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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

US adds 311,000 jobs in February; UK economy returns to growth; regulators take over Silicon Valley Bank – as it happened

United Kingdom Economy GDP United States Silicon Valley Bank SVB
Canary Wharf in London, as problems at US company Silicon Valley Bank rock the markets
Canary Wharf in London, as problems at US company Silicon Valley Bank rock the markets Photograph: Andy Rain/EPA

Some US regional bank stocks are under pressure today, after the SVB crisis:

It’s not every day, thankfully, that a US bank fails, but SVB’s woes have also not caused Armageddon in the financial sector.

Neil Wilson of Markets.com explains:

Is SVB a worry? Tsy Sec Yellen said the US Treasury is watching “a few banks” but there is no sense of a wider panic even as some of the regionals were hit – deep early losses at the open were pared reasonably quickly and bank stocks came sharply off the lows. JPM bounced 3% and the S&P 500 banks index turned higher by 1.5%.

“We want to be very clear here... we do not believe there is a liquidity crunch facing the banking industry... the headwind for the banking industry is that the cost of liquidity is high and rising... This is a headwind for net interest margins, revenue and EPS” - Morgan Stanley.

US banking regulators take over Silicon Valley Bank

Some late breaking news: US regulators have shut down Silicon Valley Bank (SVB) and taken control of its customer deposits.

It’s the largest failure of a US bank since 2008, and came after the bank failed to raise new capital today.

Officials said they shut the bank to “protect insured depositors”.

The Federal Deposit Insurance Corporation (FDIC), which typically protects deposits up to $250,000, said it had taken charge of the deposits.

As we covered through the day, trading in SVB’s shares was halted after they plunged 60% yesterday, after revealing it had lost $1.8bn on a sale of securities – forcing it to look to raise funds.

The FT says it is the second-largest bank failure in US history after the 2008 collapse of Washington Mutual.

They add:

The bank had abandoned its efforts to raise $2.25bn in new funding to cover losses on its bond portfolio earlier in the day and had been looking for a buyer to save it, according to people with knowledge of the matter.

Updated

Closing post

Time to recap….

The US economy has added more jobs than expected last month, but wage growth has cooled.

The US Non-Farm Payroll rose by 311,000 new hires last month, more than expected, but a slowdown on the blowout 504,000 recorded in January.

The unemployment rate rose to 3.6%, as more people looked for work.

But the dollar weakened, with the data showing a slowdown in wage growth. Average hourly earnings for all private workers rose 0.2% versus 0.3% in January, with annual earnings up 4.6%.

Shares of some of the world’s largest banks have fallen as fears over the future of a small California lender ripple through the markets.

Investors were spooked by news that California-based Silicon Valley Bank, which primarily lends to tech startups, had launched an emergency share sale to shore up cash after revealing it had lost $1.8bn (£1.5bn) when it sold a portfolio of bonds in response to a decline in customer deposits.

SVB’s US-listed shares plunged 60% on Thursday but the rout also spread to other Wall Street stocks. Its shares were halted on Friday after tumbling 66% in premarket trading.

UPDATE: US regulators have now taken over Silicon Valley Bank.

The UK’s FTSE 100 index is down 149 points, or 1.9%, in late trading at 7,730. HSBC are down 5%, with Standard Chartered off 4.6% and Barclays losing 4.4%.

The UK economy grew faster than expected in January, we learned today.

GDP rose by 0.3%, helped by a return of schoolchildren to class after a flurry of illness in December, and Premier League football restarting after the World Cup.

The UK’s National Food Crime Unit (NFCU) is investigating a possible case of food fraud after a supermarket stocked beef with false British labels.

The UK regulator has told banks to consider slashing mortgage payments for borrowers struggling with rising bills, as it revealed that 356,000 homeowners could be at risk of missing their monthly instalments by summer 2024.

A payout for the boss of BP has been labelled a “kick in the teeth” for consumers battling the cost of living crisis, as chief executive Bernard Looney saw his pay package more than double to £10m after the oil and gas giant landed 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.

The UK’s decision to delay the HS2 rail line will discourage British investment at a time when the US and mainland Europe are pushing forward with major spending on green technology, according to the chair of the National Infrastructure Commission.

Sir John Armitt said the delay to HS2, a high-speed line that aims to increase British rail capacity, contrasted with the heavy investments by the US and EU on decarbonisation.

And Boots is cutting the points per pound shoppers can earn on their loyalty card by a quarter, while offering discounts on its own-brand products.

The health and beauty chain told customers via email that from May, holders of the Boots Advantage card would collect 3p worth of points for every £1 spent, instead of 4p. They will keep the number of points they have already collected, which will still be worth the same amount.

