- FTSE 100 closes just under 10 points higher
- Wall Street shares plunge
- Shell higher after profits triple
- Banks weak as BoE ups rates, cuts forecasts
4.50pm: Modest gains as rates rise
The FTSE 100 index ended modestly higher on Thursday helped by strength in energy stocks while sterling sunk to its lowest levels since July 2020, after the Bank of England raised interest rates by 25 basis points to 1%, in line with expectations.
That wasn’t what sparked the weakness in the pound, it was the changes in the BoE’s economic forecasts, which pointed to a potential recession by year-end, and warnings that rates may not rise as high as markets had been expecting in the months ahead.
At the close, the FTSE 100 index was up 9.82 points, or 0.1% at 7,503.27, just off the day’s low of 7,495.89 and well below the session’s hefty peak of 7,619.39.
The UK blue-chip index ended well below its best levels as Wall Street dropped back sharply in morning trading as nerves returned after yesterday’s strong post-Federal Reserve rate hike rebound with US April jobs data due on Friday. The latest weekly US jobless claims released today showed a surprise rise to 200,000, up from 181,000 the week before.
In New York, around London’s close, the Dow Jones Industrial Average was 972 points, or 2.9% lower at 33,088, while the broader S&P 500 index dropped 3.4%, and the tech-laden Nasdaq Composite plunged 4.5%.
Michael Hewson, chief market analyst at CMC Markets UK commented: “As far as the FTSE100 is concerned the slide in the pound below $1.2400, has given an added lift to the UK index, pushing it briefly back above the 7,600 level, before it too slipped back from its intraday highs.”
He added: “The main drivers of today’s gains have been in energy once more with further gains in oil prices, as well as some decent Q1 numbers from oil giant Shell. Shell has finally seen its share price move back to its pre-pandemic levels after following in the footsteps of BP earlier this week by reporting a strong set of underlying profits for Q1.”
But on the downside, Hewson noted that banking stocks came under pressure on concerns over the economic outlook in the UK after the Bank of England’s gloomy economic forecasts, with NatWest Group and Lloyds both lower.
3.45pm: Footsie still ahead but off its best
Leading shares have shrugged off the rise in UK interest rates to their highest level since early 2009, as well as an opening fall on Wall Street, although they are off their best levels.
The FTSE 100 is up 61.01 points or 0.81% at 7554.46, having earlier climbed as high as 7619.
But the pound has fallen sharply on some disappointment the 25 basis point rise to 1% was not higher as well as the gloomy Bank of England forecasts which accompanied it.
Against the dollar, sterling is down 1.97% at US$1.2369 while it has lost 1.27% to €1.1729.
Among the market risers, packaging firm Mondi PLC (LSE:MNDI) is up 6.13% after it said it would divest its Russian operations and also gave an upbeat trading statement.
Endeavour Mining PLC (LSE:EDV, TSX:EDV, OTCQX:EDVMF) and Shell PLC (LSE:SHEL, NYSE:SHEL) have been boosted by their latest results, up 5.93% and 4.43% respectively.
But Hikma Pharmaceuticals PLC (AIM:HIK, OTC:HKMPF) is down 9.34% after it cut its guidance for revenues from generic drugs.
Insurer Admiral Group Plc (LSE:ADM) has dropped 5.58% as its shares went ex-dividend.
UK banks are under pressure after the Bank's gloom, with NatWest Group PLC (LSE:NWG) down 3.27% and Lloyds Banking Group PLC (LSE:LLOY) 2.71% lower.
3.07pm: US markets head south
US stocks have dropped at the open on Thursday as markets digested the Fed's interst rate hike and some big stocks took a share tumble.
The Dow Jones plunged 432 points at 33,629. The S&P 500 lost 68 points at 4,231. The Nasdaq shed around 293 points to stand at 12,671.
Yesterday, the US central bank announced a half-point rate hike - the first in 22 years, but it did say that bigger rises were not being actively considered.
