FTSE 100 in the red as investors anticipate Bank of England will raise rates to 3.5% By Proactive Investors
FTSE 100 in the red as investors anticipate Bank of England will raise rates to 3.5%
Proactive Investors –
- falls 55 points
- Currys drops after huge loss
- Tobacco shares edge up
10.00am: Analysts bet on 50 basis point rise from Bank of England
With most analysts expecting the Bank of England to lift , it would be quite a shock if there is a different outcome.
UBS economist Anna Titareva says there are three reasons why a 50 basis point move from 3% is likely.
She said: “First, while there appears to be consensus in the [Bank’s] Monetary Policy Committee that the labour market remains tight, several members have noted signs of an easing in labour demand, also reflected in the December labour market report.
“Second, medium-term inflation expectations, while remaining overall high, have eased in recent months.
“Third, given the lags in monetary policy transmission, most of the impact of the hikes already delivered is still to come, with the magnitude subject to significant uncertainty.
“Against this backdrop, we expect the majority of the MPC to vote in favour of a smaller rate increase. As has been the case since the start of this hiking cycle, MPC members are likely to diverge on the size of the rate hike, with the more dovish members (Tenreyro and Dhingra) likely preferring a smaller increase (or even a pause), while the more hawkish ones (Mann and possibly Haskel) are likely to support another 75bp hike.
“We continue to expect the BoE to hike twice more in 2023 (50bp on 2 February and 25bp on 23 March), bringing Bank Rate to 4.25%.”
Meanwhile Russ Mould, investment director at AJ Bell, also believes rates will continue to rise next year. He said: “The interest rate hikes keep on coming and this trend is almost certainly going to remain intact in early 2023. The Federal Reserve has lifted US rates to the highest level since 2007 at 4.25%-4.5%, and while the pace of the rate hikes has slowed, the headline rate is unlikely to have peaked for now.
“The Bank of England is following a similar playbook – keep raising interest rates to combat inflation. We’ll find out later today how much it is prepared to lift the cost of borrowing, most likely a 50 basis-point increase to 3.5%.
“Even though there are signs of inflation easing, it remains significantly higher than both the Fed and Bank of England’s 2% target. The jobs market is also too strong to suggest that the central banks will halt further rate rises.
“Raising rates makes it more expensive for consumers and businesses to borrow money and theoretically causes a reduction in spending and investment which should help to ease the economy and bring down prices. This takes time to work its way through the system and so central banks will continue their rate hiking path until there is adequate evidence to support a shift in policy.
“Investors have been eagerly awaiting this so-called pivot and comments from the Fed yesterday poured cold water over any idea of it happening soon.”
9.45am: Food service businesses struggling – ONS
With the cost of living crisis and the continuing transport strikes, it is no surprise that restaurants and pubs are suffering badly and expect to continue doing so.
According to the latest business insights survey from the Office for National Statistics, some 26% of trading businesses reported lower turnover in November compared to October. Just 13% had higher turnover.
Within that, the accommodation and food service activities industry reported the largest percentage of businesses whose turnover was lower, at 48%.
Looking forward, in early December 29% of business expected turnover to decrease in January, with only 10% anticipating an increase.
Again the accommodation and food service activities industry had the largest percentage of businesses expecting turnover to decrease, at 66%.
Some 42% of business said they faced higher costs in November, with only 19% able to pass the increase on.
Some 30% said they expected to increase their prices in January 2023, with 39% saying rising energy prices were the main reason for doing so.
We’ve published the latest findings from our Business Insights and Conditions Survey.
Data is from 28 Nov to 11 Dec 2022.
➡️ https://t.co/ry5b5iZRVJ pic.twitter.com/XEbQr27Vtw
— Office for National Statistics (ONS) (@ONS) December 15, 2022
9.22am: Oil price dips
Crude prices have slipped back after recent rises.
is down 0.6% at US$82.20 a barrel while West Texas Intermediate, the US benchmark, is 0.79% lower at US$76.67.
Craig Erlam at Oanda said: “Oil prices are a little lower on Thursday after recording three consecutive days of gains. A stronger post-Fed dollar, fears of slower growth, or a surprisingly large inventory build from EIA may be contributing to today’s declines but in reality, we’re probably just seeing a little profit-taking following a decent rebound.
“The outlook remains highly uncertain given the risks to Chinese demand as it exits zero Covid, the war in Ukraine and the impact of the G7 price cap, and OPEC+, among other factors. The rebound off $70 suggests there may be a psychological element as well after the White House previously indicated it would start refilling the SPR around these levels.”
9.09am: Swiss interest rate rise
The Swiss National Bank has raised its key interest rate by 50 basis points as expected, its third hike this year.
It increased its policy rate to 1% from the 0.5% level set in September and said further rises could be necessary.
It said the move was to counter “increased inflationary pressure and a further spread of inflation.”
It added: “It cannot be ruled out that additional rises in the SNB policy rate will be necessary to ensure price stability over the medium term. To provide appropriate monetary conditions, the SNB is also willing to be active in the foreign exchange market as necessary. ..
“Inflation has declined somewhat in recent months, and stood at 3.0% in November. However, it is still clearly above the range the SNB equates with price stability. Inflation is likely to remain elevated for the time being.”
Monetary policy assessment of 15 December 2022 https://t.co/Klao6SgzTL
— Swiss National Bank (@SNB_BNS) December 15, 2022
8.33am: Ex-divs put pressure on market
Companies seeing their shares go ex-dividend are leading the fallers in the UK blue chip index.
Associated British Foods PLC (LON:) is 2.76% lower, DS Smith PLC is down 2.67% and Burberry Group PLC (LSE:LON:) is off 2.29%.
