Proactive Investors -
- FTSE 100 rises 33 points to 8,401
- Results impress from Rolls-Royce (LON:RR), Shell (LON:SHEL), Next, Barclays (LON:BARC)
- Bank of England cuts interest rate to 5%
- BoE governor Andrew Bailey warns against cutting rates "too quickly"
Meta leaps at the open, S&P rises
Meta shares jumped 10% at the open, adding around $123 billion in market value, following the Instagram owner's earnings last night.
However, the gain has been quickly trimmed to 8/8%.
Other tech titans are not moving as much in early trades, with Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL) just above flat, Nvidia (NASDAQ:NVDA) up 1%, while Tesla is down 2%.
Overall, the Nasdaq is up 0.4%, the S&P 500 has risen 0.55% and the Dow Jones has gained 0.6%, while the Russell 2000 is up 0.5%.
UK stocks outperforming
OK, so now London stock markets have decided it's on balance today is a good one, and the FTSE indices are moving higher.
The Foostie is up 17 or 0.2% and the 250 has added 64 or 0.3%.
A fall in the pound of 0.5% versus the dollar and 0.2% against the euro might be helping.
Looking at the bigger caps in the indexes, most are on the front foot. In the top 20 of the FTSE, Rolls-Royce 11%, LSEG 4%, BAT (LON:BATS) is up 2.1%, BAE Systems (LON:BAES) 1.2%, Shell is up 1.6%, BP (LON:BP) 0.8% and AstraZeneca (NASDAQ:AZN) 0.5%.
On the back of other results today, Next is up 8.8%, Smith & Nephew 6.4% and Haleon (LON:HLN) 3.4%.
In Europe, German's DAX and Italy's FTSE MIB are down 1% and France's CAC 40 has dropped 1.3%.
The continent-wide Euro Stoxx 600 is down 0.33%, with Rolls, Next and S&N helping limit losses.
Will one small cut make much difference?
One quarter-point interest rate cut "isn’t going to make a huge amount of difference at street level", says Laith Khalaf, head of investment analysis at AJ Bell.
"But simply the direction of travel could unleash some animal spirits in the housing market, and in the wider economy," he says.
Interest rates moving onto a downward path will also help the new chancellor Rachel Reeves balance the books, he adds, with government debt interest payments "still uncomfortably high" and GDP growth forecast to remain limp at just 0.8% over the next year.
"Then again, the Bank isn’t exactly known for its Tiggerish optimism when it comes to economic projections."
Unsurprisingly, free market think tank the Institute of Economic Affairs wants more cuts.
The decision was "finely balanced but surely correct", says IEA economics fellow Julian Jessop.
"The aim should now be to return rates to a neutral level of around 4% by early next year," he says, as the Bank’s economic forecasts "point the way", with inflation expected to pick up only temporarily and then fall back, even based on market expectations of further rate cuts.
"Even at 5%, interest rates are still high and will therefore continue to bear down on inflation, especially as the Bank is persisting with ‘quantitative tightening’ as well," he says.
Muted market reaction to BoE
The pound is down 0.5% against the US dollar to 1.2792, around a three-week low.
Otherwise, the market impact has been muted so far, says market analyst Kathleen Brooks at XTB, noting that GBP/USD has bounced off earlier lows.
UK Gilt yields are lower across the curve, and the FTSE 100 is up 0.2%, but as it is bucking the trend for weaker European equities that is more to do with company results today and oil prices lifting Shell and BP.
"The move in Gilt yields is likely a reaction to the shift to the longer term BOE forecasts for growth, inflation and bank rate, which justify lower UK yields. Thus, the pound may struggle to break above $1.30 in the medium term."
BoE 'in no rush to cut again'
The initial spike in the FTSE 100 and 250 has dissipated as the Bank of England decision and comments are chewed over more deeply.
Ruth Gregory at Capital Economics says the BoE is "in no rush to cut again", with the accompanying guidance and forecasts suggesting "it will proceed cautiously".
