European stock market have closed for the week, with the FTSE 100 index finishing 11 points lower at 7661.

That 0.15% dip is a recovery from its earlier weakness.

Consumer goods giant Unilever led the risers, up 3.5%, a day after it pledged not to make any major acquisitions for the foreseeable future following the backlash over its tilt at GSK’s consumer healthcare arm.

British American Tobacco rose 3%, after reporting rising revenues from its vapes and heated tobacco division and announcing a £2bn share buyback.

European markets had a weaker day, with Germany’s DAX down around 0.5% at the close and France’s CAC off 1.3%.

But it’s been a good week for European travel and leisure stocks - the sector gained around 7% this week, on optimism for a recovery this summer as Covid-19 cases fall.

Here’s some reaction to the drop in US consumer sentiment to a decade low:

After yesterday’s wobble, Wall Street has opened cautiously.

The Dow Jones industrial average is up 58 points or 0.2% at 35,307, while the broader S&P 500 is down 0.1%.

Tech stocks are weaker, with the Nasdaq Composite down 0.4% on expectations of sharp interest rate rises this year to bring US inflation down.

Energy stocks are higher, with Chevron (+1.2%) and pharmaceuticals group Merck (+1.3%) in the Dow risers, followed by healthcare group Walgreen Boots (+1%).

Nike (-1.3%) are leading the Dow fallers, followed by Salesforce.com (-1%), Microsoft (-1%) and Apple (-0.5%).

On the trade data.....LSE associate professor Thomas Sampson says Brexit hit home last year, but surprisingly EU imports were more affected than exports:

[even though the UK delayed checks on goods coming into the country, while the EU introduced those checks at the start of 2021]

SoftBank is facing a battle to float British chip designer Arm, as it remains mired in a legal fight with the head of its Chinese joint venture, while London Stock Exchange chiefs try to persuade the company to reconsider its snub of the UK for the public listing.

The Cambridge-based company has been in dispute with Allen Wu, the head of joint venture Arm China, since 2020 when its board voted to remove him.

Wu, who refused to stand down and retains control of the venture due to legal rights, has escalated the battle by launching a third legal action against Arm China, adding additional red tape that SoftBank will need to overcome before floating Arm.

SoftBank, which bought Arm for £24bn in 2016, has been forced to turn to its backup plan of floating the company after its sale to US-based Nvidia collapsed earlier this week on regulatory hurdles. Widespread political and industry opposition in the UK, Europe, US and China scuppered the deal.

More here:

Rosneft, Russia’s leading oil producer, has posted record profits for last year as it benefitted from surging energy prices and the global economic recovery.

Rosneft followed fellow oil majors BP, Shell, and Total in reporting bumper earnings for 2021, as it benefitted from the rise in wholesale gas and oil prices.

Rosneft’s net income jumped to 883 billion rubles (£8.6bn) last year, the highest on record, up more than six times compared to 2020.

Chief executive officer Igor Sechin said:

“Against the background of the recovery of the global economy, the company achieved new financial records in 2021.”

Rosneft will also pay out record dividends for 2021, Sechin added.

BP owns a near 20-% stake in Rosneft. BP’s results this week showed that Rosneft contributed $2.7bn in underlying profit to BP’s bottom line last year, or just over 21% of its bumper $12.8bn profit for the year.

Oil prices have risen today after the International Energy Agency warned that energy markets were tight, and pointed out that Opec and its allies are failing to meet their production targets.

The IEA said that “chronic underperformance” by OPEC+ in meeting its output targets and rising geopolitical tensions have pushed oil prices to their highest in seven years.

In its latest monthly report, it said:

In January, producers outside the OPEC+ alliance were the ones driving world oil supply higher. Further increases are expected in the coming months as new projects start up and US shale continues to respond to higher prices. That has led us to raise our forecast for US oil supply growth for 2022 to 1.2 mb/d [million barrels per day].

