February 6, 2023

Sterling falls as BoE expects recession, US futures rise

  • The Bank of England has raised interest rates by 50 basis points
  • The BoE expects a slowdown throughout 2023
  • Fed official: 50bp hike in September “reasonable”
  • Oil stabilizes after six-month lows
  • Lufthansa returns to operating profit

LONDON, Aug 4 (Reuters) – Sterling fell on Thursday after the Bank of England followed its peers in the U.S. and euro zone by raising interest rates sharply to curb inflation, saying Britain was facing a prolonged recession.

As widely expected, the BoE raised rates by 50 basis points to 1.75%, the sixth increase since December but the biggest since 1995.

The UK economy will begin to contract in the final quarter of 2022 and continue to contract throughout next year, making it the longest recession since the global financial crisis, the central bank said. read more

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“The main surprise is the slightly lower economic forecasts we’ve been given, which show a slowdown expected in Q4 and continuing into 2023,” said Stuart Cole, chief macroeconomist at Equity Capital.

“It’s a bit worse than what we saw in May, where the outlook was one or two tough quarters of low or negative growth, then a recovery.”

Sterling was down 0.2% at $1.2122 shortly before the BoE announcement.

British gilt yields fell sharply and eurozone bonds extended their decline after the BoE report.

S&P 500 futures were firmer than Wall Street’s open and the latest jobless claims data, although Friday’s nonfarm payrolls will be the most closely watched.

Stocks were broadly flat on Thursday, helped by strong earnings in Europe, while Asian shares recovered some of Wednesday’s losses, fueled by tensions over Nancy Pelosi’s visit to Taiwan.

STOXX (.STOXX) An index of leading European companies rose 0.5%, helped by German airline Lufthansa (LHAG.DE) A return to operating profit, and strong earnings from commodities giant Glencore (GLEN.L). French bank Crédit Agricole joins the list of better-than-expected earnings among banks. read more

Stocks in Hong Kong (.HSI) Up 2%, tracking broader gains in Asia (.MIAP00000PUS), suffering some of the losses after Sino-US tensions flared during a visit to Taipei by House Speaker Pelosi this week that angered China. read more

Oil prices settled at six-month lows, while the dollar strengthened as U.S. Federal Reserve officials pushed back against recommendations to slow the pace of interest rate hikes. read more

A survey by the European Central Bank shows consumers in the euro zone are eager for the economy to shrink and high inflation to continue. read more

No income has been restored yet

Casper Elmgreen, head of equities at asset manager Amundi, said the illusion that decades of high inflation would be temporary has now been confirmed, as fuel prices rise and companies struggle to find staff.

“The big picture here is that it’s going to take a lot to restore price stability. The danger is that we’re underestimating how powerful a force it is to deal with,” Elmgreen said.

The current second-quarter earnings season, with the economy slowing for 2022, doesn’t offer a major “reset” to Elmgreen’s higher earnings expectations yet.

“I think we’ll start to see more demand impact in the third quarter or the fourth quarter,” Elmgreen said.

Fed officials have delivered a hawkish chorus this week, affecting the short end of the yield curve. The two-year Treasury yield traded at 3.0938%, while the benchmark 10-year yield traded at 2.7209%, also slightly weaker.

The dollar has halted a slide that began in mid-July, supported by both rate hike expectations and heightened political tensions.

Fed funds futures are pricing in rate cuts by the middle of next year and investors believe the inversion of the US yield curve, with the 10-year yield below the two-year yield, will affect growth.

The dollar index was down 0.178% at 106.27. One euro bought $1.0188, weighed down by Europe’s energy crisis.

Brent crude futures were slightly firmer at $96.82 a barrel. read more

Spot gold rose 0.9% to $1,781 an ounce.

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Tom Westbrook and Kevin Buckland report in Singapore; Editing by Kim Coghill, Mark Potter and Susan Fenton

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