMT: Germany S&P Global PMIs flash for March

  • 9am GMT: Eurozone S&P Global PMIs flash for March

  • 9.30am GMT: UK S&P/CIPS Global PMIs flash for March

  • 12.30pm GMT: US Durable goods orders for February

  • 1.45p GMT: US S&P Global PMIs flash for March

  • 4pm GMT: Bank of England policymaker Catherine Mann speaks

Updated

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