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FTSE 100 off highs after MPC decision, recession concerns

Published 04/08/2022, 12:35
Updated 04/08/2022, 12:41
© Reuters.  FTSE 100 off highs after MPC decision, recession concerns

• FTSE mixed after MPC upped UK interest rates by 50bps

• MPC predicted the UK will enter recession in quarter four 2022

• US markets seen opening higher

FTSE 100 extended gains following the as expected MPC rate announcement adding around 15 points after the news.

By 12.25pm the blue chip index was trading 34 points higher at 7,479 with the broader FTSE 250 up 170 points at 20,189.83.

US stocks are also seen higher providing further support.

The BBC’s Economic Editor Faisal Islam said it was the prediction “of a recession as long as the great financial crisis and as deep as that seen in the early 1990s that is the big shock here.”

“The Bank thinks energy bills hitting nearly £300 per month on average, treble their level of a year before, will plunge the economy in the final quarter of this year into a recession.”

“If global energy costs remain where they are, that recession will then last the whole of next year, with inflation barely below 10% even in a year’s time” Islam added.

12.20pm: Analysts react to MPC decision

Commenting on the MPC's decision Rachel Winter, Partner at Killik & Co. said “The Bank of England has followed the lead set in the US and Eurozone to raise the base rate more aggressively."

Winter said “The cost-of-living crisis continues to strangle household finances as they balance rising bills and wages that are failing to keep up" adding "With the outlook already uncertain, autumn is expected to bring about another set of challenges as energy bills rise further."

" While rate rises can apply some pressure on the brakes, solely relying on this lever to make the correction in the economy may be the catalyst for recession." she commented.

Alex Livingstone, Head of Trading at Titan Asset Management commented: “The BOE delivered a 0.50% hike today, the largest rate hike in 27 years, taking rates to 1.75%."

"The BOE looks to remain hawkish going forward."

"However, they could be accelerated in their hiking path if Liz Truss were to win the Conservative leadership battle, as she pushes for a looser fiscal stance, spurring on additional inflation the BOE would need to tame via higher rates."

“The latest move in rates and allusion to quantitative tightening could bolster some support for sterling."

"However, we believe this upside to be capped on risk sentiment, which remains weaker on China tensions, UK political uncertainty and widening economic disparities between the UK and US.”

12.10pm: MPC votes 8-1 for 50bps rate increase

The Bank of England’s Monetary Policy Committee (MPC) announced that it had raised UK interest rates by an expected 50bps to 1.75% in a statement today.

At its meeting ending on 3 August 2022, the MPC voted by a majority of 8-1 to for a 50bps rise with one member preferring a 25bps hike.

In the accompanying statement the MPC said: "inflationary pressures in the United Kingdom and the rest of Europe have intensified significantly since the May Monetary Policy Report and the MPC’s previous meeting."

"That largely reflects a near doubling in wholesale gas prices since May, owing to Russia’s restriction of gas supplies to Europe and the risk of further curbs."

"CPI inflation is expected to rise more than forecast in the May Report, from 9.4% in June to just over 13% in 2022 Q4, and to remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead."

The MPC added GDP growth in the United Kingdom is slowing with the UK now projected to enter recession from the fourth quarter of this year.

12.00pm:MPC raises interest rates by 50bps

The Monetary Policy Committee has increased UK interest rates by an expected 50bps to 1.75%, the biggest rise in 27 years.

FTSE 100 was up around 20 points ahead of the decision.

11.45am: FTSE reversed early losses to trade higher ahead of the MPC rate decision

FTSE 100 bounced back from early lows to trade higher late morning ahead of the Monetary Policy Committee’s call on interest rates.

At 11.40am the lead index was 10.75 points higher at 7,456.43 with an expected rise in the US this afternoon also supporting the FTSE.

US stocks were expected to open slightly higher on Thursday with attention turning to the US non-farm payrolls data due out tomorrow for clues on how the economy is faring amid rising prices and interest rates.

Futures for the Dow Jones Industrial Average were trading 0.1% higher pre-market, while those for the broader S&P 500 index gained 0.2%, and contracts for the tech-laden Nasdaq-100 rose 0.3%.

On Wednesday, US stocks got a lift from stronger services sector data from the Institute for Supply Management and some of that cheer is expected to be felt again, especially if economic data continues to show strength. Investors will also be looking to further comments from US rate-setters for direction.

“We're seeing a little more positivity in the markets after another lively week and there's still plenty to come as we get closer to the weekend,” said Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA. “Fed officials have been out in force again; this time with a focus on market expectations of a swift reversal from rate hikes to cuts early next year."

Whether those expectations are reasonable will be borne out by upcoming data such as the latest weekly jobless claims today, adding focus to the pivotal non-farm payrolls data for July due out on Friday.

Saxo Bank’s Head of Equity Strategy, Peter Garnry, meanwhile, noted that Cleveland Fed President Loretta Mester‘s comments on Wednesday that inflation may not have peaked have had an impact on markets.

