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Pound slumps 2pc against dollar; FTSE 100 jumps 1.5pc
The pound is on track to post its biggest fall against the dollar since the outbreak of Covid in March 2020 after the Bank of England warned the economy will shrink next year.
The Bank predicted that the cost-of-living crisis – fuelled by soaring energy costs and the war in Ukraine – will drag down output by almost 1pc in the final three months of this year. In 2023, GDP is expected to shrink by 0.25pc.
The pound dropped 2pc against the dollar.
It came as the Monetary Policy Committee raised the key Bank Rate by 25 basis points from 0.75pc to 1pc. It’s the highest since 2009 and marks the first run of four consecutive rises since 1997.
The Bank warned inflation will surge above 10pc in October when the energy price cap rises again, while it will take two years for inflation to return to its target of 2pc.
Oil prices hit highest since March as US mulls purchases
Away from the central bank drama, oil prices have jumped to their highest since late March amid reports the US may looks to replenish its emergency reserves.
The Biden administration plans to seek bids for 60m barrels of crude oil as the first step in a lengthy process to top up reserves, CNN reports.
Prices were also given a boost after Opec confirmed another small increase in output following the EU's proposed ban on imports of Russian oil.
Benchmark Brent crude jumped 3pc to above $113 a barrel, while West Texas Intermediate was trading at around $111.
Wall Street falls at the open
US stocks have dropped at the opening bell, marking an end to a rally after the Federal Reserve's aggressive interest rate rises.
Tech stocks were the biggest fallers, dragging the Nasdaq down 1.4pc. The S&P 500 fell 0.7pc, while the Dow Jones was down 0.6pc.
Reaction: Bank overstating energy impact
Simon French, chief economist at Panmure Gordon, has a damning assessment of the Bank of England's economic growth forecasts.
He questions the assumption that energy prices will rise another 40pc in October and that the Government does "diddly squat" about it.
You would only believe the BoE's growth forecast was a fair reflection of the likely economic path if you think the UK's energy price cap goes up by a further 40% in October and government does diddly squat. I dont.
— Simon French (@shjfrench) May 5, 2022
Four charts that show Britain's looming economic disaster
Soaring energy prices and living costs threaten to plunge Britain into recession, the Bank of England has warned, with the economy forecast to shrink by the end of the year.
The central bank's Monetary Policy Committee raised interest rates to 1pc on Thursday in a bid to combat runaway price rises and warned that inflation will hit its highest level since 1982.
These four charts, compiled by our economics reporters and graphics team, explain the coming economic storm.
What's happening to stocks?
The FTSE 100 was already staging strong gains this morning following the Federal Reserve's interest rate decision.
But the Bank's move to raise rates – as well as a sharp slump in the pound – have pushed these gains to 1.4pc.
Jo Rands at Martin Currie has more:
Consumer names, which have been very weak year to date, generally took the news in their stride. Perhaps also helped by an in-line trading update by Next this morning.
In contrast, banks sold off on the announcement, despite their business models benefiting from higher rates.
The Bank of England’s more cautious outlook for growth, now predicting the UK economy will shrink next year, is likely to be taking its toll on this highly economically sensitive sector.
Commodity names moved higher, supported by the Bank of England comments that inflation could now hit double digits later this year.
The central bank continues to face a difficult path of trying to control inflation, against a back drop of the worst ‘cost of living crisis’ since the 1950s.
Energy prices to drive a third of inflation
As the BBC's Ben Chu points out, the Bank expects more than a third of its projected inflation later this year to be driven by soaring energy prices.
This reflects another big increase in the energy price cap in October – something that's likely to deepen the cost-of-living crisis even further.
....more than a third of the projected headline UK inflation later this year is attributed by the Bank of England to energy price rises pic.twitter.com/CXGYj7mzW7
— Ben Chu (@BenChu_) May 5, 2022
Reaction: Housing demand won't drop any time soon
Nick Leeming, chairman of Jackson-Stops, says the interest rate rise won't have any immediate impact on the market.
Although interest rates are now at their highest since the 2008 recession, we are still talking historic lows even if further rises are an inevitability to steady the UK economy.
Most property buyers who are mid-purchase would have worked with a broker to secure a fixed rate deal, but if you are thinking of moving house, now is certainly the time to do it. We know there will be more rate rises to come, so finding a fixed deal from a recommend mortgage provider now will help mitigate any future hikes.
We may see house price rises moderate in the coming months as a result, but with demand remaining as high as it is, I don’t see transactions dropping any time soon.
We are talking about property market cycles, from seasonal to economic ups and downs, where finding a pattern can help us feel more confident about the market ahead. Many have predicted that we have a few years left to reach the top of the market, but if you are selling now and also buying now, it all comes out in the wash as prices will be relative.