Updated

Larry Elliott: Economic growth of sorts, but UK plc is going nowhere

The UK economy is ‘going nowhere’, warns our economics editor Larry Elliott.

Following this morning’s GDP report, showing 0.3% growth in January – but no growth over the last year – he writes:

Jeremy Hunt took comfort from the fact the economy is showing more resilience than expected but rightly noted there was a “long way to go”. The good news for the chancellor is that the recession predicted by the Bank of England last November has yet to materialise, and even if it does come to pass is likely to be shorter and more shallow than expected last autumn. Higher growth means stronger tax receipts, lower borrowing and some extra wriggle room for Hunt in next week’s budget.

The bad news is that it is going to be some time before the economy benefits from lower global gas prices and falling inflation. GDP is not going to do much more than edge sideways again this year, if that, and even after beating forecasts in January it is still possible the economy will contract in the first quarter. The boost to private healthcare noted by the ONS is an indication of the effect on the economy of this winter’s widespread industrial action.

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Pound rallies against dollar after GDP and jobs report

Sterling is on track for its best day against the US dollar since the first week of January.

The news that the UK economy grew faster than expected in January has boosted the pound, while the mixed US jobs report weakened dollar.

Analysts say the 0.3% increase in GDP in January, ahead of forecasts of a 0.1% gain, has eased fears of a recession.

Matthew Ryan, head of market strategy at Ebury, explains:

“At this stage, we are far from convinced that a technical recession in 2023 is the foregone conclusion that many in the market have made out.

We think that the resilience of the UK economy will provide decent support for the pound in the coming months.”

The pound is currrently up 1.4% against the dollar at $1.2090, its biggest jump against the greenback since 6 January.

John Cronin, a financial analyst at the stockbroker Goodbody, believes the sell-off in UK bank stocks is unwarranted.

As covered this morning, shares in UK-listed banks fell amid the jitters created by Silicon Valley Bank’s emergency share sale to raise cash, after it incurred a $1.8bn on the sale of bonds.

Cronin points out that given that deposits at most big banks come from the retail market rather than tech startups, and that those same lenders would have to unwind the “enormous” cash balances held by the Bank of England before selling off any of their investment portfolios.

Furthermore, UK lenders also hedge risks linked to those portfolios.

Here’s the full story:

Silicon Valley Bank’s UK arm has issued a statement, pointing out that it is a “standalone independent banking institution” that is regulated and governed by the Prudential Regularory Authority in the UK.

It says:

Silicon Valley bank UK has been an independent subsidiary since August 2022 with a separate balance sheet to the SVB Financial Group and an independent UK Board of directors.

Silicon Valley Bank UK fully abides by the UK regulatory requirements as covered by the Financial Services Compensation Scheme and by the Financial Ombudsman Service. SVB UK, Ltd. is ring-fenced from the parent and its other subsidiaries.

Erin Platts, CEO and head of EMEA, says the bank has received support from its community of investors and start-up founders:

SVB has supported investors and innovators for 40 years and we have been so humbled with the consistent drum of support coming from our UK investor and founder community in last few days.

We appreciate that this is a concerning time for our clients so we are working tirelessly to support them and give more context”

Updated

Wall Street has opened slightly lower, with the main indices down around 0.2%.

Back in the troubled banking sector:

SVB Financial Group’s efforts to raise money have failed and the troubled bank was in talks to sell itself, CNBC reported on Friday, as a crisis at the tech-heavy lender rippled through global markets and hit banking stocks.

Shares of SVB Financial Group were halted on Friday after tumbling 66% in premarket trading.

SVB, which does business as Silicon Valley Bank, was not immediately available for comment, Reuters reports.

US job creation is still running well over the historic average, despite slowing to 311,000 new jobs in February.

And while that’s excellent news for workers, it may encourage the US Federal Reserve to keep tightening monetary policy, raising interest rates to cool inflation.

Nathaniel Casey, Investment Strategist at wealth manager Evelyn Partners, explains:

Despite reporting above consensus estimates, today’s jobs report saw NFPs revert closer to recent trends after January’s gain of 517k. The unemployment rate increased slightly to 3.6%.

With January’s payrolls figure seemingly an anomaly and wage growth continuing to slow, the Federal Reserve can feel slightly more optimistic that a tight labour market will not stoke inflation further.

However, the Fed still has more work to do with NFP’s running well above the post-Second World War monthly average of 123k.

Despite a slowdown in job creation signalling relatively bad news for the economic outlook, it will be seen as good news to markets, Casey adds:

During Fed chair Powell’s testimony to Congress earlier in the week, he noted that recent economic data - including employment - had partly reversed the softening seen during the end of 2022. He went on to note that if economic data was to continue to revert those softening trends, the Fed would be prepared to ‘increase the pace of rate hikes’ to regain price stability.