“Mester’s comments yesterday lifted the entire US yield curve which surprisingly did little damage to equities with S&P 500 futures closing just below the 4,100 level and already today US equity futures are moving higher again suggesting momentum maybe has more leg,” he said.

Mester is due to speak again today and her words will likely be scrutinised further. The big question is whether inflation has indeed peaked and how many more rate increases would be needed to keep a lid on price pressures.

The ongoing earnings season will also dictate market direction with the likes of ConocoPhillips (NYSE:COP), Eli Lilly (NYSE:LLY), Kellogg, Alibaba (NYSE:BABA) due to report earnings today.

Elsewhere, US House Speaker Nancy Pelosi’s visit to Taiwan will likely speed up deglobalization in the coming years, causing a huge adjustment to the global economy, warned Saxo’s Garnry.

“Immediately after the visit China forced CATL( Contemporary Amperex Technology Co. Ltd.) to halt its $5bn battery plant in North America which was supposed to supply Tesla and Ford in their EV push. In consumer electronics, Motorola (NYSE:MSI) has pulled the launch of two products in the developed world and China has halted export of natural sand to Taiwan which is a key ingredient for semiconductor manufacturing,” he said. “These moves show that China is retaliating and it wants to impact the US where it hurts.”

These developments suggest worries about pressure prices are here to stay, he added.

10.35am: MPC expected to raise UK interest rates by 50bps

All eyes in London are on the Monetary Policy Committee decision on UK interest rates today with a 50bps rate rise expected.

AJ Bell Investment Director, Russ Mould, said: “The FTSE 100 dipped ahead of a Bank of England meeting where it is expected to introduce a 50bps hike in rates.”

“Attention is likely to be focused on the surrounding commentary and any signals it provides about inflation expectations and the trajectory of interest rates for the remainder of the year."

Fawad Razaqzada, market analyst with City Index and FOREX.com noted the "Bank of England’s “steady as she goes” approach to interest rate hikes (25 basis points) has been heavily criticized while other major banks have been more forceful in their approaches to tacking inflation."

"While this period of inflation was never going to be kept under control by the BoE, critics argue it could have been a little more tolerable had the BoE been more aggressive and quicker in hiking interest rates."

"Consumer inflation in the UK has repeatedly surged to fresh multi-decade highs and now stands at a new 40-year high of 9.4%."

"Will it finally join the rest of central banks with a bigger hike of 50 basis points this time?" he asked.

He agreed with Russ Mould that a 50bps rate hike was on the cards.

10.05am: FTSE falls back, UK construction PMI falls below 50.0

FTSE 100 fell back in mid morning with investors in cautious mood ahead of the MPC rate decision.

At 10.00am the lead index was trading down 20.41 points at 7,425.27.

The S&P Global / CIPS UK Construction PMI fell to 48.9 in July from 52.6 in June and below the 50.0 no change threshold for the first time since January 2021.

Lower volumes of residential work and civil engineering activity more than offset a sustained expansion in the commercial segment.

A strong rate of jobs growth nonetheless continued as construction companies sought to boost capacity and meet increased order intakes and improvements in the availability of some materials meant that supplier delays were the least widespread since February 2020.

Purchase price inflation meanwhile eased considerably (index at 78.1, down from 85.8 in June), with the latest rise in cost burdens the least marked since March 2021.

Construction firms noted upward pressure on business expenses from higher energy, fuel and transport costs, but this was partly offset by some easing in commodity prices (especially for metals and timber).

Business optimism remained subdued across the construction sector in July, with growth expectations well below those seen in the opening months of 2022.

That said, the degree of positive sentiment picked up slightly from June's 23-month low.

Around 42% of the survey panel anticipate a rise in output during the year ahead, while only 15% forecast a decline.

9.05am: FTSE 100 little changed ahead of MPC decision

FTSE 100 hovered around opening levels with investors awaiting today’s decision by the Monetary Policy Committee on interest rates.

At 9.00am the blue chip index was trading 5.09 points to the good at 7,450.77 although the FTSE 250 was a firmer feature up pushing ahead by 113.28 points to 20,132.12..

Market expectations are for the MPC to raise rates by 50bps for the first time since it was set up back in 1997.

Serco Group (LSE:LON:SRP) PLC was a star performer in the FTSE 250 with shares advancing 3.14% to 190.50p after better than expected first half figures.

Peel Hunt said 9% growth in pre-tax profits to £120mln was ahead of their £111mln forecast, with EBITA of £130mln also ahead of their £123mln forecast reflecting increased demand for case management in North America, employment services in the UK, immigration services in both Australia and the UK, and the acquisition of WBB in April 2021.

As a result Peel Hunt analyst Christopher Bamberry has increased his 2022 pre-tax profit forecast to £207mln from £200mln.

But shares in Rolls Royce tumbled 4.78% to 86.36p after the group posted a first half loss of £111mln.

Michael Hewson Chief Market Analyst at CMC Markets UK noted: “The various problems with the resumption of civilian air travel have meant that the rebound in revenues that had been expected in 2022 has been slower to materialise than expected.