Selling now while demand is strong could mean getting the best value for your home. But what you don’t want to do is be in a position where you are forced to sell in a market dip and then buy again as values recover. This is a fast moving market so my advice to buyers and sellers would be to act now and with due diligence.
What does the rate rise mean for house prices?
House prices in London's first-time buyer hotspots will be hit hardest by soaring mortgage costs, new analysis shows.
Melissa Lawford has the details:
The capital's outer boroughs and cheaper commuter belt areas will be particularly vulnerable to jumps in interest rates as they have the country’s highest shares of buyers purchasing with a mortgage, who will be directly hit as costs climb.
The Bank of England has today announced another interest rate rise, bringing the Bank Rate up to 1pc. Further increases are in the pipeline as the Bank scrambles to curb inflation; consultancy Capital Economics has forecast the Bank Rate will then triple to 3pc by 2023.
Areas that have particularly large shares of mortgaged buyers will be most exposed to increases in interest rates.
In Barking and Dagenham and Waltham Forest, in London, just 10pc of buyers purchased mortgage-free in 2021, the lowest proportion in the country, according to estate agency Hamptons.
Reaction: Dovish MPC may still raise rates to 3pc
Andrew Bailey insisted that market bets on interest rate rises were overblown.
Still, Paul Dales at Capital Economics thinks rates could hit 3pc.
The Monetary Policy Committee struck a more dovish tone today while raising interest rates from 0.75pc to a 13-year high of 1pc and saying that it won’t make a decision until after August on whether to shrink its balance sheet quicker by selling gilts.
But we think longer-lasting domestic price pressures will mean the MPC ends up raising rates to a peak of 3pc next year, which compares to the peaks of 2.5pc priced into the markets and 2pc expected by other analysts.
Savers will lose £594 to inflation despite rate rise
Savers will see little benefit from the Bank of England's decision to raise interest rates as the spending power of their pots will fall by hundreds of pounds this year.
Will Kirkman reports:
The Bank of England voted to raise rates today by 0.25 percentage points, to 1pc, in an attempt to tackle surging inflation.
Savings rates have started to slowly rise since the Bank initially began raising rates in December, but high inflation means savers will lose money in real terms.
If today's Bank Rate rise was passed on to savers in full, the average easy-access rate would climb from 0.39pc, according to analyst Moneyfacts, to 0.64pc, meaning savers with a pot of £10,000 would earn £64 in interest, £25 more than currently.
However, with inflation at its current rate of 7pc, rising prices would eat away £594 of the saver's purchasing power, effectively reducing the pot to £9,406.
Reaction: Bank tells markets not to overreact
Silvia Dall’Angelo, senior economist at Federated Hermes Limited says the overall tone of the meeting was more dovish than anticipated.
The Bank now expects a sharper short-term trade-off between slow growth and elevated inflation, due to the war in Ukraine and its impact on energy prices, with inflation reaching double-digit territory later this year and GDP contracting next year.
That poses a policy dilemma for the Bank of England, which was reflected in a three-way split in the meeting.
Overall, while the Bank of England is still in tightening mode, it pushed firmly back against aggressive market expectations (before today’s meeting, the OIS market was pricing the policy rate to increase to 2.5pc by February of next year).
The prevailing view at the Bank is still that most of the inflation overshooting is due to external supply shocks resulting in a deterioration of the UK’s terms of trade; as this kind of inflation is a drag on demand it should be self-adjusting over time.
However, the Bank will probably frontload some additional tightening – focusing on its policy rate – in the coming months, leaning against the risk of second-round effects materialising.
Those risks are pronounced in the context of a tight labour market. The Bank will have to walk a tightrope amid extreme uncertainty, and will probably have to adjust as needed along the way.
PWC: UK has probably entered stagflation
Barret Kupelian, senior economist at PwC, says the Bank's forecasts on inflation and growth make for grim reading.
The combination of high inflation and little to no growth signals that the UK has probably already entered stagflationary territory.
Going forward, however, there are some important points to bear in mind. CPI inflation, even though high in the next few quarters, is expected to come down rapidly early next year as high energy prices fall out from the denominator.
Also, the Bank assumes no further government action on energy prices, particularly for the most vulnerable. In the face of this latest report by the Bank of England, we think that this could be increasingly unlikely.
Press conference ends
That's all from Andrew Bailey and the other MPC officials.
Markets have reacted strongly to today's decision and the grim forecasts for inflation and an economic slowdown... we'll keep the analysis coming.
Pound extends losses to 2pc
It just keeps getting worse for the pound, which is now down more than 2pc against the dollar.