Canada, Brazil and Guyana could add an additional 460 kb/d between them. By contrast, the gap between OPEC+ output and its target levels swelled to 900 kb/d in January. The bloc’s prolonged underperformance has effectively taken 300 mb, or 800 kb/d, off the market since the start of 2021.

That shortfall is expected to deepen as some OPEC+ members struggle with production constraints, exacerbating market tightness.

Brent crude, the international benchmark, is up 1.3% at $92.58 per barrel. It had hit $94/barrel on Monday, for the first time since 2014, on rising Ukraine tensions.

However, the possibility of progress in US-Iran nuclear deal talks did push oil down during the week.

NIESR, the economic research institute, have predicted the UK economy will grow by 1% in the current quarter.

That would match the expansion in both July-September and October-December, but much slower than the rebound in activity last spring when the winter lockdowns were lifted.

NIESR say the economic impact of Omicron was far smaller than that of either of the two previous major waves of Covid-19, keeping December’s contraction to just 0.2%

Rory Macqueen, Principal Economist at NIESR, says the economy could have returned to growth in January (we’ll find out next month).

The economic impact of Omicron was far smaller than that of either of the two previous major waves of Covid-19: a mere 0.2% fall in December was even stronger than consensus forecasts, but in line with NIESR’s January GDP tracker, suggesting the possibility of a positive reading in January.

Unsurprisingly, retail and hospitality contributed the most to December’s fall, with the healthcare sector providing the largest positive contribution.”

European stock markets lost ground this morning as investors ponder how aggressively America’s central bank will react to soaring inflation.

In the City, the FTSE 100 index is down 60 points today at 7612, a drop of 0.75%.

France’s CAC has lost 1.2%, while Germany’s DAX is 0.45% lower.

Wall Street economists have been revising their interest rate forecasts higher, after US inflation soared to a 40-year high of 7.5% in January. Core inflation was also higher than forecast, dashing hopes that US inflation could have peaked in December.

Goldman Sachs now expects seven 25-basis point interest rate rises from the U.S. Federal Reserve this year, up from its previous forecast of five.

The markets are betting on ‘shock and awe’ from the Federal Reserve, says Raffi Boyadjian of XM:

The big question now is whether there will be some kind of a knee-jerk reaction from the Fed itself amid the ever-worrying rise in inflation. The formerly dovish, now hawkish president of the St. Louis Federal Reserve, James Bullard, has made his views known on what the Fed should do next. Commenting soon after yesterday’s data, Bullard, who is a voting member this year, called for a 100-basis-point increase in rates over the next three meetings.

This would mean at least one double hike of 50-basis points, but Bullard didn’t stop there as he raised the prospect of the Fed holding an unscheduled meeting before March to get an early start on liftoff.

However, it’s doubtful whether enough voting FOMC members would support such an aggressive move, with Barkin and Daly not in favour of raising rates more quickly.

Over in Moscow, Russia’s central bank has raised its key interest rate sharply to 9.5% as it tries to tackle inflation.

The Bank of Russia lifted rates from 8.5%, and said inflation was rising appreciably above its forecasts last October.

Annual inflation in Russia climbed to 8.7% in January, more than double the Bank’s 4% target.

It warned that the balance of risks had tipped towards higher inflation, citing higher energy prices and ‘geopolitical events’:

Due to the active growth of demand in the global economy, proinflationary risks associated with price trends in global commodity markets increased. This primarily concerns energy commodities and food markets.

Short-term proinflationary risks associated with volatility in global financial markets caused by, among other factors, various geopolitical events, intensified, which may affect exchange rate and inflation expectations.

[The Ukraine crisis has caused volatility in energy markets, and pushed the ruble to a 14-month low in January, which lifts import costs]

The central bank had already raised interest rates seven times in 2021, up from a record low of 4.25%. Today, it warns that further increases are possible:

If the situation develops in line with the baseline forecast, the Bank of Russia holds open the prospect of further key rate increase at its upcoming meetings.