With the Jobs data now softening again and the unemployment rate ticking up, the market can feel slightly relieved that the likelihood of the Fed increasing the pace of hikes has fallen for the time being.

The labour force participation rate among ‘prime-age’ workers (ages 25 to 54) in the US has risen to its levels in early 2020.

That suggests that the workers who left the labor market during the pandemic have been returning – either finding jobs or looking for them.

Updated

Average hourly earnings growth has slowed to 0.2% month-on-month, from 0.3%, the US jobs report shows.

On an annual basis, average hourly pay growth was weaker than expected, at 4.6%.

US unemployment rate rises to 3.6%

The US unemployment rate has edged up to 3.6% for February, with the number of unemployed persons rising to 5.9 million, the Bureau of Labor Statistics reports.

There were notable job gains across US leisure and hospitality companies, retail trade, government, and health care.

But employment declined in the information sector, and in transportation and warehousing.

US created 311,000 jobs in February

Newsflash: Job creation across the US slowed last month, but more jobs were created than expected.

The Non-Farm Payroll, a closely-watched measure of US employment, rose by 311,000 in February, rather stronger than the 205,000 which was expected.

That follows a (downwardly revised) 504,000 in January. January’s non-farm payroll increase had initially been estimated at 517,000 jobs last month.

It’s nearly time for the US unemployment report for February, which could add more volatility to the markets.

Economists predict that around 205,000 new jobs were added last month.

A strong jobs report could encourage the US Federal Reserve to keep raising intrerest rates.

UK's G4S fraud prosecution collapses

The UK Serious Fraud Office has dropped the prosecution of three former managers at G4S, two years after the security company took responsibility for fraud related to government contracts for electronically tagging offenders.

The SFO on Friday told a London court that there was no longer a public interest in pursuing the case, because of requirements for disclosure of evidence to the people charged that would have dragged out for at least another year, with the prospect of a six-month trial at its end.

The scandal emerged in 2013, with G4S agreeing it had tried to “dishonestly mislead” the Ministry of Justice to boost profits on the tagging programme after some offenders recorded as electronically tagged were found to be dead, back in prison or abroad.

G4S agreed to compensate the Ministry of Justice in 2014, reaching a settlement worth £121m. G4S was fined £44m and agreed to overhaul its governance as part of a 2020 deferred prosecution agreement with the SFO.

An SFO spokesperson said:

“As a public prosecutor we have to make difficult decisions, including ending a prosecution where it is right to do so. In line with the Code for Crown Prosecutors, we have determined it is no longer in the public interest to continue this prosecution.”

The decision means it is likely that no individuals will be prosecuted in relation to the alleged overcharging by G4S.

The three men prosecuted have denied wrongdoing throughout the case. Richard Morris, the former CEO of G4S UK & Ireland who was one of the people charged by the SFO, criticised the prosecutors and his former employer for agreeing that fraud was committed, saying the allegation of “wrongdoing” against him was “a wholly untrue allegation”.

He said:

“This amounted to G4S signing a false confession, plain and simple.”

A spokesperson for the G4S subsidiary involved said:

“G4S Care and Justice Services (UK) Limited settled this legacy issue in 2014 through a full commercial settlement with the Ministry of Justice and subsequently agreed a deferred prosecution agreement with the SFO.

“It’s not appropriate for us to comment on the cases involving the individuals.”

In the commodity markets, wheat futures are on track for their fourth weekly fall in a row, amid growing expectations of a Black Sea deal, to allow Ukraine to continue shipping grains.

Prices touched their lowest since July 2021 this morning, and are down more than 15% during the last four weeks, Reuters points out:

The U.S. and European wheat markets have been under pressure from Russian export competition and expectations that the wartime grain corridor from Ukraine will be extended beyond this month, increasing available global supplies.

“For the moment, as negotiations are still in progress, operators still favour a renewal of the export corridor from Ukraine,” French consultancy Agritel said in a note.

Earlier this week Ukraine’s president and the UN secretary general called for an extension to the deal allowing Russian and Ukrainian wheat and fertilisers to be exported through the Black Sea, amid reports that Moscow does not intend to renew its participation.

Britain’s consumer services sector has yet to recover to its pre-Covid levels, January’s GDP report shows.

Overall, consumer facing services remain 8.6% below their pre-pandemic levels, whilst all other services were 2.1% above their February 2020 levels.

Modupe Adegbembo, G7 Economist at AXA Investment Managers, explains:

Consumer facing services have remained subdued as households pull back on discretionary spending and have also been impacted by industrial action particularly on transport rose by 0.3% on the month, following a fall of 1.2% in December.

AXA predicts the UK economy will shrink by 0.1% in the January-March quarter. That would be the third quarter without growth in a row, after the economy shrank in Q3 and stagnated in Q4 2022.

