Sterling falls as BoE expects recession, U.S. futures up

  • Bank of England raises interest rate by 50 basis points
  • BoE expects recession in 2023
  • Fed official: September 50 basis point increase “reasonable”
  • Oil stabilizes after six-month low
  • Lufthansa returns to operating profit

LONDON, Aug. 4 (Reuters) – The British pound fell on Thursday after the Bank of England followed its counterparts in the United States and the euro-zone with a sharp rate hike to quell inflation, saying Britain faces a prolonged recession.

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

The UK economy is set to begin contracting in the last quarter of 2022 and contract next year, making it the longest recession since the global financial crisis, the central bank said. read more

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“The biggest surprise seems to be the somewhat bleak economic forecasts we’ve also received, which show a recession expected in the fourth quarter and lasting through 2023,” said Stuart Cole, chief macroeconomist at Equiti Capital.

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

Sterling fell 0.2% to $1,2122, after being slightly firmer ahead of the BoE announcement.

UK government bond yields fell sharply, while euro-zone bond yields continued their decline following the BoE statement.

S&P 500 futures were firmer ahead of the Wall Street opening and the latest unemployment claim data, although Friday’s nonfarm payrolls will be watched more closely.

Shares were generally more stable on Thursday, helped by strong gains in Europe, while Asian stocks made up for some of Wednesday’s losses, driven by tensions over Nancy Pelosi’s visit to Taiwan.

The STOXX (.STOXX) index of leading European companies gained 0.5%, helped by German airline Lufthansa (LHAG.DE) returning to an operating profit, and strong gains from commodities giant Glencore (GLEN.L). French bank Credit Agricole joined the growing list of better-than-expected profits at banks. read more

Shares in Hong Kong (.HSI) were up 2%, followed by broader gains in Asia (.MIAP00000PUS), reaping some of the losses suffered after Sino-US frictions flared up this week during a visit to Taipei by Speaker Pelosi of the House of Representatives, who angered China. read more

Oil prices stabilized after their six-month low, while the dollar was supported by US Federal Reserve officials resisting suggestions to slow the pace of rate hikes, with someone saying a 50 basis point increase would be “reasonable” . read more

A survey by the European Central Bank shows that consumers in the eurozone are bracing for a contraction in the economy and continued high inflation. read more

NO EARNINGS RESET YET

Kasper Elmgreen, head of equities at asset manager Amundi, said the illusion that decades-long high inflation would be transient is now gone for good as fuel bills rise and companies struggle to recruit staff.

“The big picture here is that it will take a lot to restore price stability. The risk here is that we underestimate the power we are dealing with,” Elmgreen said.

The second quarter earnings season now underway has not provided a major “reset” of what Elmgreen sees as still overstated earnings expectations for 2022 overall as the economy slows.

“I think that could come in the third or fourth quarter as we’re going to see more of an impact on demand,” Elmgreen said.

Fed officials have given a hawkish chorus this week, mistreating the short end of the yield curve. The yield on two-year government bonds was 3.0938%, down slightly, while the benchmark 10-year yield was 2.7209%, also slightly weaker.

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

Fed fund futures remain priced ahead of rate cuts starting mid-next year and the inversion of the US yield curve, with 10-year yields below 2-year yields, suggests investors believe the upward path will hurt growth.

The dollar index traded at 106.27, down 0.178%. One euro, weighted by the European energy crisis, brought in $1.0188.

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

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

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

Our Standards: The Thomson Reuters Trust Principles.

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