Like a bad Valentine’s Day date, today’s stock market rally has fizzled out after a perky start.

The FTSE 100 index has closed just 6 points higher at 7,197, having earlier hit a four-month high around 7,230 points.

While Brexit worries are sweeping the City again, the weak US retail sales also knocked confidence.

Fiona Cincotta of City Index explains:

US retail sales unexpectedly fell in December -1.2%, the largest decline in 9 years. Analysts had expected retail sales to have increased 0.1%. Retail sales are renowned for their volatility. Under normal circumstances one weak reading by no means constitutes a new trend. However, these dire figures feed directly into the market fear over slowing economic growth. This explains why we havre seem such a dramatic market reaction.

The figures showed a broad weakness across most sectors, fuelling concerns that the cooling of the US economy from prior quarters, could be greater than initially projected. Although interestingly this goes against the impressively strong labour market data which we saw in December and January. US futures quickly erased gains resulting in a weaker start for Wall Street.

Capital Economics are also concerned by the (apparent) slump in US retail spending; suggesting it will force the Federal Reserve to leave interest rates on hold for longer for some time:

The unexpected plunge in control group retail sales in December means that fourth-quarter GDP growth was probably nearer 2.5% annualised than the 3.1% we had pencilled in and, more worryingly, it also suggests the economy entered 2019 with less momentum than anticipated.

That doesn’t mean the economy is falling into recession; after all, that decline is hard to square with the recent strength of payroll gains and the boost to households’ purchasing power from lower energy prices. But with the producer price data suggesting inflationary pressures remain contained, it strengthens the case for the Fed to remain “patient” in the months ahead.

The retail sales plunge has prompted Morgan Stanley to slash their forecast for annualised US growth in the last quarter (the official estimate has been delayed until the end of December).

They’re also gloomy about the current quarter:

The latest US jobs figures aren’t too hot either.

The number of Americans filing new unemployment claims jumped last week, to 239,000, a 4,000 increase.

This pushed the four-week moving average of initial jobless claims, a less volatile measure, hit a one-year high.

Worryingly, the US retail sales report shows that 11 of 13 major retail categories showed a decline in sales last month. That includes non-store retailers (down 3.9%!), clothing stores and gas stations.

Bloomberg has more details:

Receipts at health and personal care stores fell 2%, the most since October 2016. Sales at sporting goods, hobby, musical instrument and book stores tumbled 4.9%, the biggest drop since September 2008.

December’s US retail sales figures are so bad that some economists are questioning whether they really show what’s happening in the American economy.

Perhaps the shock 1.2% decline is all down to bad weather, or the US shutdown? Maybe it’s a knock-on effect from Black Wednesday in November?

Or could the US-China trade wars be to blame - hurting confidence and driving up the cost of Chinese-made imports?

The surprise plunge in US retail sales has knocked the dollar down a little:

The news has sent traders piling into US government bonds -- suggesting they expect weaker growth in 2019. That’s pushed down the interest rate (or yield) on the debt.

Here’s our news story on the impact of the Brexit vote on UK growth:

Back in the UK, cake chain Patisserie Valerie has been saved from closure.

Irish private equity firm Causeway Capital is financing a management buyout for company, which was dragged into administration by a £40m black hole in its accounts.

This must be a relief for employees, as my colleague Sarah Butler explains:

Almost 100 cafes will be rescued in the Causeway Capital deal, while another 21 sites under the Philpotts brand have been bought by AF Blakemore & Son, the family owned company which is the largest operator of Spar franchise outlets in the UK.

The two deals will save about 2,000 jobs.

You can read Jan Vleighe’s speech here:

Q: What has the Bank of England learned about the impact of political uncertainty on the economy?

Gertjan Vlieghe replies that the Bank has learned that not all political uncertainty is the same.

There are some where people scratch their head, and don’t feel happy, but they keeps spending. And others where people do cut back on their spending, hurting the economy.

Sometimes increased political uncertainty goes hand in hand with increased financial turmoil - credit spreads widening, risk premia increasing. When the two go together you see an economic effect. However, if the markets don’t respond to political uncertainty, it doesn’t seem to affect the economy, he says.

So the Bank has to decide what kind of uncertainty the UK is facing now, Vlieghe concludes.

He doesn’t specifically mention Brexit. But in broad terms, this argument explains why some economists (wrongly) predicted a recession if Britain voted to leave the EU - only to find that consumers weren’t panicking (not too surprising, given half of them should have been happy with the referendum result).

Gertjan Vlieghe is taking questions, and is asked how soon the Bank of England might raise interest rates.

He warns that the UK economic data “is still deteriorating”, so that’s not a good time to raise borrowing costs. The Bank of England would need to see economic data stabilising, and then improving, first.

But really, it all depends on Brexit.

If a withdrawal agreement is reached, confidence shoots up and business investment rallies, then it might not take long before interest rates move higher, Vlieghe says.

But if it takes longer to get clarity on Brexit, and firms take longer to respond, then borrowing costs (currently 0.75%) could stay low for longer.

BoE policymaker Gertjan Vlieghe has also warned that business confidence has suffered from Brexit uncertainty, while households have barely changed their behaviour:

You can see Gertjan Vlieghe’s comments on the economic costs of Brexit here:

Bank of England policymaker Gertjan Vlieghe has taken a pop at the Vote Leave bus, in his speech on the impact of Brexit:

We now have a decent picture of how Europe’s economy fared in the last three months of 2018, and over the whole year. And it’s not encouraging.

