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FTSE heads lower as traders digest Bank of England recession warning

·Business Reporter, Yahoo Finance UK
·3-min read
Exterior of the Bank of England in London. The FTSE was down on Friday
The FTSE headed lower on Friday after the warnings from the Bank of England on Thursday. Photo: Richard Baker/In Pictures via Getty

European stock markets were in the red on Friday after the Bank of England (BoE) warned that the UK is set to fall into a recession at the end of this year, and into 2023.

In London, the FTSE 100 (^FTSE) fell 0.1% on the day, while the CAC (^FCHI) was 0.6% lower in Paris, and the Frankfurt DAX (^GDAXI) also shed 0.7%.

The negative mood came as the central bank said on Thursday that Britain was heading into deepening economic misery, with a recession expected this winter that will last over a year.

It also said that inflation would surge over 13% along with a rise in unemployment and a continued squeeze on living standards following the sharp jump in gas prices.

Elsewhere, the the latest UK house price data from Halifax showed a 0.1% dip in July — the first decline since June 2021. The average value of a home stood at £293,221 ($356,373), which is still 11.8% higher than a year ago.

Read more: Bank of England announces biggest interest rate hike in 27 years

The fall reflects the impact of a deepening cost of living crisis, as inflation soars and the economy heads towards a recession.

Watch: What is a recession and how do we spot one?

Across the pond, the S&P 500 (^GSPC) dipped 0.8% and the tech-heavy Nasdaq (^IXIC) fell 1.3% by the time of the European close. The Dow Jones (^DJI) edged 0.4% lower.

On Thursday, US markets finished the session mixed, with the Nasdaq 100 closing higher and the Dow and S&P 500 closing lower, while yields fell too.

“The fall in yields suggests that bond markets are ignoring central bank tightening, and focusing more on a looming slowdown and recession,” Michael Hewson of CMC Markets said.

Read more: UK average house price falls for the first time in a year to £293,221

It came as US employers added more jobs than forecast in July, easing recession fears and encouraging the Federal Reserve to push ahead with steep interest rate rises.

According to the Labour Department on Friday, non-farm payrolls jumped 528,000 last month, beating estimates. It was the largest increase in five months, marking a recovery to pre-pandemic levels.

The unemployment rate fell to 3.5%, matching a five-decade low. Wage growth accelerated and the labour force participation rate eased.

Callie Cox, investment analyst at eToro, said: "The US job market has been one of the brightest spots in the economy’s recovery since COVID began, and it’s still cranking along.

Read more: Bank of England's Bailey concerned big pay rises may fuel further inflation for the poorest

"Unfortunately, for people worried about inflation, this job market may be a little too hot. Wage gains have been significant over the past year, but higher wages have also been a main driver for inflation, as wages are typically the biggest cost for businesses.

"For most income groups, inflation has even outpaced wages. That’s an unsustainable dynamic, and the Fed has been vocal about cooling down the job market. In that lens, the Fed’s rate hike campaign may not be finished yet."

Watch: US economy shrinks amid fears of recession

Stocks in Asia traded higher on Friday, with the Nikkei (^N225) climbing 0.9% in Japan while the Hang Seng (^HSI) rose 0.2% in Hong Kong, and the Shanghai Composite (000001.SS) gained 1.2% on the day.

Elsewhere, the potential for a global slowdown and a temporary excess of supply has put the brakes on the energy sector.

While the oil (BZ=F) price remains ahead by 22% in the year to date, a possible draining of demand, as currently being seen in the traditionally busy US driving season, for example, has halted progress for the time being.

Watch: How does inflation affect interest rates?