Sterling falls as Bank of England predicts recession, US futures rise

  • The Bank of England raised interest rates by 50 basis points
  • The Bank of England predicts a recession throughout 2023
  • Fed official: 50 basis points increase in September ‘reasonable’
  • Oil stabilizes after hitting a six-month low
  • Lufthansa returns to operating profit

LONDON (Reuters) – Sterling fell on Thursday after the Bank of England followed its US and euro zone counterparts with a big interest rate hike to cool inflation, saying Britain faced a prolonged recession.

As widely expected, the Bank of England raised interest rates by 50 basis points to 1.75%, the sixth increase since December but the largest since 1995.

The central bank said the British economy will start to contract in the last quarter of 2022 and will begin to contract throughout the next year, making it the longest recession since the post-global financial crisis. Read more

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“The main surprise seems to be the somewhat pessimistic economic outlook that we also received, which shows a recession expected in the fourth quarter and continuing into 2023,” said Stuart Cole, chief macro economist at Equiti Capital.

“This is somewhat worse than what we saw in May, where expectations were for a tough quarter or two of low or negative growth, and then recovery.”

Sterling fell 0.2% to $1.2122, having been firmer before the Bank of England’s announcement.

UK bond yields fell sharply, with Eurozone bond yields extending their decline after the Bank of England statement.

S&P 500 futures were firmer ahead of the Wall Street open and the latest jobless claims data, although Friday’s non-farm payrolls will be closely watched.

Stocks were generally more stable on Thursday, buoyed by strong earnings in Europe while Asian stocks recovered some of Wednesday’s losses driven by nervousness over Nancy Pelosi’s visit to Taiwan.

The STOXX (.STOXX) index of leading European companies rose 0.5%, boosted by German airline Lufthansa (LHAG.DE) returning to operating profit, and strong earnings from commodity giant Glencore (GLEN.L). France’s Credit Agricole joined the growing list of bank earnings that beat expectations. Read more

Shares in Hong Kong (.HSI) rose 2%, tracking broader gains in Asia (.China angered. Read more

Oil prices stabilized after hitting six-month lows, while the dollar was supported by US Federal Reserve officials resisting suggestions that they would slow the pace of interest rate hikes, with one saying a 50 basis point rate hike would be “reasonable”. . Read more

A survey from the European Central Bank showed that consumers in the euro zone are preparing for a contraction in the economy and persistently high inflation. Read more

Earnings not reset yet

Kasper Elmgren, head of equities at Amundi Asset Management, said the illusion that decades of high inflation would be temporary has all but died away with rising fuel bills and difficulties finding employees.

“The big picture here is that it will take a lot to restore price stability. The danger here is that we are underestimating the strength of the force that we are dealing with,” he said.

The second-quarter earnings season currently underway has not provided a major “reset” for what Elmgreen sees as still a very high earnings outlook for 2022 overall given the slowdown in the economy.

“I think this could come in the third or fourth quarter as we start to see a bigger impact on demand,” Al-Magren said.

Fed officials delivered a hawkish chorus this week, hitting the short end of the yield curve. The two-year Treasury yield was trading at 3.0938%, slightly down, while the 10-year Treasury yield was trading at 2.7209%, also slightly weaker.

The dollar halted its decline that began in mid-July, supported by expectations of a rate hike and escalating political tension.

Fed fund futures remain priced to cut interest rates by the middle of next year and the inversion of the US yield curve, with 10-year yields below 2-year yields, suggests investors believe the upward trajectory will hurt growth.

The dollar index was trading at 106.27, down 0.178%. The euro, affected by the energy crisis in Europe, bought 1.0188 dollars.

Brent crude futures were firmer at $96.82 a barrel as supply concerns led to a rebound from multi-month lows on Wednesday after US data indicated weak fuel demand. Read more

And the spot gold price rose 0.9 percent to $ 1.781 an ounce.

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Additional reporting by Tom Westbrook in Singapore and Kevin Buckland. Editing by Kim Coogle, Mark Potter and Susan Fenton

Our Standards: Thomson Reuters Trust Principles.

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