It's trading at $1.2368 – its lowest since July 2020.
Reaction: Bank's main message is 'calm down'
Torsten Bell at the Resolution Foundation argues that the Bank of England's main message is that market bets on future interest rate rises are overblown.
In his works, the message is: "We're serious about bringing inflation back down to target but won't need as many rate rises as you think to do it (partly because there's a world of pain for households coming anyway)."
Worth paying attention to what the @bankofengland's really telling us today. Yes they're serious that rates are rising (four rises in a row), but the real message is calm down on how high rates might go
— Torsten Bell (@TorstenBell) May 5, 2022
Broadbent: This is an extremely severe shock
Deputy Governor Ben Broadbent has deflected comparisons to the crisis of the 1970s, but admitted the current economic situation is an extremely severe shock.
Reaction: Will policy be like the City-Madrid game?
Policymakers have made several references to the "two halves" impacting monetary policy, prompting this topical response from Monex Europe's Simon Harvey...
BoE continue to keep talking in terms of "two halves". Let's hope it isn't quite like the Man City - Real Madrid game last night. That is, policy is on a pre-set conservative path, just for the economy to tank under extreme pressure on the consumer, and rapidly.
— Simon Harvey (@_SimonHarvey) May 5, 2022
Resolution Foundation: Government must provide more support
James Smith, research director at the Resolution Foundation, says double-digit inflation will deepen Britain's cost-of-living crisis further and calls for more Government support.
The decision to raise interest rates today is important in the Bank’s fight to stop high inflation becoming entrenched. It will have relatively little immediate impact on households in the short term, although in time the intention is for unemployment to rise.
Of more interest will be the pace and scale of future interest rate rises as the Bank of England – along with other central Banks – seek to tame inflation without inducing a recession.
Here the Bank of England is clearly signalling that markets should calm down in terms of how rates might go – arguing that current market expectations would see unemployment rising for the next three years, and inflation undershooting their 2pc target.
But if few households will feel a small interest rate rise immediately, everyone will be affected by the return of double-digit inflation as the Bank are now forecasting. This will further tighten Britain’s cost of living crisis, with families facing an average income loss of around £1,200 this year.
This awful outlook for living standards may make monetary policy decisions harder, but it makes fiscal policy decisions far easier.
The Government can’t shield us all from the pain of rising energy costs, but can and must provide more targeted support for the low-and-middle income households worst affected by this cost of living crisis.
Chart: UK faces economic slowdown
The Bank has warned of the UK economy will shrink as the cost-of-living crisis and soaring energy bills put the squeeze on households.
Bailey: I'm worried about pay increases
Andrew Bailey found himself in hot water earlier this year when he said workers should show restraint in demanding pay increases, warning this could push up inflation.
He's doubled down on this point, though he says companies also need to show restraint in raising prices.
The Governor says the Bank has increased its assumption of pay growth this year, adding that it's worried about second-round inflation effects.
Bailey vs the markets
The Bank Governor is making it clear that he thinks the market is over-egging its expectations for future interest rate rises.
Traders had been betting on a half-point rate rise by September. While they're still expecting a series of quarter-point hikes, there's very little hedging for larger increase.
Bailey says he doesn't agree with calls for bigger rate rises.
Bailey: I'm not passing buck to Chancellor
Andrew Bailey has denied that the Bank is passing the buck to Chancellor Rishi Sunak to combat inflation and the cost-of-living crisis.
He says monetary policy has limited powers to tackle the problem, adding that inflation is "self-correcting" because of the hit to real incomes.
Mr Bailey also says he doesn't agree with calls for far biggest interest rate rises.
Broadbent: Hit to incomes is unavoidable
The MPC members are asked whether the fall in living standards is the "necessary medicine" to deal with the cost-of-living crisis.
Deputy Governor Ben Broadbent reiterates how difficult the Bank's position is, saying the hit to incomes is unavoidable.
He says the shock that's pushing up prices this year will reduce real incomes. That means inflation is the "medicine" that will cure itself.
Pound extends fall to 1.7pc
Sterling has extended its losses to slump 1.7pc against the dollar.
It's now at its lowest since July 2020 and is on track for its biggest fall since the outbreak of the pandemic.
Bailey: Inflation will fall quickly
While price rises look set to remain high for some time, Andrew Bailey says inflation will fall relatively quickly once it does start to come down.
That's because the influence of external factors will start to wane.
Bailey: Bank navigating narrow path on policy
Andrew Bailey has emphasised that the Bank is treading a narrow line on monetary policy as it balances surging inflation with a looming economic slowdown.
He says inflation will peak later in the UK than in other economies. Meanwhile, UK growth is expected to slow sharply.