Salesforce shares and Home Depot are off around 3% and 2.75% in early deals respectively.
The US falls are having little impact on the FTSE 100, which is up 88.54 points or 1.18% at 7581.99.
1.35pm: US jobless claims higher than forecast
US weekly jobless claims have come in higher than expected , ahead of the widely watched non-farm payroll numbers due on Friday.
The number of Americans seeking unemployment benefit for the first time was 200,000 last week, compared to expectations of a figure of 180,000.
Meanwhile the previous week's figure was revised upwards by 1,000 to 181,000.
US Initial Jobless Claims Apr 30: 200K (est 180K; prev 180K; prevR 181K)
- US Continuing Claims Apr 23: 1384K (est 1400K; prev 1408K; prevR 1403K)
— LiveSquawk (@LiveSquawk) May 5, 2022
1.05pm: Bank cuts growth forecasts
The Bank of England has also cut its growth forecasts for the UK, going so far as to anticipate a drop in GDP later this year and for next year.
It suggests GDP could fall by nearly 1% in the final quarter of 2022 and by 0.25% next year, compared to its prediction in February of 1.25% growth in 2023.
The following year it has cut its forecast from 1% growth to just 0.25%.
Here are the quarterly predictions.
Is the Bank of England forecasting a #recession for the UK?
Not a technical one (two quarters of negative quarter on quarter GDP growth).
Here's their latest forecast... ???? pic.twitter.com/xK2nl8D9ZR
— Ben Chu (@BenChu_) May 5, 2022
12.29pm: Bank urged to be cautious on further rises
The CBI has backed the rate rise but urges caution on future moves.
Alpesh Paleja, CBI lead economist, said: “Another rise in interest rates is warranted, given the persistence of high inflation. However, the Monetary Policy Committee are walking an increasingly fine line. Further action to curb price pressures needs to be weighed against the increasing need to protect growth, particularly in light of a historic cost-of-living crunch. Households are feeling it and so are businesses, with cost pressures across the board.
“While monetary policy is the appropriate first line of defence in tackling inflation, government needs to take further action to shore up the broader resilience of the UK economy. In the near-term, higher inflation will hit poorer households hardest, so support measures for this group will need to be kept under review. Over the longer-term, securing greener energy supply and a relentless focus on raising potential growth will bolster our ability to withstand shocks and further price pressures."
So where could UK interest rates go from here?
Victoria Scholar, head of investment at interactive investor said: “Financial markets and economists are divided over the number of rate hikes the central bank will carry out in the months ahead. According to the overnight index swaps (OIS) market ahead of the decision, traders are pricing in around six hikes including today’s move to lift the bank rate to around 2.25% by December whereas more prudent economists see interest rates moving a lot more slowly, reaching 1.5% by early 2023.
"Markets have been impacted by US market pricing amid expectations of more aggressive tightening from the Fed as well as liquidity issues, suggesting their expectations could be getting ahead of themselves, while economists’ forecasts are updated a lot less frequently and so could be revised higher soon. When combined, it suggests that both will meet somewhere in the middle.”
12.20pm: Pound falls after rate rise news
Sterling has dropped further following the Bank of England decision, in disappointment that the rate rise was not higher.
Against the dollar, the pound is 1.26% lower at US$1.2459. Before the announcement it was down just 0.57% at US$1.2546.
It is faring little better against the euro, down 0.927 at €1.1769. Previously it was off 0.287% at €1.1846.
But the FTSE 100 has picked up steam and is now up 1.31% or 97.97 points at 7591.42 having been up 1.09% before the news.
12.12pm: Bank sees inflation at 10% at the end of the year
Six of the members of the Bank's monetary policy committee voted for the interest rate rise of 0.25 percentage points, to 1%.
The other three - Jonathan Haskel, Catherine Mann and Michael Saunders - plumped for a 0.5 percentage point rise to 1.25%.
