The US stock market recovered some losses after it emerged, with fortunate timing, that Fed chair Janet Yellen had spoken confidently about America’s economic prospects.

Bloomberg has the details:

Federal Reserve Chair Janet Yellen voiced confidence in the durability of the U.S. economic expansion in the face of slowing global growth and turbulent financial markets at a closed-door meeting in Washington last weekend, according to two people familiar with her comments.

The people, who asked not to be named because the meeting was private, said Yellen told the Group of 30* that the economy looked to be on track to achieve growth of around 3 percent. She also saw inflation eventually rising back to the Fed’s 2 percent target as unemployment falls further, according to the people.

*The Group of 30 is, it says, a “nonprofit, international body composed of very senior representatives of the private and public sectors and academia.”

Here’s confirmation that Europe’s stock markets were all hit by the selloff.

The Athens market was the worst performer, dragged down by its banks:

Michael Hewson of CMC Markets sums up the mood:

Carnage on the markets today as European markets, hit by a perfect storm of disappointment over the health of the economy in Europe, concerns about a slowdown in Asia, as well as Ebola, and political dislocation at the heart of Europe, as investors look ahead to the end of QE at the end of this month, and see very little evidence of a balancing factor to mitigate the end of monetary stimulus and falling prices.

Combined with concerns about economic and political paralysis at the heart of Europe, as Germany pushes back against French and Italian demands to give the ECB free rein has raised the prospect that Europe’s economic growth could well be sub-par for years to come. A fact reinforced by the recent growth downgrades by the IMF and OECD of the European economy and more recently by the German finance ministry of the German economy, which is the anchor around which all of Europe has pivoted.

The FTSE 100 index of leading blue-chip shares has tumbled to its lowest level in 15 months, as fear stalks the markets.

The Footsie closed down 181 points at 6211, a 2.83% slide, which is the biggest one-day fall since June 2013.

Other markets also posted major falls, with the German DAX provisionally closing down 2.9% and the French CAC tumbling a hefty 3.6%.

The weak economic data, growth fears, deflation worries -- and the looming threat of ebola and geopolitical tensions -- all combined to drive the markets down today.

The sell-off is also triggered by fears that the Federal Reserve will soon normalise monetary policy, by ending its QE bond-buying programme this month and then raise interest rates in 2015.

Henk Potts, director of global research at Barclays, explains (via Reuters):

The stock market is in a fear mode at the moment on worries about global growth conditions and normalisation of U.S. interest rates,”

”But if the sell-off continues, it could prove to be a strong entry point into an asset class that we think will continue to outperform.”

It’s not all bad news this afternoon --- the US budget deficit has just fallen, to below 3% of GDP.

The US Treasury has reported that the US budget deficit fell by nearly a third to $483bn in the 2014 fiscal year (the 12 months to the end of September), as tax receipts rise on the back of the economic recovery.

At 2.8% of GDP, that is the smallest deficit since 2007 -- and dwarfed by the $1trn-plus deficits which America ran after Lehman Brothers collapsed.

US Treasury Secretary Jack Lew says that America has returned to “fiscal normalcy”:

The president’s policies and a strengthening U.S. economy have resulted in a reduction of the U.S. budget deficit of approximately two-thirds -- the fastest sustained deficit reduction since World War II,”

It’s a vindication for Keynesian stimulus, over eurozone-style austerity. And for the ultra-loose monetary policy implemented by the Federal Reserve since 2008.

Volatility is surging in the European markets this afternoon, hitting its highest level since the height of the eurozone crisis two years ago:

Reuters has the details:

The Euro STOXX 50 Volatility Index surged to 28.6 on Wednesday, its highest level since mid-2012 as mounting jitters over the strength of the global economy prompted investors to slash exposure to risky assets.

Europe’s widely-used measure of investor risk aversion known as the VSTOXX - which is based on put and call options on Euro STOXX 50 stocks - was trading at around 19 a week ago.

The FTSEurofirst 300 index of top European shares was down 3% on Wednesday, at 1,255.07 points, a level not seen in 10 months, with Greek stocks among the hardest hit.

European markets are deeper in the red too, as traders watch the Dow Jones industrial average shed points like they’re going out of fashion.

The FTSE 100 is now down 161 points, a 2.5% slide today, to 6226 points.

“Investors are fleeing for the exits right now,” says Bloomberg’s Betty Liu, capturing the mood rather well....

Over in New York, the Wall Street opening bell has been rung, and shares are (as expected) losing ground fast.

The Dow Jones Industrial Average has immediately lost 265 points to 16048, a tumble of 1.4%.

Fears over the global economy are stalking trading floors on both side of the Atlantic....

Money is flowing out of shares, and piling into safe-haven government bonds.

That’s driving up the prices of US Treasuries and UK gilts, which pushes down the yield, or interest rate, on the debt.