Andrew Bailey press conference begins
Bank of England Governor Andrew Bailey has begun giving a press conference following the latest interest rate decision.
Former MPC member: Bank rise is 'inadequate response'
Andrew Sentance, a former member of the Bank's Monetary Policy Committee, has given a frank assessment of the decision.
With inflation now forecast to rise to just over 10 percent later this year, the MPC’s quarter point rise seems an inadequate response. A 0.5 pc rise would have sent a stronger signal. Further significant rate rises will be needed this year and next.
— Andrew Sentance (@asentance) May 5, 2022
More reaction: UK facing period of stagflation
Caspar Rock, chief investment officer at Cazenove Capital, says there's little surprise about the Bank's decision:
The Bank is having to walk a tightrope when it comes to tackling the current inflation surge such that it doesn’t induce a recession, but the 0.25bps hike is a necessary step in our view.
Whilst we do not expect to see a repeat of the inflation we saw in the 1970s, we could once again be facing a period of stagflation – that is low growth in combination with higher inflation.
Some asset classes and sectors look better positioned than others in such an environment. Commodities have tended to perform well during previous episodes of stagflation – and we increased our exposure late last year.
Elsewhere, we continue to hold gold and inflation-linked bonds. We are also tilting our equity exposure towards higher-quality companies with strong balance sheets and the ability to pass on higher costs to customers. Historically, these companies outperformed broader equity markets [...]
We may be nearing a peak in inflation in the US, though this could be further off for the UK and Europe given their closer proximity to developments in Ukraine. Over the medium term, we expect inflationary pressures to ease from current levels as supply chains improve and higher interest rates reduce demand. At the same time, however, we would not be surprised to see inflation remain persistently above pre-pandemic levels.
Reaction: Energy prices key to Bank decision
Emma Mogford at Premier Miton Monthly Income Fund says:
Today’s rate hike comes amid considerable uncertainty about the future path of inflation and growth. This is reflected in the split of the vote, with 3 members preferring to increase to 1.25pc.
The assumption that energy prices will stay high will prove critical to whether today’s decision was the correct one.
BoE: Inflation to return to 2pc target in two years
With inflation peaking above 10pc later this year, the Bank thinks it will take around two years to return to its target of 2pc.
— Bank of England (@bankofengland) May 5, 2022
BoE: Surging energy bills to drive inflation above 10pc
Economists will have a close eye on the Bank's forecasts for inflation in the coming months.
It's warned that another rise in the energy price cap in October will push inflation above 10pc.
Higher energy and goods prices have pushed inflation to 7%, and we expect inflation to rise further to around 10% this year. https://t.co/h3ewfvAPYp #MonetaryPolicyReport #Inflation pic.twitter.com/r6oNXwpveh
— Bank of England (@bankofengland) May 5, 2022
Reaction: Haven't seen an MPC this split for a while
FX strategist Viraj Patel says he hasn't seen an MPC this divided for a while, with three members voting for an even more aggressive 50 basis point rise.
He says the split highlights the challenge facing the Bank as it weighs surging inflation against recession risks.
⚠️ The BoE is split. Hawks are back as Haskel, Mann, Saunders vote for 50bps. All external & latter leaving MPC so may not matter. 2 say no more hikes needed. Haven't seen an MPC this split for a while. Shows the dilemma that the BoE in are with inflation & recession risks $GBP pic.twitter.com/z1CxNTXUId
— Viraj Patel (@VPatelFX) May 5, 2022
Pound drops 1.2pc
The pound has plunged 1.3pc against the dollar in the wake of the Bank of England's interest rate decision.
While rising rates is usually a boost for the pound, it seems traders are setting more store by predictions that the UK economy will contract in 2023.
Bank warns over cost-of-living crunch
Other grim forecasts from the Bank of England's update include:
Inflation will climb above 10pc in October, when the energy price cap rises again
Pay growth will hit 5.75pc in 2022 – much higher than February's forecast – before falling again in the following two years.
Unemployment will drop this year before climbing to 5.5pc by 2025
Households are facing a 1.75pc drop in real disposable income this year – the second biggest fall since 1964
Economy will stagnate in 2024 with growth of just 0.25pc
Hawks abound in the MPC
A breakdown of the voting shows a hawkish tilt among the MPC members.
Six of the nine policy makers backed the 25 basis point increase to 1pc, while three voted for an even bigger 50 basis point rises.
Those members – Michael Saunders, Catherine Mann and Jonathan Haskel – citing concerns about rising pay growth.
Bank of England: Economy will shrink in 2023
The Bank of England has also issued a shock warning that the economy is on course to shrink in 2023.
The MPC said the UK will avoid a technical recession, but output will collapse by close to 1pc in the final quarter of this year as the cost-of-living crisis bites.