Explaining its decision the Bank said it expected inflation to rise from the current 7% to just over 9% in the second quarter of 022 and averaging slightly over 10% at its peak in the fourth quarter.
The majority of that increase is due to higher household energy prices following the large rise in the Ofgem price cap in April and projected additional large increase in October. It also reflects higher food, core goods and services prices.
It added that further tightening in monetary policy could still be appropriate in the coming months, although it admitted there were risks on both sides of that judgement.
And it will be making plans to unwind the bond buying from its quantitative easing programme.
It said: "As bank rate is now being increased to 1%, and consistent with the MPC’s previous guidance, the committee will consider beginning the process of selling UK government bonds held in the Asset Purchase Facility."
It also defended a rate rise in the face of a slowing economy.
It said: "The economy has recently been subject to a succession of very large shocks. Russia’s invasion of Ukraine is another such shock. In particular, should recent movements prove persistent as the central projections assume, the very elevated levels of global energy and tradable goods prices, of which the United Kingdom is a net importer, will necessarily weigh further on most UK households’ real incomes and many UK companies’ profit margins.
"This is something monetary policy is unable to prevent. The role of monetary policy is to ensure that, as this real economic adjustment occurs, it does so in a manner consistent with achieving the 2% inflation target sustainably in the medium term, while minimising undesirable volatility in output."
12.00pm: UK rates up for the fourth time in a row
The Bank of England has raised UK interest rates by 0.25 percentage points to 1%, the fourth increase in a row and in line with market expectations.
This is the highest level since February 2009 when it was cutting rates to cope with the fallout from the financial crisis.
Despite the continuing uncertainties caused by the conflict in Ukraine and worries about the state of the economy amid a cost of living crisis, the Bank has acted to try and curb surging inflation. The consumer price index is 7% - well above its target of 2% - and could hit 10% later this year.
The move follows a 50 basis point rise by the US Federal Reserve on Wednesday.
The Monetary Policy Committee voted to raise #BankRate to 1%. Find out more in our #MonetaryPolicyReport: https://t.co/h3ewfvAPYp pic.twitter.com/I5q7mliWza
— Bank of England (@bankofengland) May 5, 2022
11.41am: US market set to come off the boil
US stocks were expected to open lower on Thursday after the Federal Open Market Committee on Wednesday delivered a 50-basis point (bp) rate hike and paved the way for a series of aggressive increases to help fight runaway inflation.
Stocks rose strongly in the wake of the news that the Fed had not considered a larger 75 basis point rate increase but much of the optimism has begun to fade amid expectations that interest rates will still have to rise rapidly to ward off further spikes in inflation, possibly denting economic growth.
Futures for the Dow Jones Industrial Average fell 0.4% in pre-market trading, while those for the broader S&P 500 index shed 0.6%, and contracts for the Nasdaq-100 lost 0.7%.
“At this point, many expect the Fed to raise the rates above the neutral-rate estimate of about 2.5% by the end of this year to tame inflation, and Bloomberg economists believe that the balance sheet will come back to the pre-pandemic levels by 2024. But we will still be only half-way from the levels pre-2007/2008 subprime crisis,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
“Therefore, there is still a lot of room for more Fed hawkishness,” she said, adding that just how hawkish the Fed could get would depend on how inflation pans out.
As investors think this over, some of the early cheer which on Wednesday lifted the S&P 500 by around 3%, the Nasdaq about 3.4% and the DJIA around 2.8 % has begun to wane. Investors are increasingly worried that higher interest rates will crimp economic growth at a time when the strength of the dollar is also likely to weigh on US exports.
Benchmark crude oil prices were slightly higher. Brent crude futures were up 0.3% at $110.46 a barrel while WTI futures rose 0.05% to $107.86 a barrel.
Still, that has not really dented the enthusiasm in the UK market.
Ahead of the Bank of England's own interest rate decision, the FTSE 100 is up 85.82 points or 1.15% at 7579.17.