And Reuters is reporting that the yields on UK sovereign debt are at record lows:

• UK TEN-YEAR GILT YIELDS FALL TO 2.055 PCT, LOWEST SINCE JUNE 2013, AFTER WEAK U.S. RETAIL SALES DATA
  
• UK 30-YEAR GILT YIELDS FALL TO NEW ALL-TIME LOW OF 2.757 PCT, DOWN 10 BPS ON DAY

Another day, another sea of red across Europe’s markets:

And in Athens, there’s a full-blown rout. The main stock index is down 8% and counting, with banks leading the selloff:

A triple-dose of bad economic news from America just hit the financial markets, driving shares lower.

US retail sales fell 0.3 per cent in September, the first decline since January, and rather worse than the 0.1% decline expected.

That suggests consumers are becoming more cautious, cutting back on spending.

US producer prices (what firms receive for their goods) has also fallen, down 0.1% in September, in the first decline since August 2013. That is the latest in a swath of signs that inflation is falling.

And the Empire manufacturing report, which tracks factories in the New York area, has slumped., It fell to 6.17 this month, from 20.5 in September. Both the manufacturing conditions measure, and the new orders index, hit the lowest level since April.

That has driven stock market down further, with the FTSE 100 falling up to 102 points, to 6290.

And the yield on US Treasury bills (ie, the interest rate on US debt) is falling further..

European stock markets are in retreat again this afternoon, as nervous traders continue to push share prices down.

The FTSE 100 has shed another 85 points to 6306, a fresh one-year low. Around half that loss is due to Shire, the pharmaceuticals firm, down 26% as its takeover by AbbVie hits trouble.

Germany’s DAX is down 1.3%, the Italian MIB has shed 2.4%, and the Greek stock market has tumbled 5%, as fears of a global slowdown and a eurozone recession hit markets.

The slide in the crude oil price, to a new four-year low, is driving up concerns over the health of the global economy. There’s plenty of talk that this will drive inflation lower:

As Lee Hardman, currency analyst at Bank of Tokyo-Mitsubishi UFJ, puts it:

“The sharp decline in the price of crude oil is serving to increase downside risks to inflation in the near-term,”

Important news in the banking sector -- Europe’s top banking regulator has said major banks should not try to get around the EU’s cap on bonuses by handing their staff extra payments to top up their pay.

The move sets the EBA up on a collision course with no fewer than 39 banks, who are paying their senior staff some ‘allowances’ to bump up their take-home pay.

City editor Jill Treanor reports:

The ruling of the European Banking Authority (EBA) has implications for 39 financial institutions, thousands of bankers and risks putting the UK’s already strained relationship with the EU under further pressure. The chancellor, George Osborne, is already challenging the restriction on bonus payouts in the European court of justice.

The announcement by the EBA –which is likely to have an impact on UK banks such as Barclays, HSBC and the bailed-out Royal Bank of Scotland – raises the prospect of thousands of bankers being denied any further of top-up payments. The regulator did not name any banks as it published its analysis into the way the industry had implemented the bonus cap, which restricts them to 100% of a bankers’ salary, rising to 200% if shareholders grant their approval.

Full story: Banks should not use extra payments to get around bonus cap, says regulator

Reaction to follow....

City economists are rewriting their predictions for when the Bank of England will start to raise interest rates.

Today’s jobs report, showing weak wage growth, and yesterday’s surprise fall in inflation means a rate hike in 2014 looks most unlikely.

Investec, which expected a rate rise in November, now reckon the BoE will hold borrowing costs at 0.5% until next summer. That’s quite a u-turn....

Investec economist Philip Shaw says:

We are dropping our November 2014 rate hike call.

We now consider that a combination of low inflation, international economic uncertainty and the absence of pay pressures means that the MPC will hold off from raising rates until August next year.

Swiss bank UBS have made the same decision:

Reminder: In June-August, pay including bonuses was just 0.7% higher than a year earlier, while pay excluding bonuses was 0.9% higher. Inflation was 1.5% in August.

David Kern, chief economist at the British Chambers of Commerce (BCC), says this will encourage the Bank of England to sit tight:

With early wage increases remaining below 1% a year there is clearly no case for early rate increases - and we are pleased that this view is now widely accepted by the financial markets.”

Mark Miller, UK Analyst at The Economist Intelligence Unit, also reckons interest rates will remain at 0.5% until June 2015 at the earliest:

Following yesterday’s weak CPI data, we continue to feel a first interest rate increase is unlikely before next year’s general election”.

The ongoing pay squeeze means that British workers aren’t sharing in the recovery, says TUC General Secretary Frances O’Grady:

The real value of wages has fallen again this month. This is not only the longest and deepest pay cut on record but there is no end in sight.