In 2023, GDP is expected to shrink by 0.25pc.
Bank of England raises interest rates to 1pc
It's confirmed – the Bank has raised interest rates by 25 basis points to 1pc.
What's the context?
In case you needed any reminding, today's decision comes against the backdrop of the biggest squeeze on living standards since the 1950s.
The ongoing war in Ukraine is exacerbating the surge in inflation, while energy bills are set to rise even higher at the next price cap review in October.
That said, the Bank must also weigh up the risk of tightening monetary policy too aggressively, slamming the brakes on economic growth and threatening to derail the post-pandemic recovery.
Markets expect rates to rise by 25 basis points to 1pc – the highest level in 13 years and the fourth consecutive increase.
Markets await interest rate decision
Just over 10 minutes to go now before the Bank of England reveals its decision on interest rates.
It's the calm before the storm... stick with us for the headline figure as it happens, followed by plenty of market reaction and analysis.
Is the Bank preparing to pause rate rises?
While markets are expecting the MPC to raise interest rates for the fourth meeting in a row this afternoon, there's less certainty about what path it will take next.
With surging energy and food bills putting the squeeze on household budgets, there are growing fears about a slowdown in economic growth.
As a result, the Bank has toned down its rhetoric over the need for aggressive interest rate rises over the summer months.
FX strategist Viraj Patel thinks there could be a "summer pause" in the rate rise cycle after today.
⚠️ BoE unlikely to be explicit about the path of policy beyond May... as it's 'meeting-by-meeting' policy decisions right now. But the hints may be that we see a 'summer pause' in the hiking cycle. Also think the BoE will be the first to cut in '23. This isn't priced either $GBP pic.twitter.com/ZYOvZbSINS
— Viraj Patel (@VPatelFX) May 5, 2022
Climate crisis will dwarf cost-of-living crunch, warns Mark Carney
As markets gear up for the Bank of England decision, former Governor Mark Carney has put in his two (Canadian) cents on the issue.
He's warned that the looming climate crisis will "dwarf" the hardships faced in today's cost-of-living crunch, adding that Russia's war in Ukraine had laid bare the dysfunction of global energy markets.
Mr Carney, now the vice chairman of Brookfield Asset Management, told a conference that fossil fuels had become “a weapon in a horrific and unjust war”, and that while countries were trying to replace Russian energy imports, the climate crisis was deepening.
He said the world was “building future costs that will dwarf current hardships”, adding that the goal was to seize this moment and move away from fossil fuels.
“It’s risky and it’ll be disruptive but it can no longer be delayed,” he added.
Russia faces defaulting on foreign debts within weeks
Russia is poised to default on its foreign debts within weeks as new US sanctions threaten to prevent it from paying bond holders, writes Louis Ashworth.
Moscow could find itself on track for a failed payment by the end of the month, despite the Kremlin blinking and raiding its limited reserves to pay off bondholders earlier this week.
Russia is due to make coupon payments on several bonds on May 27, but an exemption granted by the US Treasury allowing payments to flow to Western investors will lapse two days before.
That means Russia could face the prospect of an automatic default, even if it tries to once again tap its foreign exchange warchest, the majority of which has been frozen by sanctions, in order to make the payment.
Andy Sparks from MSCi, a US data company, said failure to make the payment “could trigger a default event”.
All eyes on Bank of England's inflation forecasts
In addition to the interest rate decision, economists will have a close eye on the Bank of England's inflation forecast for the years ahead.
Inflation is expected to have pushed higher after the price cap increase in April, with markets braced for a further surge later this year.
But Samuel Tombs, chief economist at Pantheon Macroeconomics, thinks the two-year forecast for interest rate expectations will be less than 2pc, signalling the MPC thinks market expectations are too high.
Keep a close eye today on the MPC's 2yr ahead forecast for CPI inflation. The rise in markets’ rate expectations since Feb should mechanically depress it by 0.7pp, all else equal. That should mean the fc is <2%, signalling the MPC thinks markets' rate expectations are too high
— Samuel Tombs (@samueltombs) May 5, 2022
Britain could already be in a recession, Bank of England warned
The UK may already be in a recession, economists have warned as the Bank of England prepares to further slam the brakes on growth with a fourth successive increase in the cost of borrowing.
Louis Ashworth has the details:
The Monetary Policy Committee is expected to increase interest rates to 1pc, an increase of 0.25 percentage points, when it meets today.
Raising interest rates typically slows economic activity by making it more expensive to borrow, which cools demand and tempers inflation.
However, Britain’s rampant inflation – which reached a 30-year high of 7pc in March and is expected to have accelerated in April – is being heavily driven by supply-side issues that are beyond the Bank’s influence.
