- FTSE 100 slides 54 points
- BoE raises the bank rate by 25 basis points
- UK Services PMI rebounds to 54.1 from 53.6 in December
4.50pm: FTSE 100 ends lower, US stocks slide midday
The FTSE 100 finished the day on a down note, easing 54 points, or 0.7%, to 7,529, after the Bank of England (BoE) announced a second consecutive interest rate hike to curb inflation, which put upward pressure on the pound.
“Hawkish shifts from the BoE and ECB have caught investors on the hop today, prompting some strength in the euro and sterling but hitting indices on this side of the Atlantic,” IG chief market analyst Chris Beauchamp said.
““It is the turn of the BoE and ECB to turn hawkish in their outlooks for monetary policy, but central banks around the globe face a tricky act as they look to rein in inflation without hitting consumer spending too hard,” Beauchamp added.
Notable movers included shares of Compass Group PLC (LSE:CPG), which climbed 5% after the catering giant said its first-quarter revenue had reached 97% of its pre-pandemic levels.
4.05pm: Footsie subsides
There were plenty of potential catalysts to push the Footsie significantly one way or another but in the end, the index just gently subsided throughout the day.
Entering the last half-hour of trading, the index was down 31 points (0.4%) at 7,552.
The tone was set early doors by the IHS Markit/CIPS UK Services Purchasing Managers’ Index (PMI) where y steeper cost pressures were in evidence.
The headline seasonally adjusted Business Activity Index picked up to 54.1 in January, after hitting a 10-month low of 53.6 in December. Output growth was nonetheless weaker than seen on average in 2021 (56.0) as customer-facing service providers continued to report an adverse impact from pandemic restrictions, IHS Markit reported.
“The latest PMI data provide good news about prospects for the UK economy in 2022 as demand has started to recover from the impact of Omicron restrictions and most businesses expect only a temporary slowdown from cancelled bookings and staff absences at the turn of the year. Growth expectations for the next 12 months picked up in January and are now the highest since last spring, with staff recruitment difficulties often the only major source of anxiety,” said Tim Moore, the economics director at IHS Markit, which compiles the survey.
"However, record price increases in the service economy are set to add to the cost of living crisis for UK households. Input cost inflation accelerated again in January and service providers responded by increasing their prices charged at the fastest rate since the index began in July 1996. Nearly one-in-three survey respondents reported higher average prices charged than in December, with rising salary payments, energy bills and logistics costs the most commonly cited reasons,” he added.
Inflation also appeared to be on the minds of the members of the Bank of England’s Monetary Policy Committee (MPC), where four members of the nine-person committee opposed the quarter-point rise the MPC eventually settled on and pushed for a half-point rise.
3.05pm: US markets open lower
US indices have opened lower, with the Nasdaq Composite, weighed down by Facebook owner Metsa Platforms Inc hardest hit of all.
The Nasdaq was down 270 points (1.9%) at 14,148, while the S&P 500 was 58 points (1.3%) weaker at 4,532. The Dow Jones 30-share got off relatively lightly with a 60 point (1.3%) fall to 4,530.
In London, the FTSE 100 index is going down like an arthritic striker in the penalty box. The index is 25 points (0.3%) lower at 7,561.
Today’s interest rate rise announced by the Bank of England, and the revelation that a large proportion of the Bank’s policy making committee was in favour of a larger rise, has been good for the banks. Barclays, up 2.9% at 205.9p, is the sector’s best performer with Standard Chartered PLC (LSE:STAN) up 1.2% and Lloyds Banking Group PLC (LSE:LLOY) up 1.1%.
“In the press conference [Bank of England] Governor Bailey emphasised that markets should not extrapolate from today’s decision that rates are ‘on a long march upward’. Judging by the initial market reaction, that seems to be what has happened,” said Kallum Pickering at Berenberg.