"Accordingly, we now think the next 25 basis point cut will come in November instead of September. And the risks to our forecast are tilted towards cuts being a bit slower and smaller than we currently expect."
There were three ways why the MPC decision "felt like a 'hawkish cut'," she says, including the MPC tweaking its forward guidance by adding that policy would remain restrictive for sufficiently long until, in its words, the risks to inflation returning to the 2% target had dissipated further.
Inflation forecasts below the 2% target in three years’ time and Bailey's comment that "we need to be careful not to cut rates too quickly or by too much", lend support to the view that rates will fall further than investors anticipate, she adds.
Gregory says: "That could be an attempt to avoid giving the impression the MPC is going to cut rates rapidly. We suspect today’s cut is a case of the Bank moving a bit sooner, rather than further, than we had anticipated.
"We still think that a fading in services inflation and below-target CPI inflation will prompt the Bank to cut rates to 4.50% by the end of this year and 3.00% next year, rather than 3.75% as markets expect. That said, if we are wrong, it’s likely to be because rate cuts are slower and smaller than we currently expect."
BoE 'leap of faith' should support growth
The Bank of England base rate cut decision "should help to support growth by encouraging consumption and investment", says Sam Miley, managing economist at CEBR.
Miley says "However, this also risks adding further inflationary pressure from the demand side of the economy. This will be monitored closely at upcoming monetary policy decisions."
Jeremy Batstone-Carr, strategist at Raymond James, says the decision shows the MPC "remains deeply divided on its outlook regarding inflation", with concerns around wage growth and service sector price pressures.
Despite these, he says the committee "has taken a leap of faith in cutting rates, hoping to stimulate consumers with lower borrowing costs and increased spending power".
'Must be careful not to cut too much or too quickly' says Bailey
The decision to cut rates to 5.0% was "finely balanced", says BoE governor Andrew Bailey.
"The risks of higher inflation remain. We need to make sure inflation stays low. So we have to be careful not to cut interest rates too much or too quickly," he says.
He says the MPC expects inflation to rise again this year, to around 2.75%, "but we expect this increase to be temporary, with inflation coming back down next year.
"Over the coming years we need to make sure that inflation will continue to stay low."
It is worth noting that while the BoE raised its 2024 growth forecast, it left leaves 2025 and 2026 unchanged, and lowered its CPI forecasts to further below its 2% target, seeing inflation at 1.7% in mid 2026 and 1.5% in 2027, though inflation risks are seen as skewed to the upside.
MPC explains why it cut rates
The FTSE 100 has moved back into positive territory after the BoE decision, jumping 25 points to 8,393.
And the FTSE 250 has too, rising 40 points to 21,641.
In its statement, the BoE said the MPC voted to reduce the bank rate by 0.25 percentage points to 5%, though four committee members preferred to maintain the base rate as it was.
The MPC has also published an updated set of projections for activity and inflation in the accompanying August monetary policy report.
It was noted that UK CPI inflation was 2% in both May and June, in line with the committee's target, though CPI is expected to increase to around 2.75% in the second half of this year, as declines in energy prices last year fall out of the annual comparison.
On cutting the base rate, the MPC said: "It is now appropriate to reduce slightly the degree of policy restrictiveness.
"The impact from past external shocks has abated and there has been some progress in moderating risks of persistence in inflation.
"Although GDP has been stronger than expected, the restrictive stance of monetary policy continues to weigh on activity in the real economy, leading to a looser labour market and bearing down on inflationary pressures.
"Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.
"The Committee continues to monitor closely the risks of inflation persistence and will decide the appropriate degree of monetary policy restrictiveness at each meeting."
The Monetary Policy Committee voted by a majority of 5-4 to reduce #BankRate to 5%. Find out more: https://t.co/zBZeLlwSxD pic.twitter.com/YOcCTfER5o— Bank of England (@bankofengland) August 1, 2024