10.49am: Mining shares provide support
Leading shares have come off their best levels but are still firmly in positive territory.
The FTSE 100 is now up 64.07 points or 0.86% at 7557.52, having earlier climbed as high as 7619 on relief that the US Federal Reserve seemed to rule out a hefty 0.75% rate rise in future.
Russ Mould, investment director at AJ Bell. said: "The Fed raised rates by half a percentage point whereas traditionally a quarter percentage point rise is the norm. The reason why the market jumped was down to previous fears that the central bank would be even more aggressive with rate rises to curb inflation.
“There was a lot of chatter about whether the Fed would have been bold enough to deliver three quarters of a percentage point rise. Federal Reserve chair Jay Powell gave the answer the market was looking for – no, that is not ‘actively’ being considered. Investors breathed a sigh of relief and hence share prices went up.
“But what about the next interest rate decision? What Powell says this week may not necessarily stand in a month’s time if inflation keeps going up. One must never rule out central bankers changing their mind so we could still feasibly see three quarters of a percentage point rise if inflation remains a pain, which implies markets could remain choppy for the weeks and months ahead."
Meanwhile mining shares are among the risers despite a disappointing service sector report from China, the world's second largest economy.
Endeavour Mining PLC (LSE:EDV, TSX:EDV, OTCQX:EDVMF) is up 7.57%, Anglo American PLC (LSE:AAL) has added 3.55% and Fresnillo PLC (LSE:FRES) is 3.44% better.
Elsewhere technology investor Scottish Mortgage Investment Trust PLC (LSE:SMT) has climbed 3.52% after a positive performance from Nasdaq.
9.49am: Business confidence lowest for a year and a half
Although the service sector report does show contining growth, there are a few warning signs.
Andrew Harker, economics director at S&P Global, which compiles the survey, said: “The twin headwinds of the cost of living crisis and the war in Ukraine started to bite on the UK service sector during April, as evidenced by a sharp slowdown in new order growth to the lowest in the year so far.
"Worryingly, companies seem to be expecting impacts to be prolonged, with business confidence dropping to the lowest in a year and a half.
"Indeed, cost pressures show little sign of abating, with inflation even accelerating in April to the strongest in almost 26 years of data collection. The feeding through of these cost pressures to charges for customers means that the spell of rapid inflation clearly has further to run."
Duncan Brock, group director at the Chartered Institute of Procurement & Supply, added: “Though the headline index remained in growth territory, the services sector is showing signs of going off the boil as the drip drip effects of the highest prices for 26 years impacted on orders and business mood.
9.34am: Mixed picture for UK economy from PMI reports
As we wait for the Bank of England interest rate decision, the latest report on the UK economy has come in slightly better than first expected although below the previous month.
The S&P Global/CIPS service sector PMI is up from April's initial reading of 58.3 to 58.9. But this was down from 62.6 in March and pointed to the softest rise in activity since January.
UK S&P Global/CIPS Services PMI Apr F: 58.9 (est 58.3; prev 58.3)
- UK S&P Global/CIPS Composite PMI Apr F: 58.2 (est 57.6; prev 57.6)
— LiveSquawk (@LiveSquawk) May 5, 2022
The report said: "Anecdotal evidence suggested that [service sector] companies continued to benefit from the lifting of COVID-19 related restrictions, with a number of firms highlighting the positive impact of freer international travel. That said, strong inflationary pressures and the war in Ukraine reportedly limited the pace of expansion."
Meanwhile the composite index, which takes in manufacturing as well as services, was up from the initial reading of 57.6 to 58.2, but down on the 60.9 recorded in March. The rate of growth remained sharp, said S&P, but eased to a three month low.
9.18am: Car registrations fall in April
The UK car market continues to be hit by supply problems.
New car registrations fell by 15.8% to 119,167 units in April, according to the latest figures from the Society of Motor Manufacturers and Traders (SMMT).
