US stocks struggled to establish any meaningful direction as investors absorbed the news of monetary tightening in Europe.

Some support was provided by a broadly upbeat retail sector report, while the number of US jobless claims dropped again.

While one rate increase by a single central bank does not an era of tight policy make, the move by the ECB is nonetheless something of a momentous event. Now that it has occurred, the question will now be whether it is the beginning of a steady progression of rate increases, or just a one-off before a cooling off period. It does certainly mark a divergence from the coordinated policy of the financial crisis, when central bankers in London, Washington and Frankfurt acted together to help stave off disaster. Now, the ECB appears to think that recent gains in commodity prices will become a more permanent fixture, while the Fed and Bank of England continue to expect prices to ease off in the coming year.

Central bank moves

For the first time in almost two years, a central bank has tightened monetary policy. The European Central Bank has raised interest rates by 25 basis points to 1.25%, following a surge in inflation in the eurozone and a growing sense at the ECB that the need for emergency lows in borrowing costs has now passed. The move was not unexpected, bank president Jean-Claude Trichet having dropped a rather large hint at the March press conference with the use of the phrase ‘strong vigilance’, but it will prove controversial given Portugal’s decision last night to request aid from the EU. The ECB is worried that higher oil and commodity prices will become more permanent through higher wages, and so is attempting to head off wage-price inflation.

The higher borrowing costs will be felt most keenly in the nations hit by the sovereign debt crisis, with Portugal and Greece chief among them, since these countries have a high proportion of variable rate mortgages. The pain will be less in the healthier economies of France and Germany, which have recovered more quickly from the 2008/9 crisis.

At the press conference that followed the announcement, Mr Trichet said that inflation risks remained on the upside and that policy remains ‘accommodative’ despite the rate hike. He also left open the possibility of more increases by saying that the bank would do what was necessary to maintain price stability over the medium term. This is a shift back to more traditional monetary policy, which is designed to keep prices under control, and away from the aim of promoting growth in economies, which more hawkish members of the bank view as more properly belonging to national and supra-national governments.

Compared to the news from Europe, today’s Bank of England update was something of a non-event. The ‘Old Lady of Threadneedle Street’, as the bank is known, left UK interest rates unchanged at 0.5% and kept the asset purchase programme on hold at £200 billion. The Monetary Policy Committee has not changed policy for 25 months, and is unlikely to do so for a while yet, so long as economic data points to a weak recovery. Stagnation in household incomes, higher taxes and lower consumer spending will all hold back the British economy, and policymakers are unlikely to act unless and until they see evidence of solid, rather than anaemic, recovery.

US equities - Costco

By 3.30pm (London time), the Dow Jones had shed 21.08 points (0.17%) to 12405.67, while the S&P 500 had gained 0.67 points (0.05%) to 1336.21.

Wholesale retailer Costco lifted sales in March by 13%, almost double the consensus estimate. Analysts had predicted sales of 7.4%, but strong foreign currencies and higher gasoline prices meant that income was above expectations. Sales in the international division were up 17% and the US business saw growth of 11%. The American division was helped by strong performance in California, where the company has a significant presence.

Costco’s experience was broadly reflected throughout the sector, with around three quarters of the 17 firms to have reported so far exceeding expectations. Increasing consumer spending is a reflection of greater confidence among Americans, and the late date of Easter has provided hope that the burst in spending will persist throughout April.

US jobless report

Jobless claims fell once more last week, providing more hope for a recovery in the US labour market. Initial applications for benefits dropped by 10,000 to 382,000 in the week to 2 April, while the four-week moving average was down 6,000 to 389,500. Slow but steady growth in the US market is a most welcome sign, since it indicates confidence in the economy among businesses and will also result in increased optimism among ordinary Americans. The number of people continuing to receive benefits declined by 9000 to 3.72 million in the week to 26 March, from an upwardly-revised figure of 3.73 million.

UK afternoon trading – Talvivaara, Hays, Armour Group

London stocks followed their New York counterparts lower, and by 3.30pm (London time) the FTSE 100 had lost 7.91 points to 6033.22.

Shares in Finnish firm Talvivaara Mining dropped 6.4% to 543p after it lowered its production guidance for 2011. Forecast nickel output has been cut by five to eight thousand tonnes, to 22 to 28 thousand tonnes, as planned maintenance breaks will take longer than anticipated. However, Talvivaara was able to achieve a quarterly production record of 4215 tonnes of nickel, up 10% from the preceding three months.

The gulf between the UK’s economic performance and that of emerging markets was highlighted by recruitment firm Hays, which reported like-for-like growth in all areas save the British Isles. The Europe and Asia Pacific divisions saw growth of 35% and 23% respectively, while the UK & Ireland division fell behind with growth of only 16%. Hays said its outlook was positive in all areas apart from the UK public sector, and it expects its strong international business to protect it from any further slowdown in the UK market.

Shares in small-cap car entertainment firm Armour Group were dented by 16%, dropping to 4.75p, following a profit warning. Armour said that the weak consumer environment in Britain would significantly affect the group’s core UK retail sales, which make up 60% of overall sales. It now expects a loss for its full year, and also warns that the current bleak environment may persist throughout 2012.