Adegbembo says:

The stronger than expected start to Q1 suggests it may be possible for the UK to avoid a technical recession, but the data reflects a rebound following sharp declines in December impacted by strikes across sectors and points less to stronger underlying growth momentum.

We continue to expect Q1 growth of -0.1%, with risks skewed to the upside.

Back on the GDP report…Moody’s Analytics economist Barbara Teixeira Araujo is concerned that the UK’s production sector, and the building sector, both contracted in January:

“U.K. GDP rose by an above-expectations 0.3% m/m in January, partially reversing December’s 0.5% fall. Despite the positive surprise, we caution against reading too much into January’s rise.

The monthly data is volatile and evidence abounds that the economy remains extremely weak on the back of high inflation and awfully tight financing conditions. Indeed, the sectoral details paint a very mixed picture, as much of the rebound in services activities was offset by declines in both industrial production and constructions.

Our forecast is that the U.K. economy will remain at best flat in the first half of 2023.”

That would mean around 18 months of stagnation, as the economy didn’t grow in the year to January.

Passengers have been warned that parts of Britain’s rail network will be closed during strikes next week.

Members of the Rail, Maritime and Transport union (RMT) will walk out at 14 train companies on March 16 and 18, as well as March 30 and April 1.

The Rail Delivery Group (RDG), which represents train operators, said it expects 40-50% of services to run on those days but there will be “wide variations”, with some areas having no trains.

Affected operators will only run services from around 7.30am until 6.30pm.

There will also be disruption to services during the nights before and mornings after each strike.

Earlier this week the RMT suspended stirike action at Network Rail, with staff due to vote on a pay offer, but industrial action continues at the train operators.

Despite January’s growth, the UK economy has still not regained its pre-pandemic levels, the CBI point out here:

Berenberg bank has upgraded its growth forecasts for the UK for the second time in as many weeks, after the economy grew by a stronger-than-expected 0.3% in January.

Berenberg now expect the economy to contract by 0.1% during 2023, up from -0.5% forecast before, and keep their 2024 and 2025 calls broadly unchanged at 1.5% and 1.7% (previously 1.6% and 1.7%) respectively.

Kallum Pickering of Berenberg says the UK now faces stagflation, instead of recession, this year.

At first glance, the degree of economic resilience the UK is “somewhat of a puzzle”, Pickering writes, adding:

Factors including falling real retail sales, the housing market correction and near-record low consumer confidence are strongly pointing to at least a mild downturn.

But headline GDP data continue to suggest stagflation rather than outright recession. As balance sheets across the private sector are in good health and the labour market is holding up well even as financial conditions tighten, our earlier calls for a historically mild recession now appear too pessimistic. The tension between clear spots of weakness versus favourable fundamentals and robust aggregate output implies a high degree of uncertainty regarding our medium-term calls.

Updated

European banking stocks were heading for their largest one-day fall in nine months this morning, fears over the health of banks’ bond portfolios rattled nervous investors.

Europe’s STOXX banking index fell by over 4%, set for its biggest one-day slide since early June. Deutsche Bank is leading the fallers, down 7.9%, while France’s Société Générale has lost 5.6%.

In London.HSBC are down 4.8%, still leading the FTSE 100 fallers.

Outlook for UKeconomy improving, says NIESR

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.”

Updated

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.

Reuters reports:

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.

Updated

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.

More here:

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:

Bloomberg says:

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.

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.

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.

Updated

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.

They say:

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.

Here’s the full piece.

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.

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.

She writes:

…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.

Updated

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.

Yael Selfin, chief economist at KPMG UK, fears a UK recession is “still on the cards” despite the brightening economic outlook.

Selfin says:

“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.”

Updated

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.’’

Private healthcare boosted GDP

The was increased demand for private healthcare in January, the GDP report shows, as NHS waiting lists grew longer.

Human health and social work activities grew by 0.7% in January, following a fall of 2.8% in December 2022.

January saw growth of 1.1% in human health activities driven by “increased output in the private sector”, the ONS says.

One in eight adults in the UK paid for private medical care in 2022, data last December showed, due to long delays for NHS tests or treatment. Analysts have warned that waiting lists are unlikely to fall in 2023.

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.

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).

Updated

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.

Morgan explains:

“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.

UK GDP January 2023 detail

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.

Updated

Despite growing in January, the UK economy is still 0.2% smaller than in February 2020, when the Covid-19 pandemic hit.

A chart showing UK GDP
A chart showing UK GDP Photograph: ONS

Looking at the broader picture, though, GDP was flat in the three months to January 2023.

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.

Updated

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

Good morning

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.

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%.

Reuters explains:

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.

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.

The agenda

  • 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

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