Policy makers also revised their year-end inflation forecast higher, to 5%-6%, compared with the bank’s earlier forecast for 4%-4.5%.

Despite the dip in GDP in December, the Bank of England is likely to continue raising interest rates this year, predicts Ed Monk, associate director at Fidelity International.

Monk also warns that wages may lag inflation for some time [inflation is likely to exceed 7% by April, creating the worst squeeze on disposable incomes in at least 30 years].

“While today’s growth data suggest the UK has broadly recovered the ground lost to the pandemic, it’s also clear some momentum has been lost in the past few months. A dip in growth in December was forecast and is understandable given the emergence of Omicron, which led many to restrict their activity in the run-up to Christmas.

The question now is whether a fully open UK economy can step up a gear. Consumer sentiment will be tested by the rising cost of living and with tax rises on the way that will squeeze monthly budgets further. Wages are rising but may lag inflation for some time.

The Bank of England is worried enough about inflation that it is now raising interest rates and is likely to continue tightening this year. Very weak growth could alter that plan but for now the fact the economy is growing means rate-setters will remain hawkish.”

Heathrow airport has said more than 1.3 million passengers cancelled their travel plans over the Christmas and new year period because of Omicron, with hopes for a summer recovery after a weak start to the year.

The airport said travel was down 56% in January compared with 2019 levels, a worse start to the year than it had forecast, as the hangover from the Omicron variant affected traveller confidence.

“After a tough Christmas, Omicron has continued to bite, and this has been a weak start to the year,” said John Holland-Kaye, the chief executive of Heathrow airport.

“As short-lived as the additional travel restrictions were, they ruined the travel plans of more than 1.3 million passengers in the last two months.”

Charles Hepworth, investment director, GAM Investments also puts 2021’s recovery into context:

“The UK economy grew at its fastest pace in 81 years over the course of 2021, growing 7.5% over the full year. But before we get out the bunting, let’s not forget that 2020 saw a record contraction of 9.4% [the worst since 1921], so the economy is still below pre-pandemic levels unlike some other G7 members.

The Omicron variant impacted output in December, as was to be expected, with consumers reigning in activity and this will no doubt effect January’s numbers too. As the cost of living crisis builds, it hardly heralds as rosy an outlook– this year the UK economy’s growth will inevitably slow to its post Brexit sub-optimal level.”

Barret Kupelian, senior economist at PwC UK, agrees.

He says the UK’s position is “less flattering” when you compare its level of output since the pandemic began to its G7 peers, with the US and France having grown more over the same period.

(PwC’s chart uses OECD forecasts for Canada and Japan, as they haven’t published Q4 GDP yet)

Kitty Ussher, Chief Economist at the Institute of Directors, is hopeful the UK economy returned to growth in January, after Omicron led to a 0.2% drop in GDP in December.

“The story of December was one of cancellations and caution, as consumers jettisoned their plans to avoid bringing Covid home for Christmas. Today’s data shows the impact of this screeching halt to festive cheer, with consumer-facing services down 3% in December compared to the previous month. Possibly ironically, one of the most buoyant contributions to economic activity was the vaccination and Test and Trace programmes.

“We know from our own data, however, that caution over Omicron among business leaders eased in January, so we are hopeful that next month’s data will see growth rising again.”

Sebastian Mackay, Invesco multi-asset fund manager, warns that the UK economy faces many challenges this year.

Energy bills are set to soar in April, taxes on workers are going up, and the Bank of England is expected to keep raising interest rates (on top of last week’s rise to 0.5%).

Mackay says:

“A decent final quarter confirmed a strong growth rebound of 7.5% in 2021 from the 9.4% decline in 2020, albeit real GDP remains below its pre-pandemic level.

Looking ahead, UK households face a triple whammy of higher energy prices, an increase in the rate on National Insurance contributions and higher interest rates. Accumulated savings will provide a cushion for wealthier households but little comfort for lower income families.