Despite showrooms being open for the entire month, unlike the previous year which saw lockdown restrictions in place until 12 April, global supply chain shortages, especially semiconductors, have continued to constrain the delivery of new vehicles, it said.
April’s decline was driven primarily by a 33.3% decrease in large fleet registrations, with manufacturers continuing to prioritise private consumers given robust demand, which helped this market segment see a modest increase of 4.8%
Given the ongoing impact of supply chain constraints and broader macro-economic factors, the SMMT has revised its market outlook for 2022 downwards, with 1.72 million new cars new cars now expected to be registered during the year, down from the 1.89 million outlook in January.1 While this still represents a 4.5% rise on 2021, the SMMT said it highlights the effect the semiconductor shortage is still having on supply as well as anticipated impacts from rising living costs.
UK new car market declines -15.8% to 119,167 units in April, but battery electric car registrations buck trend, up 40.9%.https://t.co/ZIxK03AyZK pic.twitter.com/eB2L8JO9Xu
— SMMT (@SMMT) May 5, 2022
SMMT revises 2022 outlook down from 1.89m units to 1.72m as parts shortages continue to impact supply.https://t.co/ZIxK03AyZK pic.twitter.com/iKwcSg2lfu
— SMMT (@SMMT) May 5, 2022
On the positive side, battery electric vehicle registrations continued to grow with 12,899 of the latest zero emission cars joining UK roads – an increase of 40.9% on the same month last year – and taking a 10.8% market share, up from 6.5% last year.
8.37am: Hikma leads the fallers
Inevitably there are a few gloomier parts of the market despite the overall buoyance.
Hikma Pharmaceuticals PLC (AIM:HIK, OTC:HKMPF) is the biggest faller in the leading index, down 9.07% as it cut its guidance for revenues from generic drugs.
It said: "Hikma now expects Generics revenue to be in the range of $710 million to $750 million and core operating margin to be around 20%, with the lower end of the range reflecting the possibility of further price erosion in the US generic market, should this materialize.
"This compares with Hikma's previous guidance of Generics revenue growth in the range of 8% to 10% over full year 2021 revenue of $820 million and core operating margin in the range of 24% to 25%."
Elsewhere insurer Admiral Group Plc (LSE:ADM) has lost 4.65% as its shares went ex-dividend.
But overall the FTSE 100 is holding on to much of its early gains, and is currently up 106.55 points or 1.42% at 7600 exactly.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: ‘’Relief has rippled through the financial markets as the Federal Reserve seems committed to keep to the path it had mapped out to try and tame roaring inflation. The FTSE 100 has opened.. higher following big gains on Wall Street with the S&P 500 and tech heavy NASDAQ surging by around 3%.
"Financial markets have become hooked on the drug of cheap money and policymakers are clearly keen not to induce a shock for the economy, by weaning dependents off too rapidly and that’s reassured investors.The 0.5% interest rate hike may have been the biggest in the US since 2000 but it was a move already priced in by the markets. Rolling back the mass stimulus programme by offloading bonds from Fed’s balance sheet will start on a more gradual incline than some feared at $47 billion a month, before rising.
"Remarks by Jerome Powell soothed tensions further indicating a steeper 0.75% rise wasn’t on the cards right now for hikes in the summer, with a more gradual edging up of rates expected. But it’s not completely out of the game plan, as the Fed wants to stay nimble in the face of rapidly changing circumstances."
8.13am: Markets rise as Fed rules out hefty rate rises
On a big day in the UK for voting - polls for local elections and the Bank of England rate decision - leading shares have moved sharply higher.
The FTSE 100 has jumped 110.06 points or 1.47% to 7603.51, helped by a strong finish on Wall Street after the Federal Reserve's decision to lift US rates but not by the feared 0.75%.
Over here, the Bank is expected to raise interest rates by 25 basis points to 1% but there is a chance it could go further.
