Pound drops as BoE expects recession, US futures up

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  • Bank of England raises rates by 50 basis points
  • The BoE expects a recession throughout 2023
  • Fed official: 50 bp rise in September “reasonable”
  • Oil stabilizes after hitting six-month low
  • Lufthansa returns to operating profit

LONDON, Aug 4 (Reuters) – The pound fell on Thursday after the Bank of England followed its U.S. and eurozone counterparts with a sharp hike in interest rates to curb inflation, saying that Britain is facing a long recession.

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

Britain’s economy would begin to shrink in the last quarter of 2022 and 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 appears to be the somewhat pessimistic economic forecast also given to us, which shows a recession expected in the fourth quarter and lasting until 2023,” said Stuart Cole, chief macroeconomist at Equiti Capital.

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

The pound fell 0.2% to $1.2122 after being slightly firmer ahead of the BoE announcement.

Yields on UK gilts fell sharply, with eurozone bond yields extending their slide after the BoE statement.

S&P 500 futures were firmer ahead of the Wall Street open and the latest jobless claims data, although Friday’s nonfarm payrolls are being watched more closely.

Stocks were broadly more stable on Thursday, helped by strong profits in Europe, while Asian stocks recouped some of Wednesday’s losses due to tension over Nancy Pelosi’s visit to Taiwan.

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

Shares in Hong Kong (.HSI) rose 2%, following larger gains in Asia (.MIAP00000PUS), reeling from some of the losses suffered after Sino-US friction erupted during a visit to China. Taipei this week from House of Representatives Speaker Pelosi who angered China. Read more

Oil prices stabilized after hitting six-month lows, while the dollar was buoyed by U.S. Federal Reserve officials who pushed back on suggestions they would slow the pace of interest rate hikes, with one saying a 50 basis point hike would be “reasonable”. Read more

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

NO REVENUE RESET YET

Kasper Elmgreen, head of equities at asset manager Amundi, said the illusion that inflation, which had been high for decades, would be transitory was now firmly dispelled as fuel bills rise and businesses struggle to find staff.

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

The current second-quarter earnings season has not provided a major “reset” to what Elmgreen considers still too high earnings expectations for 2022 overall, given the slowing economy.

“I think it could come in the third or fourth quarter as we start to see more demand impact,” Elmgreen said.

Fed officials provided a chorus of hawkishness this week, hitting the short end of the yield curve. Two-year Treasury yields traded at 3.0938%, slightly lower, while benchmark 10-year yields traded at 2.7209%, also slightly lower.

The dollar halted a decline that began in mid-July, with support from both rate hike expectations and heightened political tension.

Fed funds futures remain pegged for rate cuts to be in the works by the middle of next year and the US yield curve inverting, with 10-year yields lower than forward yields. two years, suggests to investors that the upward trajectory will hurt growth.

The dollar index traded at 106.27, down 0.178%. A euro weighed down by the European energy crisis bought $1.0188.

Brent crude futures were slightly firmer at $96.82 a barrel as supply concerns sparked a rebound from multi-month lows on Wednesday after U.S. data signaled 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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