The UK now faces the prospect of ‘stagflation’, when growth is tepid but prices are rapidly increasing, or even a recession.
“If we are unlucky, the UK is already in the early stage of a recession,” says Kallum Pickering, an economist at Berenberg.
S4 Capital shares jump as it finally gives date for results
Shares in S4 Capital jumped this morning as the company finally gave a date for its full-year results following a string of audit delays.
Sir Martin Sorrell's advertising firm said it will publish its 2021 numbers tomorrow. Shares rose more than 16pc.
Around £1.2bn was wiped off S4's market value in late March after it delayed its results for a second time, saying PwC was unable to complete the audit work in time.
S4 had blamed Covid for the original delay at the beginning of March, but no explanation was given for the second delay.
Budweiser owner cashes in on higher beer prices
The owner of Budweiser has become the latest drinks firm to enjoy a boost as customers kept buying more expensive beer.
AB InBev's first-quarter profits rose 7.4pc as higher prices helped to offset the impact of soaring expenses. Revenues rose 11pc.
The positive outlook from the Belgium-based booze group, which also owns Beck's and Corona, followed similar reports from both Carlsberg and Heineken.
Drinkers have so far been undeterred in their appetite for beer as Covid restrictions eased, despite the rise in prices.
Interest rates set to rise on election day for the first time in 18 years
It's a busy day today, with Britons heading to the polls in the local elections and the MPC poised to deliver its interest rate verdict.
Here's a flavour of what's to come from my colleague Louis Ashworth:
The Bank of England is poised to increase interest rates on an election day for the first time in 18 years as officials struggle to contain soaring inflation.
The Monetary Policy Committee (MPC) is expected to increase the benchmark cost of borrowing to 1pc, the highest since 2009, in a fourth successive increase.
Officials are trying to curb rampant inflation, which rose to a 30-year high of 7pc in March as energy and food prices surge. The rate of price increases is expected to have jumped further in April, and later in the year, when increases in the energy price cap kick in.
It comes as households go to the polls in local elections, with Boris Johnson’s Conservatives facing a backlash over the cost-of-living crisis engulfing the UK.
The last time an MPC rate increase coincided with polling was during 2004’s June local elections, in which the ruling Labour party fared poorly.
German factory orders drop as war hits manufacturers
Earlier this morning there were more grim indications of how the war in Ukraine is hurting Germany's economy, with factory orders dropping by more than expected.
Demand plunged 4.7pc in March from the previous month, driven by a decline in orders from abroad.
Expectations for growth in Europe's largest economy have been slashed since the start of the war as the key manufacturing industry grapples with rising costs and supply shortages.
🇩🇪 🌎 German factory orders suggest that global trade growth will weaken in the coming months ⬇ pic.twitter.com/xDxB9GSRSv
— Christophe Barraud🛢🐳 (@C_Barraud) May 5, 2022
Domino's slumps as VAT rise hits sales
Shares in Domino's Pizza dropped as much as 4.4pc after a rise in VAT dented sales in the first quarter.
The food group said sales slipped 1.5pc to £365.9m over the three-month period after the VAT rate on hot takeaway food was lifted to 12.5pc from 5pc in the same period last year.
Excluding the impact of the tax rise, like-for-like sales grew 3.9pc.
Domino's hailed "strong" trading and said orders grew 5.5pc over the quarter despite last year's lockdown delivery boom.
But analysts at Liberum cut their recommendation on the stock from hold to buy, citing concerns about the company's valuation.
Service sector growth slows as costs hit record high
Growth in the service sector began to slow in April as surging prices and the war in Ukraine took their toll.
New order growth was the weakest so far this year, while business confidence dropped to the lowest level in a year and a half.
It came as input costs rose at the fastest pace on record, with energy, fuel and wages all pushing higher. In turn, companies raised their own prices at a pace only marginally below March's record.
Overall, the S&P Services PMI came in at 58.9 in April, marking the 14th straight month of expansion in the sector. That said, the reading was down from 62.6 in March and pointed to the softest rise in activity since January.
Virgin Money gets credit card boost
Virgin Money has reported a surge in demand for credit cards among customers, suggesting more households are being forced to borrow to pay the bills.
The high street bank said unsecured lending grew 7pc in the six months to the end of March to £5.8bn. That's compared to a 2.5pc fall in business lending to £8.3bn.
It came as Virgin said pre-tax profits soared to £315m, up from just £72m in the same period last year. However, this was down from £345m in the previous six months as inflationary pressures started to hit.
The bank said it was too early to say whether the cost-of-living crisis was impacting customers but did warn it expects the economic outlook to be more uncertain. Shares dropped 4.9pc.