Michael Hewson, chief market analyst at CMC Markets UK, said: "With UK inflation already at 7% in March and set to go even higher the Bank of England hasn’t got an easy task, especially given the plunge seen in retail sales during the same month.
"We already know that some on the MPC are concerned about the negative impact a further rise in interest rates might have on demand in the UK economy and fragile consumer confidence. This was a factor cited by Jon Cunliffe at the last meeting when he voted to keep rates on hold, but it’s also hard to ignore the impact rising prices also has on those factors.
"Rising prices are becoming embedded in the price of clothing, furniture, food, drink and restaurants, while a sinking pound has served to add to that upward pressure on prices. Cunliffe can worry about a rise in interest rates all he likes, but if the pound continues to fall the upward pressure on inflation will increase further. Raising rates may be the least bad option, nonetheless Cunliffe could well be a dissenter, along perhaps with Tenreyro to any decision to hike today.
"With input prices at 19.2% further upward pressure in headline inflation is coming, and the Bank of England is likely to be faced with little choice but to raise rates if only to keep pace with the Federal Reserve, if only to maintain rate differentials, and help to push the pound back up to $1.3000...
"The bigger risk for today is if the central bank does nothing, with a minimum expectation of a 25bps rise to 1%, but an outside chance we could see a 50bps move to 1.25%."
Ahead of the rate decision comes the latest UK service sector purchasing managers index, expected to come in at 58.3, down from 62.6 in March.
Back with the markets, Shell PLC (LSE:SHEL, NYSE:SHEL) is up 3.15% after first quarter profits nearly tripled to US$9.13bn.
Next PLC (LSE:NXT) has climbed 1.28% as it reported a 21.3% rise in first quarter sales and stuck to its full year guidance. Within that headline figure, online sales were down 11% but retail sales soared 285% as shops reopened.
6.50am: UK market set to benefit from US rebound
FTSE 100 was being called up to 80 points higher in early trades after US markets soared on the back of comments from Fed chair Jerome Powell.
Financial spread betting firms see Footsie regaining all of Wednesday’s 68 point loss as Wall Street enjoyed its best day in two years.
As expected, the Fed raised US interest rates by 0.5% and also said it will start shrinking its balance sheet – the reverse of quantitative easing- initially by US$47bn a month from 1 June but rising to US$95bn a month by September.
In the press conference afterwards, however, Powell said the Fed was “not actively considering” a further 0.75% rise, something the market had pencilled in for June or July said economists sending bonds and equities shooting higher.
This "huge relief rally in equity and currency markets" also spread to gold, noted Jeffery Halley, senior analyst at Oanda, but he added there was a risk of too much being read into the remark.
“In fact, Mr Powell didn’t specifically rule out a 0.75% hike next month, citing the need to be “nimble.”
The Fed also signalled another 0.50% hike is pencilled in for the next two meetings, noted Halley, while the focus on the US also overshadowed another set of poor economic numbers out of China where the Caixin Services PMI for April recorded its second-largest fall on record.
Big day in the UK as well
Interest rates will also be to the fore in the UK with the Bank of England predicted to raise them for the fourth month running to 1% at its meeting today.
Company news meanwhile will be dominated by Shell and how much money it is making out of the current buoyant oil and gas prices.
Retail bellwether Next will give a clear indication of the impact of the household income squeeze on discretionary spending (read more).
6.50am: Early Markets - Asia / Australia
Asian shares were higher on Thursday following the US central bank’s widely expected decision overnight to hike interest rates by 0.50% - its biggest increase in two decades.
The Shanghai Composite in China surged 0.98% while Hong Kong’s Hang Seng index gained 0.45%.
Markets in Japan and South Korea are closed today.
Australia’s S&P/ASX200 gained 0.85% as the Australian dollar surged 2.2% to 72.55 US cents, the largest daily gain in more than a decade after the US Fed appeared less aggressive in its fight against inflation.