“When asked in the press conference if the BoE was behind the curve, governor Bailey said ‘are we behind the curve? No’. This is, essentially, what the debate in the market boils down to. With inflation on course to rise further in the coming months, to a peak of 7.25% in April according to the BoE’s latest projections (2ppt higher than projected in November), markets are unlikely to back away from their hawkish bets for Bank Rate. Markets may not pare back their rate expectations until inflation starts to moderate – likely from summer onwards, in our view,” he added.
“So where to now?” asked Marc Ostwald, the chief economist and global strategist at ADM Investor Services International.
“The thin majority clearly favours a little and probably more frequent rate hikes, suggesting further rate hikes in March and May, especially given that the four who voted for a rate hike will surely vote again for a hike in March, and may well be joined by at least one of the gradualists. At that point, they are likely to pause and assess both the impact of the rate hikes and as importantly what they openly admit will be a very disproportionate effect on household incomes and spending from the current energy led inflation squeeze,” Ostwald conjectured.
“On balance, the risk is that they proceed at a slower pace than markets are expecting (i.e. Base Rate at 1.50% by year-end), and that growth indications, above all private consumption trends will need to be watched as, if not more closely, than inflation and labour data. Markets will, however, continue to maintain a degree of risk premium for the overall lack of guidance for the time being, even if the absence is now more justified given the level of uncertainty about the medium-term outlook for the economy,” he added.
1.15pm: Slow decline continues
Market commentators are playing a game of hawks versus doves this afternoon after a surprisingly close decision on the Bank of England’s interest rate increase.
The central bank, as expected, opted for a quarter-point rise by four of the nine policy committee members were in favour of a bigger rise.
“As expected the Bank of England hiked interest rates to 0.50%, however with four members of the committee voting for a 50-basis point increase, there is certainly a hawkish skew. Further, with the announcement to unwind the corporate bond purchases, this will turn up the heat and focus on the unwind of Gilt purchases when interest rates hit 1%. This now may well be sooner than when than most investors had initially thought and we could well see gilt yields move further higher from here,” said Edward Hutchings, the head of rates at Aviva Investors.
Simon Harvey, the head of FX Analysis at Monex Europe, said the hawkish undertones of the committee’s release was a surprise.
“While the decision to hike rates by 25bps and exit the reinvestment stage was largely expected by markets, the voting split in favour of a more front-loaded hiking cycle and the Bank’s decision to actively sell its corporate bond holdings came as a hawkish surprise to markets. This suggests a growing discomfort in the current level of monetary accommodation in light of the near-term inflation outlook and has emboldened expectations of a successive hike in March. Coupled with the material downgrade to the three-year inflation projection based on the market-implied rate path from 1.9% to 1.6%, the Bank has cast the signal to markets that its intentions are to hike rates earlier at the cost of a lower potential terminal rate,” Harvey said.
Martin Lawrence, the director of investments at Wesleyan, the specialist financial services mutual, said interest rate rises have been priced in for some time, but for savers, they won’t protect consumers against inflation.
“The rising cost of living is adding pressure to already stretched budgets, and higher interest rates will mean that those not on a fixed-rate mortgage will have to contend with bigger mortgage costs. Today serves as a timely prompt to shop around for the best deal,” he said.
“When costs rise, an easy way for some people to manage is to cut how much they’re saving, but it’s a short-term fix with long-term implications – particularly if savings are cut from important things like retirement plans.
"Those that can afford to set money aside in savings should check what rates they’re getting on their money to make sure that, at the very least, it’s benefiting from higher interest rates, and in the best case is outpacing the rate of inflation,” he added.
UK blue-chips have largely turned a shade lower since the Bank’s decision. The FTSE 100 has ebbed to 7,567, down 16 points (0.2%).
12.15pm: The hawks nearly ambush the doves
The Bank of England has hiked the bank rate by a quarter of a percentage point to 0.5%, although the decision was a close-run thing.
The nine-person committee voted five to four in favour of the increase.
The decision did not exactly surprise the market and the FTSE 100 remained becalmed at 7,579, down 4 points.
Bank of England hike rates 4 members voted for 50bp move.