Our strategy remains the right one against a macroeconomic backdrop that has become more uncertain over the course of the six months.
Following a period of strong recovery in gross domestic product as Covid restrictions were lifted and consumer spending levels improved, the impact of higher inflation has seen expectations for further growth start to temper.
Pound falls ahead of Bank of England decision
Sterling has lost ground against a rebounding dollar as investors turn their attention to central bank decisions.
The Federal Reserve last night confirmed the biggest interest rate increase in more than two decades as it battles to keep a lid on inflation.
The Bank of England is expected to raise interest rates for the fourth consecutive meeting this afternoon – the first such run since 1997, lifting the rate from 0.75pc to 1pc.
The pound fell 0.7pc against the dollar to $1.2542, reversing Wednesday's gains and falling back towards the lowest level since July 2020 hit last week. Against the euro, it fell 0.5pc to 84.49p.
New car sales slump again amid shortages
New car sales took another hit in April as chip shortages continue to hurt producers, while the cost-of-living crisis and war in Ukraine threaten demand in the coming months.
Registrations tumbled 15.8pc to 119,167 units last month, according to the latest figures from the SMMT. The group downgraded its 2022 forecast from 1.89m to 1.72m units as parts shortages show no signs of letting up.
Electric battery vehicles remain the bright spot, with registrations up almost 41pc.
But there's more trouble on the horizon as the industry faces spiralling inflation – in particular soaring fuel costs – as well as further supply troubles and wider uncertainty caused by the war.
Mike Hawes, chief executive of the SMMT, said:
The worldwide semiconductor shortage continues to drag down the market, with global geopolitical issues threatening to undermine both supply and demand in the coming months.
Manufacturers are doing everything they can to deliver the latest low and zero emission vehicles, and those considering purchase should look to place their orders now to benefit from incentives, low interest rates and reduced running costs.
— SMMT (@SMMT) May 5, 2022
Mirror owner Reach warns of Ukraine hit to ad demand
Newspaper giant Reach has warned of a slump in advertising demand over the last two months as brands tried to avoid appearing next to stories about the Ukraine war.
The Mirror and Express publisher said digital revenue grew 9.3pc in the four months of April 24, though this was down from 24pc growth over 2021.
Advertising revenue in print was down 10.1pc, while Reach said it was working to mitigate the impact of newsprint inflation due to higher costs for paper and energy.
The group said: "Over the past two months the market has experienced reduced advertiser demand and lower average yields, with the war in Ukraine significantly reducing the level of 'brand safe' content for news publishers."
Shares in Reach slumped 20pc following the update.
Turkish inflation soars to 70pc
Turkey's official inflation rate soared to nearly 70pc last month, highlighting President Recep Tayyip Erdogan's struggles to keep the economy under control.
The consumer price index rose by 69.97pc in April, compared to 61.14pc in March.
Economists argue that many of Turkey's social problems are attributable to Mr Erdogan's unconventional economic strategy, which has turned many foreign investors away from the once-promising emerging market.
The Turkish leader insists that sharp cuts in interest rates are needed to bring down soaring consumer prices, flying in the face of economic orthodoxy.
The higher rate in inflation is also attributable to a collapse in the lira which has made energy imports much more expensive.
Barratt urges rethink of fire safety levy
Barratt Developments has called on the Government to rethink its plans to expand a levy designed to fund fire safety repairs.
Barratt and its rival housebuilders have signed up to a new building safety pledge and agreed to fix cladding issues on buildings in the wake of the Grenfell Tower fire – a commitment that amounts to around £2bn.
At the same time, the Government has announced plans to extend the levy to tax all new residential buildings in England with an aim of raising a further £3bn. The funds will be used to fix issues with blocks where the developer could not be identified or forced by law to resolve problems.
But in a trading update this morning, Barratt urged ministers to reconsider the expansion.
It said: “In our view, this is unjust and disproportionate, further punishing UK housebuilders who were not responsible for most of the historical buildings or building safety issues being addressed and fails to effectively allocate the cost of remediation to those responsible.”
Friends of the Earth call for windfall tax
It's not just Labour calling for a windfall tax on energy giants – climate group Friends of the Earth has joined in.
Campaigner Connor Schwartz says:
While giant fossil fuel firms like Shell post massive profits, millions of people are struggling with sky-rocketing energy bills and living in heat leaking homes.
A tax on these excess profits could help pay for a nationwide free insulation programme, rolled out street-by-street, focusing on those most in need first.
There’s no time to waste. The quickest way to bring down energy bills for good is to insulate our homes and invest in cheap and reliable renewable power. And it starts with a windfall tax on fossil fuel companies.
