The FTSE snapped a two-day decline, with the banking sector broadly rising and real estate stocks benefitting from a broker upgrade, however, retailers were stung by a drop in UK consumer confidence.

Consumer confidence wanes

Consumer confidence in the UK took a dive in January, highlighting the concerns Britons have over the outlook for the economy. The Nationwide consumer confidence survey fell six points to 47 last month, reversing gains seen in December. With the onset of the VAT, the largest fall was seen in whether the current period was a good time to spend, which fell 20 points to 70. The gauge, which measures expectations on the future, fell from 73 to 63. Depressed house prices and uncertainty on whether unemployment may creep higher has kept household lending at bay and may see consumers more reluctant to spend in the coming months.

UK employment data

While the outlook for unemployment is uncertain, consumers should be heartened by the fact that employment has remained resilient so far through the recovery. The Office for National Statistics this morning said that the ILO unemployment rate remained at 7.9% in December, in line with expectations. The average weekly earnings, excluding bonuses, rose 2.3% in the last quarter, compared to a year earlier. However, there was a 2400 increase in jobless claims, which may be a concern considering economists were forecasting claims to fall by 3000 on the month.

BoE inflation report

At the same time that Britons are preparing themselves for the government’s fiscal squeeze, the Bank of England may be priming the market for an interest rate rise. It seems that comments from the Governor’s letter to Chancellor George Osborne yesterday have fuelled this speculation. ‘The MPC's central judgement, under the assumption that bank rate increases in line with market expectations, remains that, as the temporary effects of the factors listed above wane, inflation will fall back so that it is about as likely to be above the target as below it two to three years ahead.’

The key is that the central bank acknowledges market expectations on rates as part of their inflation outlook. Similar wording was used in the BoE inflation report released this morning. However, sterling plunged following the release of the report, which may suggest the market got a little ahead of itself in anticipating a rate rise in the near term. The report highlights the central bank’s uncertainty over the outlook for the economy and inflation and said that ‘the risks to growth are judged to be weighted to the downside.’  The rather dovish outlook will make it less likely that the central bank will move on rates at the risk of derailing the economic recovery.

UK equities

By 10.30am (London time) the FTSE 100 was trading 32.89 points higher (+0.54%), while the broader FTSE 250 gained 40.17 points (+0.34%) to 11789.89.

Banks were broadly higher this morning following impressive results from Barclays yesterday and the prospect that an interest rate rise may help profit margins. HSBC, Royal Bank of Scotland and Lloyds gained 1.84%, 1.41% and 0.9% respectively.

African Barrick Gold added 3.32% to 544.5p after net income for the year increased to $218.1 million, from $58.6 million a year earlier. Higher gold prices in 2010 underpinned the surge in profits last year, with prices reaching a record $1432.50 an ounce in December. Sales increased 6% to 724,083 ounces, however production for 2010 fell 2% to 700,934 due to production issues in Buzwagi, Tanzania.

Land Securities gained 2.64% to 720.5p this morning after HSBC upgraded the stock from ‘underweight’ to ‘neutral’. Sector peer British Land was also buoyed by the upgrade and rose 2.21%, as it may suggest an improvement in the property landscape.

Retailers were among the worst performers today as a drop in UK consumer confidence suggests consumer spending may remain anaemic. NEXT, Sainsbury and Marks and Spencer were down 0.75%, 0.72% and 0.36% respectively.

Meanwhile, BHP Billiton dropped 1.41% to 2464.79p after reporting first half results this morning. The earnings in the first half rose 72% to $10.5 billion and dividends increased from 42 cents to 46 cents a share, but this missed the 48 cents analysts were projecting. The company also talked down future takeover bids and instead would invest $80 billion on organic expansion.

US pre-market

This afternoon, US producer prices, housing starts and building permits are due at 1.30pm (London time). At 2.15pm, industrial production and capacity utilisation will shed further light on the health of the US economic recovery. The FOMC minutes will be released at 7pm tonight.

March Dow and S&P futures were trading 0.37% and 0.39% higher respectively, which suggests markets are gearing up for a positive start to the US trading session.