“Rolls-Royce (LON:RR) has been making progress, but it has been glacial as today’s share price reaction appears to indicate.

“All in all, today’s H1 numbers are disappointing, progress is being made in civil aerospace and power systems, but the deterioration in margins is concerning and something that new CEO Tufan Erginbilgic will need to get to grips with when he replaces Warren East at the end of the year.”

8.30am: FTSE flat as trading kicks off

FTSE 100 was little moved as trading got underway on Thursday with investors staying sidelined ahead of today’s Monetary Policy Committee’s (MPC) interest rate decision.

At 8.30am the FTSE 100 was down 4.68% at 7,441.00 with the broader FTSE 250 also flat, down 11.22 points (0.06%) to 20,007.62.

Market expectations are for the MPC to raise rates by 50bps for the first time since it was set up back in 1997.

Next made early progress with shares up 1.96% to 6,880p after a bumper second quarter prompted the retailer to raise full year profit guidance by £10mln.

Shore Capital analyst, Eleonora Dani, said the results were reassuring after a series of profit warnings in the sector.

She said the strength in retail sales and online was unexpected which led to the upgrade in full year guidance.

“ Next remains a well-managed company with an experienced management team and tight stock and cost control. “ she added.

Glencore PLC (LSE:LON:GLEN) fell 1.29% to 440.50p despite rewarding investors with a special dividend.

It reported a 43% increase in revenue to US$134,435mln in the first half with adjusted EBIT of US$15,415mln, up 191%.

Joshua Warner, market analyst at City Index said: "Glencore has reaped rewards from higher prices for the likes of gas and coal during the first half, which resulted in record earnings and a significant influx of cash for the commodity giant. Net debt has now fallen to nominal levels of just $2.3bn, well below the $10 bn cap set by the company.”

“This gives it plenty of headroom and this, combined with the significant improvement in cashflow, prompted Glencore to top-up shareholder returns by $4.5bn this morning, split into a new $3bn share buyback and a special dividend worth $1.45bn," he added.

Rolls Royce PLC was another early faller with shares slumping 5.26% after it reported a sharp fall in first-half underlying operating profits to £125m after taking £371mln of R&D costs.

The engineering giant reiterated full year guidance and continues to expect low-to-mid-single digit underlying revenue growth, full-year underlying operating profit margin to be broadly unchanged and modestly positive free cash flow in 2022.

7.35am: FTSE seen treading water in early trading

FTSE 100 expected to make a lacklustre start to trading on Thursday with spread betting companies calling the lead index up around 7 points.

Strong gains in the US will provide some support but the focus will be on the Monetary Policy Committee meeting with an interest rate rise of 25bps to 50bps expected.

Michael Hewson chief market analyst at CMC Markets UK commented: “European markets saw a much more buoyant tone yesterday with the news that US House Speaker Nancy Pelosi had left Taiwan without incident, and better than expected US economic data prompted a similarly strong session for US markets which finished the day strongly higher.

“This positive finish looks set to see a higher open for markets in Europe, with the focus on the Bank of England rate decision and the latest US weekly jobless claims.”

“Today the Bank of England could make history by raising interest rates by 50bps for the first time since the Monetary Policy Committee was set up back in 1997. Market expectation is that we will get 50bps today," Hewson added.

Next PLC (LSE:NXT) upped its guidance for full year profit before tax by £10mln today after a bumper second quarter.

Quarter two sales were up 5%, £50mln ahead of previous guidance.

As a result the retailer now expects full year pre-tax profit of around £860mln, an increase of £10mln from previous expectations.

Next expects this to be made up of a £15mln benefit from better than expected first half sales, improved margins with these increases partially offset by some additional costs.

Rolls-Royce Holdings PLC (LSE:RR.) reported underlying first revenues of £5.3bn today led by a recovery in Power Systems and improvement in Civil Aerospace.

But underlying operating profit of £125m was lower including a £371mln R&D cost.

The engineering giant reiterated full year guidance and continues to expect low-to-mid-single digit underlying revenue growth, full-year underlying operating profit margins to be broadly unchanged and modestly positive free cash flow in 2022.

6.50am: FTSE 100 seen little changed at Thursday's open

FTSE 100 seen little changed at the open with spread betting companies calling the lead index up around 7 points.

Focus in London will be on the Monetary Policy Committee meeting with an interest rate rise of 25bps to 50bps expected.

US markets closed in positive territory on Wednesday with the Dow Jones Industrial Average up 416 points, 1.3%, at 32,813, the Nasdaq Composite up 319 points, 2.6%, to 12,668, and the S&P 500 up 64 points, 1.6%, to 4,155.

Traders shook off some of the concerns involving Nancy Pelosi's visit to Taiwan, which China had urged her not to make, after she landed Tuesday night.

Asian markets were mixed with the Nikkei 225 rising modestly after The Bank of Japan left interest rates unchanged but the Hang Seng fell back in late trading with real estate stocks dragging the index lower.

Read more on Proactive Investors UK


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