— James Hughes (@James_HughesUK) February 3, 2022
Bank of England now says it expects inflation to hit 7%. Wasn’t it 6% previously? Like ten minutes ago? So much for Andrew Bailey’s ‘transient’ suggestion. It somehow doesn’t feel like an unimportant flash in the pan any more
— Mark Brumby (@brumbymark) February 3, 2022
11.55am: US markets to surrender some recent gains
US stocks are expected to reverse some of the early February rally at open on Thursday as shares of Facebook owner Meta Platforms get hammered after releasing earnings after-hours yesterday and investors await reports from tech peers Amazon.com and Snap.
Futures for the tech-laden Nasdaq-100 dropped 2.1% on Thursday as investors wiped 20% pre-market off Meta stock, which painted a gloomy outlook in its earnings report.
Elsewhere, futures for the Dow Jones Industrial Average shed 0.3%, and contracts for the broader S&P 500 index fell 1%. Over the four sessions to Wednesday, the S&P 500 notched up its biggest four-day percentage gain since November 2020.
Facebook tumbled after posting its first earnings report since chief executive Mark Zuckerberg outlined a pivot to the metaverse. The company said it expected revenue growth to slow because users were spending less time on its more lucrative services. Meta cited inflation as a weight on advertiser spending.
After markets close on Thursday, investors will assess earnings from internet shopping giant Amazon.com. The company is expected to post record quarterly revenue of $137.73 billion, but profits are expected to fall from a year earlier, due in part to higher costs.
Aside from tech earnings, investors are also concerned that the US economic recovery has slowed after growing rapidly at the end of 2021 as spiralling inflation takes a toll. With the Federal Reserve poised to resume interest rates hikes as early as next month, investors will look cautiously at tomorrow's key monthly US non-farm payrolls data.
In London, traders continued to sit on their hands, waiting for the Bank of England to reveal its interest rate decision. The FTSE 100 was down 4 points at 7,579.
10.47am: All eyes on the BoE
The FTSE 100 is in a holding pattern ahead of the Bank of England policy announcement later, remaining slightly underwater at just below 7,578.
"Seatbelts are still being fastened for a bout of volatility as the calmer moment for tech stocks is likely to be short-lived given the jolt to the market Facebook owner Meta delivered with reported fall in profits," said Susannah Streeter, senior investment and markets analyst at HL.
Ahead of the new energy price cap set to be announced, which will mean higher bills for millions of households, Streeter says the cost of living squeeze is "looming large" today.
"With budgets already under so much pressure from the rise in cost of goods and services, trying to tether sky-high inflation is highly likely to be the number priority of policymakers in the hot seat of decision making. Although a rise in the official interest rate to 0.5% is expected, a fast move by the Bank of England to significantly tighten its mass bond-buying programme which was aimed at lowering yields and reducing the cost of borrowing risks causing a fresh round of nervousness in financial markets," she said.
9.47am: Reversal into the red
The Footsie has dropped into the red as the Shell-led energy gains are offset by falls for industrials, miners, telecoms and software sectors.
Distribution group Bunzl PLC (LSE:BNZL) and tech-focused Scottish Mortgage Investment Trust PLC (LSE:SMT) are now bookending BT's declines at the bottom of the pile.
Having been the only one of Europe's benchmarks in positive territory, London's blue-chip index has now dropped around 5 points below the watermark to 7,578.
Traders are already thinking about the Bank of England and ECB central bank meetings later today.
The BoE meeting is looking rather more interesting than its European counterpart, said Neil Wilson at Markets.com.
Indeed, with inflation at a 30-year high and the negative economic impact from Omicron less than feared, the BoE's Monetary Policy Committee is set to raise rates for the second meeting in a row.
"Not quite a done deal but close to a slam dunk given the outlook," says Wilson. "There are plenty of signs of inflation pressures persisting and broadening; a cost of living crisis is already here.
"But it’s not a zero sum game," he warns, "raising rates will hit people on floating rate mortgages, for instance. Increasing the cost of borrowing at this moment carries some risks but ultimately it’s the right thing to do – in fact they should have done it much sooner last year."
