US growth surge helps revive the markets
The markets rallied yesterday on news that the American economy is growing more quickly than previously thought.
Following losses prompted by fears over Chinese growth earlier this week, the FTSE closed up 3.6 per cent and the dollar jumped in value after the US Commerce Department revised up its estimate of growth for the second quarter to an annualised rate of 3.7 per cent. This was far stronger than the previous estimate of 2.3 per cent.
Economists said that it would boost the case for the Federal Reserve to begin raising US interest rates.
STOCKS rallied and the dollar jumped yesterday after official data showed the US economy grew at a faster pace in the second quarter than previously thought.
The revised data pushed the dollar up by almost a cent against the pound and more than a cent against the euro. Share prices also rallied, extending their recovery from a sharp sell-off that was triggered by concerns about the health of the Chinese economy.
The FTSE 100 closed up 3.56pc, at 6,192.03, with stocks gaining £60bn in value and helping the London index to its biggest one-day rise since October 2011. Markets across Europe and Asia also closed higher. On Wall Street, the Dow Jones Industrial Average rose 2.3pc, while the S&P 500 climbed 2.4pc.
The US Commerce Department earlier revised up its estimate of growth in the three months to June to 3.7pc annualised. This was much stronger than the expected upgrade to 3.2pc and compares with a previous estimate of 2.3pc. The US economy grew at an annualised rate of 0.6pc in the first three months of this year.
The upward revision reflected stronger domestic demand and investment, higher government spending and lower imports, according to the US Commerce Department.
A measure of private domestic demand, which excludes trade, inventories and government spending, grew by 3.3pc, from a previous estimate of 2.5pc.
Economists said stronger-than-expected growth in the second quarter boosted the case for the Federal Reserve to begin raising interest rates this year, even as jitters in China raise concerns about global growth and low inflation.
“The pick-up from 0.6pc to 3.7pc makes it abundantly clear that the slowdown in the first quarter was noth- ing more than a weather-related blip,” said Paul Ashworth, chief US economist at Capital Economics.
However, markets believe a September interest rate hike in the US remains unlikely. “A mixture of imported deflation driven by a cheaper yuan, coupled with the global financial markets crash means that traders now expect the traditionally risk-averse Fed will choose to hold fire for now,” said Joshua Mahony, market analyst at IG.
Others highlighted that the upward revisions also reflected a surge in inventories, which suggests the rapid expansion will not be matched in the third quarter. Higher inventories added 0.22 percentage points to GDP instead of subtracting 0.08 points.
Central bankers gathered in Wyoming yesterday for the annual Jackson Hole symposium. While Fed chairman Janet Yellen is not expected to attend, policymakers will discuss the challenges facing the global economy. This year’s theme is “inflation dynamics and monetary policy”.
Analysts will be searching for clues as to when the Fed will raise interest rates following the stock market gyrations. Stanley Fischer, Fed vice-chairman, will deliver a speech on Saturday.
Stock markets were soothed by comments from William Dudley, head of the New York Fed, who said the threat of a slowdown in the Chinese economy and falling commodity prices had made a US interest rate hike next month “less compelling”.