These domestic headwinds, combined with a backdrop of decelerating global growth indicate a more challenging outlook for the UK economy.”

The UK experienced ‘a taste of stagflation’ in December, says Capital Economics’ Paul Dales, with Omicron pushing GDP down by 0.2% and inflation hitting a 30-year high.

When combined with the CPI inflation rate of 5.4%, the 0.2% m/m fall in GDP in December meant that the economy experienced a taste of stagflation at the end of last year.

As it was driven by the Omicron COVID-19 wave which has now faded, the fall in GDP will soon be reversed. But high inflation will be with us for longer and, together with the rise in taxes in April, will restrain GDP growth this year.

Much of the UK’s growth in 2021 came in the spring, after the winter lockdown hit the economy hard.

GDP shrank by 1.2% in Q1 2021, as England entered its toughest lockdown since the start of the pandemic. Activity fell sharply in January, but then recovered in March as schools reopened, and manufacturing and construction picked up.

GDP then jumped by 5.6% in April-June as restrictions were relaxed and people flocked back to shops, offices and hospitality venues.

But after that bounceback faded, growth slipped back to 1% in both Q3 and Q4 (as we learned this morning).

Economist Simon French of Panmure Gordon points out that UK growth was “mid-range” in the second half of last year.

Resolution’s James Smith also highlights that the economy was bouncing back from a weak 2020:

Pat McFadden MP, Labour’s Shadow Chief Secretary to the Treasury, has warned that the UK recovery is expected to slow this year:

“The reality is the way the Government runs our economy is trapping us in a high tax, low growth cycle.

“Despite government bluster, with their current plans our position is not expected to improve. The latest Bank of England forecast suggests that growth will slow to a crawl next year. That would be the slowest growth of any G7 economy.

“Rising taxes, rising prices, and a squeeze on wages and living standards sit squarely on the shoulders of the Conservatives.

“Labour has a plan to build a stronger economy, based on an understanding that Britain’s prosperity is found in the effort and talent of tens of millions of ordinary people, as well as backing the sectors that will help drive the industries of the future.”

Chancellor of the Exchequer, Rishi Sunak says the UK economy has been ‘remarkably resilient’:

“Thanks to our £400bn package of support and making the right calls at the right time, the economy has been remarkably resilient; with the UK seeing the fastest growth in the G7 last year and GDP remaining at pre-pandemic levels in December.

“I’m proud of the resolve the whole country has demonstrated, and proud of our incredible vaccine programme which has allowed the economy to stay open.

“We’re continuing to help the economy rebuild through our Plan for Jobs, boost for business investment and support for households with the cost of living.”

Darren Morgan, director of Economic Statistics at the ONS, says GDP fell back slightly in December as the Omicron wave hit.

Despite December’s setback, GDP grew robustly across the fourth quarter as a whole with the NHS (National Health Service), couriers and employment agencies all helping to support the economy.

The UK’s service sector bore the brunt of the Omicron hit, with output falling by 0.5% in December.

Output in consumer-facing services fell by 3.0% in the month, mainly driven by a 3.7% fall in retail trade as consumers avoided the shops.

Production rose by 0.3% during the month, and construction increased by 2.0%.

That leaves services and construction both above their pre-coronavirus levels, by 0.5% and 0.3% respectively, while production has yet to recover (still 2.6% below)

Q4 had been shaping up to be a reasonably decent quarter until the Omicron wave broke over the UK economy in December, says Michael Hewson of CMC Markets.

The big question is how much of the November rebound in manufacturing and construction carried over into December, and whether it was enough to offset the collapse in retail sales which fell by -3.6%, more than wiping out the collective 2.7% gain seen in October and November.

Expectations for the UK economy come in slightly below the 1.1% gain seen in Q3, with a rebound in exports and imports also likely to be seen, as consumers here in the UK and across Europe shop early for Christmas.

Industrial and manufacturing production is expected to slow from the strong performance seen in November, with forecasts of about 0.1%.

We’ll find out at 7am....