The Bank is expected to begin 'quantitative tightening' by not reinvesting the proceeds of bond purchases, and is thought not likely to start selling down its massive balance sheet until later this year.
Financial markets are currently pricing for five MPC rate hikes, Wilson adds, "which is pretty hawkish so risks open for a dovish surprise. If it sticks to its view that 'some modest tightening of monetary policy…is likely to be necessary', the market probably takes this as dovish."
9.37am: Positive start in London
No thanks to BT Group PLC (LSE:BT.A), the FTSE 100 has made a positive start.
London’s index of heavyweight shares was up 9 points (0.1%) at 7,592 despite BT shedding 3.5% at 188.6p after the telecoms giant lowered full-year revenue guidance.
“BT is making tracks to improve its content position, which in today’s climate is no bad thing. That said, there’s an argument that sport is a lot more sheltered from changing media habits than other mediums, so while BT can’t rest on its laurels, it has a bit more breathing room. BT Sport is a genuine asset,” said Sophie Lund-Yates at Hargreaves Lansdown.
“It’s disappointing to see other areas of the business looking less bright as Covid disruption and supply issues continue. The telecoms giant is weighed down by a number of legacy products that have been falling out of favour for a while. The issue with being an internet or phone service provider is that the main differentiator on product is price. That’s a tough place to be,” she added.
A warmer reception was given to the fiscal third-quarter update from oil leviathan Shell PLC (LSE:SHEL, NYSE:SHEL), with the shares rising 1.0% to 1,951.6p after the company announced a new share repurchase programme.
Richard Hunter at Interactive Investor said it was a return to form for the multinational company.
“Revenues, cash flow and adjusted earnings were all comfortably ahead of expectations, and for the full year, the previous loss attributable to shareholders of US$21.7bn swung to a profit of US$20.1bn,” Hunter reported.
“These elevated levels of cash generation, in part helped by disciplined capital expenditure but mainly made possible by Shell’s ability to capitalise on higher energy prices, have enabled several financial boxes to be ticked,” he added.
The best performing blue-chip this morning, however, is Compass Group PLC (LSE:CPG), the contract caterer.
The shares were 7.0% higher at 1,769p after the company reported a continued improvement in trading across all parts of its business.
“The structural outlook for new business wins and market share growth is compelling; however, we retain some caution given uncertainties over short term volume and margin recovery given challenging market conditions,” said broker Liberum, as it stuck by its ‘hold’ recommendation and 1,600p price target.
6.36am: Cautious start in store
The FTSE 100 was set for a cautious start on what is set to be a huge news day for investors and households in the UK.
An hour before the opening, spread bet firms were calling Footsie eleven points lower at around 7,579, but with oil stocks and the banks likely to feature today and mixed tech earnings overnight in the US, trading is likely to be volatile.
In the UK, households are bracing for a likely 50% rise in their heating bills as Ofgem announces the price cap for the next six months. A figure near £2,000 is being widely forecast.
Around the same time, the Bank of England is expected to raise interest rates for the second month running, the first time that has happened since 2004.
A 0.25% hike to 0.5% is the City’s prediction plus some change in the current quantitative easing programme.
“We remain concerned about the risk of an overreaction in financial markets from a BoE announcement on quantitative tightening (QT), which we consider likely at 12pm today when the BoE publishes the February Monetary Policy Report and MPC meeting minutes”, said Kallum Pickering at Berenberg.
Elsewhere, there are likely to be bumper profits announced by Shell and more modest progress at BT, where the prognosis is for another flat quarter of sales and earnings, in the raft of trading updates.
All this follows a night of earnings in the US that saw a major split in the fortunes of FAANG members.
Google/Alphabet smashed forecasts, with a jump of 36% in profits to US$20bn as sales leapt 32%.
Facebook/Meta shares, though, tanked by 20% as it reported the first reduction in the number of daily users in its history alongside a lower than expected revenue forecast this quarter.