She adds:

“Detailed analysis of the figures show that even the cash increase in pay was entirely due to the finance and business sectors.

“With these never ending falls in living standards and so many new jobs insecure, low-paid and self-employed, Britain’s workers have been excluded from the recovery.

The TUC is holding a demonstration in central London this weekend, to press its case that “Britain needs a pay rise.”

Here’s another reason for caution -- the number of people in Britain classed as ‘economically inactive’ rose by 113,000 in the last quarter, compared to March to May 2014.

That helped to drag the unemployment rate down, from 6.2% to 6.0%.

Dr John Philpott, director of The Jobs Economist, explains:

Unemployment has continued to fall sharply because slower job creation was dwarfed by a big quarterly rise of 113,000 in the number of economically inactive people, almost half of which is accounted for by a rise in the student population.

The fact that the latest fall in unemployment has been driven by rising inactivity rather than job creation explains why the associated fall in the number of people unemployed and claiming job seekers allowance (JSA) is also much lower than in previous months.

These five charts also tell the story of Britain’s labour market.

The jobless rate has fallen steadily over the last year, to its near six-year low of 6.0%:

This graph shows the sharp rise in job creation, and the record-breaking drop in unemployment, over the last year:

The employment rate rose again, to 73.0%, showing that more 16 to 64-year olds are in work:

But the recovery hasn’t reached people’s pockets yet. Wages (the blue lines) continue to lag inflation (yellow):

And this chart shows where these new jobs have been created:

This should go down well in Downing Street: Britain has just recorded its biggest annual fall in unemployment on record.

The ONS says:

There were 1.97 million unemployed people, 154,000 fewer than for March to May 2014 and 538,000 fewer than a year earlier.

This is the largest annual fall in unemployment on record. Records for annual changes in unemployment begin in 1972.

Real wages in the UK economy are still shrinking, but there are signs that the gap is closing at LONG last.

The Office for National Statistics reports that average earnings in the UK rose by just 0.7% annually in the June-August quarter.

If you exclude bonuses, pay rose by 0.9% in the quarter.

And in August alone, average earnings ex-bonuses rose by 1.2%.

Inflation in August was 1.5% 1.6% , and dropped to 1.2% in September.

Breaking: Britain’s unemployment rate has fallen to 6.0% in the three months to August.

That’s the lowest since October 2008, the month in which Lehman Brothers collapsed.....

Just in.... Italy’s economy shrank by more than previously thought in the last three months, but didn’t actually contract at the start of the year.

ISTAT, the Italian statistics body, has revised its data to match new international standards. And it now reckons that:

1) Italian GDP was flat in January-March, rather than contracting by 0.1% as previously thought.

2) Italian GDP fell by 0.3% in April-June, rather than 0.2%.

I think that means that Italy is no longer officially in recession (defined as two consecutive quarters of negative growth).

The oil price has fallen again today, hit by growing concerns that the global economy is slowing.

The price of a barrel of Brent oil for delivery in November is down another 1.3% at $83.91, a fresh four-year low.

New York crude is down a similar amount, to $80.50 per barrel.

Oil is also weakening because the International Energy Agency yesterday cut its demand forecasts, as the global economic outlook darkens.

As the FT points out this morning, there’s no shortage of crude oil right now:

The world’s weakening appetite for oil comes with the market awash with plentiful supplies of crude. Libya’s production has recovered strongly even as the country descends further into chaos, while Iraq’s oilfields have remained insulated from the violence in the north.

Meanwhile, US output remains strong, leading to a glut of supply in the Atlantic Basin and the North Sea.

OUCH. Shares in UK pharmaceuticals firm Shire have fallen by more than a quarter as its planned merger with AbbVie appears to unravel.

Shares slid by 28% to £36.50, to £14.88, wiping over £8bn off its market value.

This follows the news that AbbVie has cold feet, following America’s new clampdown on tax inversions (in which US companies shift their tax base abroad).

China’s consumer inflation has fallen to its lowest level in five years, fuelling fears that the world economy is sinking into a low-growth, low-flation bog.

The Chinese consumer prices index slid to 1.6% in September, down sharply on August’s 2.0%, renewing calls for Beijing to do more to spur Chinese growth and demand.

The main cause of the drop in inflation was falling food and fuel prices (as we also say in the UK yesterday).

But it also hints at weaker domestic demand.

Dariusz Kowalczyk, senior economist at Credit Agricole CIB in Hong Kong, predicts that Chinese politicians will be worried that global disinflationary pressures are reaching China.

“The low inflation readings will open the door to further targeted monetary and fiscal easing. There is also less need for a strong currency to offset imported inflation.”

ANZ analysts agreed, saying in a research note that:.

“China’s soft inflation profile heightens the risk of deflation, thus requiring further monetary policy easing.”