But defensive stocks are edging higher, with British American Tobacco PLC (LON:) 0.77% better, Imperial Brands PLC (LON:) up 0.59% and GSK PLC ahead by 0.37%.
Overall the FTSE 100 continues to fall, down 55.86 points or 0.75% to 7440.07.
8.15am: Footsie falters at the start
Leading shares are heading south ahead of the key interest rate decisions from the Bank of England and European Central Bank, and following the expected 50 basis points hike from the US Federal Reserve.
Jim Reid at Deutsche Bank (ETR:) said: “If you wanted to briefly sum up the FOMC meeting last night you would probably say that the Fed were hawkish but that the market doesn’t believe they will be.”
But with Wall Street losing its early gains in the wake of the Fed decision, the FTSE 100 has fallen 37.69 points or 0.5% at 7458.24.
Sentiment has also been hit by disappointing data from China as the effects of the recent lockdowns undermine the economy.
Reid said: “The big news overnight was data from China showing the toll that widespread COVID-19 restrictions took on growth last month before the government announced that it would ease its policy.
“Industrial production slowed to +2.2% y/y (v/s +3.5% expected) in November from the +5.0% rise recorded in October. This marked the slowest growth since May when Shanghai was put under a two-month lockdown.
“At the same time, retail sales (-5.9% y/y) had their biggest contraction since May, underperforming expectations for a decline of -4.0% and greater than a -0.5% drop recorded in October.”
Among the movers electrical retailer Currys PLC (LSE:CURY) has dropped 6.2% after it plunged into loss at the half way stage.
Richard Hunter, head of markets at interactive investor, said “Despite Currys having made some progress on its UK operations, there is little dressing up some ugly numbers within the release.
“At the headline level, a goodwill impairment of £511mln arising from the previous Dixons Carphone (LON:) merger was recognised, resulting in a pre-tax loss of £548mln as compared to a profit of £48mln the year previous. However, even stripping this out on an adjusted basis, pre-tax profit still declined by 17% in the period.
“The International business, which currently accounts for 49% of overall revenues, is the main culprit. In the Nordics region in particular (42% of overall revenues), new entrants to the space have relied on heavy discounting of goods to announce their arrival, partly driven by excess stock which they are now selling at basement (and virtually unprofitable) prices. In turn, Currys has had to react by eroding its margins, and a decline of 94% in earnings over the period is the resultant outcome…
“UK sales account for 51% of overall revenues, and the picture painted here is rather more promising. The previously announced cost savings target of £300mln is on track, allowing the group to absorb some of the inflationary pressures being faced. Adjusted profit rose by 25% in the period, and the group’s Omnichannel strategy is bearing fruit, remaining something of a competitive advantage.”
7.51am: GBP hits a volatility streak against USD as the market gears up for Bank of England’s rate decision
Cable ended yesterday’s trading session in a stronger position as the US dollar encountered selling pressure due to a particularly soft inflation reading.
But having added half a percent to close Wednesday at 1.241, the pair has since cut back slightly to 1.238 in this morning’s Asia trading window.
GBP/USD cuts back slightly on Thursday morning – Source: capital.com
The pound is still in a strong position against the dollar though, as the market gears up for today’s interest rate decision from the Bank of England.
A 50 bps hike in line with yesterday’s Federal Reserve announcement is more or less a given, but the real story will be in the BoE’s forward projections.
Gilt yields have come down a long way since the mini-budget armageddon, but have started rising in the past week, suggesting that the market could be pricing in rate rises on the hawkish side in 2023.
Despite Sterling’s pre-policy announcement volatility streak against the greenback (see below), the trading pair remains wedded to the 86p price point.
Source: Pantheon Macroeconomics
We’ll also get an interest rate decision from the European Central Bank today.
Eurozone inflation is still particularly painful, but a reversion to 50 bps following two straight bouts of jumbo hikes is largely expected.
Whether that results in a softening of the euro against the US dollar will depend on what the bank has in store for 2023. In the meantime, remains strong at 1.065, despite edging back around 0.2% from an intraday high of 1.068 in this morning’s Asia hours.
7.00am: Interest rate decisions take centre stage
FTSE 100 expected to open lower on Thursday after the Federal Reserve signalled more rate rises were on the way and as investors look ahead to rate calls by the Bank of England, the ECB and the Swiss National Bank today.
Spread betting companies are calling the lead index down by around 12 points.
US markets closed lower after the Federal Reserve chairman Jerome Powell signalled more data was needed before the central bank would meaningfully change its view of inflation.
At the close the was down 143 points, or 0.42%, to 33,966. the S&P 500 fell 24 points, or 0.61%, to 3,995 and the dipped 86 points, or 0.76%, to 11,171.
“The inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases. But it will take substantially more evidence to give confidence that inflation is on a sustained downward path,” Powell said.
Powell’s comments came after the Fed increased interest rates by 50bps, as expected, to a target range of 4.25% to 4.5% – the highest level since early 2008.
But in the announcement accompanying the rate rise, officials said ongoing increases “will be appropriate” in order to help bring inflation down to the Fed’s target level.
Over in Asia, the was down 0.4% in Tokyo and the in Hong Kong was down 1.4% hit by the latest Chinese retail sales and industrial production numbers which paint a dire picture of the Chinese economy last month.
Back in London and the decision by the Bank of England will take centre stage.
“We could see some policymakers argue for a 25bps hike as opposed to a 50bps move, while we could also see some push for a move of 75bps in order to front load the hiking process” suggested Michael Hewson chief market analyst at CMC Markets UK.
But “the odds favour a move of 50bps in line with the Federal Reserve last night” he said.
Soon after the Bank of England announces its decision the European Central Bank will make its call and is expected to follow suit in hiking rates by 50bps.
In Thursday’s corporate calendar, there are half-year results from electricals retailer Currys and a trading statement from outsourcer Serco.