Both the European Union and the eurozone only grew by 0.2% in the last quarter, with Germany stagnant, Italy in recession, and France and the UK both posting modest growth.

In terms of quarterly growth, the UK was the third-best performer out of the EU’s Big Five.

• Spain: 0.7% growth in Q4 2018 vs Q3 2018
  
• France: 0.3% growth
  
• UK: 0.2% growth (as we learned on Monday)
  
• Germany: Zero growth (as we learned this morning)
  
• Italy: 0.1% contraction
  

Taking a longer-term view, Eurozone GDP was only 1.2% higher than in Q4 2017, rising to 1.4% in the wider EU.

• Spain: 2.4% growth in Q4 2018 vs Q4 2017
  
• UK: 1.3% growth in Q4 2018 vs Q4 2017
  
• France: 0.9% growth in Q4 2018 vs Q4 2017
  
• Germany: 0.6% growth in Q4 2018 vs Q4 2017
  
• Italy: 0.1% growth in Q4 2018 vs Q4 2017
  

Newsflash: Eurostat has confirmed that the eurozone economy grew by 0.2% in the last quarter, in line with its first estimate two weeks ago.

More to follow....

Germany’s stock market has risen this morning, amid relief that its economy has avoided falling into recession.

The DAX index has gained 0.25%, helping push the Europe-wide Stoxx 600 to its highest level since November.

Here’s Associated Press’s take on the German growth report:

Germany narrowly avoided a recession in the fourth quarter, reporting only zero growth as foreign trade made little contribution to Europe’s largest economy.

The lackluster figure released Thursday by the state statistics agency followed a 0.2% fall in output during the preceding third quarter. Business spending on machinery and equipment as well as construction supported the economy in the fourth quarter and kept Germany from suffering two straight quarters of negative growth, one definition of a recession.

Slowing global trade amid U.S.-China trade tensions has been holding back Germany’s export-focused economy. Growth last year was also hit by troubles in the auto industry when automakers had difficulty getting new cars certified under new emissions tests, and by low water on the Rhine River that interrupted commerce. The slowdown led the European Commission last week to cut its growth forecast for Germany for this year to 1.3% from 1.9%.

The weak second half followed stronger performance in the first six months, leaving growth for the full year at 1.5%.

Andrew Kenningham, chief Europe economist at Capital Economics, said the fourth-quarter weakness “bodes ill for economic growth this year too.” He said the fourth-quarter weakness could no longer be attributed to the auto sector problems since vehicle production edged up in the last three months of the year. He forecast 1.0% growth this year but added “there are significant downside risks to this forecast.”

Economist Carsten Brzeski at ING Germany said that “the German economy escaped a technical recession with the smallest margin possible. The black eye just got blacker.” He said, however, that many economic fundamentals remain strong. A low unemployment rate of 3.3 percent is helping support domestic demand.

“The upside from today’s data is that it can hardly get worse,” Brzeski said. “Economic fundamentals remain solid and from here on, chances of a gradual rebound are still much higher than chances of yet another disappointment.”

Claus Vistesen, economist at Pantheon, says Germany’s economy was held back by weak net trade and sluggish consumers’ spending.

He fears that the eurozone growth figures, which will be updated at 10am, will be lowered from 0.2% to just 0.1% for the last quarter.

Just as bad as we feared, adding to our conviction that today’s second estimate quarter-on-quarter for the eurozone as a whole will be revised down, by 0.1pp, to 0.1%.

We don’t see numerical details in this report, but the statistical office provide hints, indicating that domestic demand, mainly investment in construction and machinery and equipment, and government spending supported the economy. By contrast, growth in consumers’ spending remained subdued, and net exports remained a severe drag on headline GDP growth.

We don’t yet have a breakdown of German GDP for the last quarter. But this chart shows how net trade had a negative impact in the third quarter of 2018 (when the economy shrank by 0.2%).

It’s from Florien Hense of Berenberg Bank, who says external shocks, political risks and temporary domestic problem all hurt growth.

He adds:

2019 looks set to have started as 2018 ended – not well. While the risks loom large, chances are that a brighter spring could still follow the grey winter if trade tensions do not escalate badly, China escapes a hard landing and the UK avoids a hard Brexit.

Ana Andrade, Germany analyst at the Economist Intelligence Unit, predicts that Germany’s government may be forced to stimulate its economy this year (through higher spending):

“German weakness is attributed in part to the production disruption in the auto sector that resulted from the introduction of the EU’s new emissions standards, to rising geopolitical uncertainty and the softer growth in the Chinese economy.

The economy will enter a slowdown in 2109 but this will be manageable. Still, risks to the economy in 2019 are on the downsize and are mainly external and geopolitical. It if turns out to be worst than expected, we believe the government would be willing to provide some fiscal stimulus. It is very well-placed to do so.”

Some economists are predicting that Germany’s economy will pick up in 2019.

Here’s analysts at Danske Bank:

And here’s Azad Zangana of Schroders:

Destatis says that domestic demand made a positive contribution to German growth in the last quarter -- that’ll be household consumption and government spending.

However, trade (so often the backbone of German growth) “did not make a positive contribution”.

That suggests that US-China trade war, and its knock-on effect on the world economy, is hurting Germany.

This chart shows how German’s growth rate has slowed: