London stocks finished Friday’s session in positive territory after figures were released showing US gross domestic product for the second quarter was unexpectedly revised higher, adding to the case for an interest rate hike later this year.
The third and final estimate of second quarter US GDP was revised to show an annualised 3.9% increase, up from a previous estimate of 3.7%. Analysts had been expecting no change.
The GDP numbers therefore confirm the Fed’s rosy view that the US economy is in fine health. However, this would be the Fed looking at the economy through the rear-view mirror once again. The recent survey data raise questions over the extent to which growth is already waning.
A separate report showed US consumer confidence in September was higher than originally estimated but remained markedly below last month’s level. The final reading of consumer sentiment was revised higher to 87.2 from a preliminary reading of 85.7, according to the University of Michigan, coming in slightly above analysts’ expectations for a print of 87.0 but well below the 91.9 level reached in August.
Momentum in the US services sector petered out in September, according to Markit. The seasonally adjusted Flash US Services purchasing managers’ index declined from 56.1 to 55.6, in line with analysts’ expectations.
The data comes after Federal Reserve chair Janet Yellen said most Federal Open Market Committee members, herself included, anticipate an initial rate increase last this year followed by a gradual tightening thereafter.
Speaking at the University of Massachusetts on Thursday evening, Yellen said she expects inflation to return to the Fed’s 2% target over the next few years and that weak growth in emerging economies will not have a big enough impact on the US to influence policy.
Given that 13 of 17 officials think that rates will rise later this year, it is still likey that the Fed will begin to hike rates in December.
In the UK, the Bank of England’s Ian McCafferty said he believed the best course of action to safeguard the economic recovery would be to raise interest rates . McCafferty, who was the only member of the Monetary Policy Committee to vote in favour of a rate hike this month, said concerns on China “should not be overstated”.
“By not delaying, we increase the likelihood of being able to normalise monetary policy only very gradually, thus minimising the potential shock,” he wrote in The Times.