Expert reaction: Future remains bright for Shell
Jamie Maddock at Quilter Cheviot says Shell's good fortune is likely to last beyond the current energy crisis.
Despite mixed underlying performance and the high bar set by peers, Shell’s results were similarly strong as it continues to benefit from high commodity prices and the inflationary environment.
Like others, Shell benefited from the disruption caused to the fuel market however they also took a meaningful write down on the value of their Russian operations as they prepare to exit.
Shareholders will also be able to continue to benefit from the higher commodity prices via the dividend which was increased and the implied increase to the full year share buyback program.
Even once inflation washes out of the system and commodities calm down once again, the future remains bright for Shell. Recent events have shown the need for energy security for individual nations and as such oil and gas pipes are unlikely to be turned off for good anytime soon.
As a result, while it continues to invest in the energy transition and makes that a priority for future proofing the business, energy concerns will mean the company can benefit from both old and new world energy resources.
FTSE risers and fallers
The FTSE 100 has staged a strong start to the day after the Federal Reserve's widely-expected interest rate rise triggered a rally in global stocks.
The blue-chip index gained 1.5pc in early trading, with investors turning their attention to the Bank of England decision due this afternoon.
Shell was the biggest boost to the index, gaining 3.4pc after the surge in oil and gas prices helped it triple profits in the first quarter.
Miners including Anglo American, Glencore and Rio Tinto all pushed higher, tracking a rise in metal prices after the Fed's decision.
Financial stocks such as banks and insurers also gained ground amid optimism about a higher-rate environment.
The domestically-focused FTSE 250 was also up 1.5pc. Playtech jumped 5pc after it reported progress in takeover talks with investor group TTB.
Another day, another windfall tax tweet
Ed Miliband and Rachel Reeves are very much singing from the same hymn sheet.
20 minutes after Mr Miliband blasted the Conservatives for failing to introduce a windfall tax, the Shadow Chancellor posted an almost identical tweet.
NEW: Shell profits jump 43% to £7.2 billion.
Another day, another oil and gas producer making billions in profits, and yet another day of the Conservatives refusing a windfall tax to bring down bills.
Today #VoteLabour for a party on your side. https://t.co/SowgDFT0HG
— Rachel Reeves (@RachelReevesMP) May 5, 2022
Next sales rise despite online shopping hit
Next has reported another rise in sales despite a dip in online shopping as Britons returned to the high street.
The fashion chain posted a 21pc increase in full-price sales in the 13 weeks to the end of April, although online sales were down 11pc.
The figures highlighted the shift in shopping patterns as Covid restrictions eased and stores reopened. Store sales surged 285pc on the same period last year, though they remained 8pc behind pre-pandemic levels.
Next said it remained in good shape for the rest of the year and didn't downgrade its forecasts as a result of inflation.
Boss Lord Simon Wolfson previously said the chain would increase prices by an average of 3.7pc over the half-year to July, but there was no suggestion that prices would rise any higher than that.
FTSE 100 jumps at the open
The FTSE 100 has risen sharply at the open, boosted by Shell's strong earnings and the Federal Reserve's aggressive interest rate increase.
The blue-chip index jumped 1.6pc to 7,616 points.
Labour doubles down on calls for windfall tax
As expected, Shell's bumper results have fuelled calls for a windfall tax on energy giants.
Ed Miliband, Shadow Climate and Net Zero Secretary, accuses the Tories of "shamefully" refusing to act to bring down energy bills.
The results coincide with polls opening for local elections across the UK.
Another day, another oil + gas company making billions in profits, and yet another day when the Conservatives shamefully refuse to act with a windfall tax to bring down bills.
Today voters can send a message. Vote Labour for a party on your side. https://t.co/iAbi0FmAWo
— Ed Miliband (@Ed_Miliband) May 5, 2022
Shell keeps a tight lid on finances
Only a few months ago, activist investor Dan Loeb was calling for a break-up of Shell. So for bosses, the latest figures will come as a significant relief.
Shell's net debt has dropped from $79bn at the end of 2019 to $48.5bn in the first quarter this year. It hasn't given detailed guidance on capex, but it's told investors spending will be at the low end of its range of $23bn to $27bn for the year as a whole.
This suggests Shell is keeping a lid on spending and focusing instead on shareholder returns. The group has announced $8.5bn of share buybacks in the first half, funded largely by the sale of its Permian assets last year.
While there's no dollar amount for buybacks in the second half, it said these would be more than 30pc of operating cash flow.
Shell promises investor payouts
Ben van Beurden, Shell's chief executive, has said the company will prioritise investor returns after the strong results.
Generating value through strong earnings and cash flow, coupled with maintaining a healthy balance sheet and continuing the disciplined delivery of our strategy, are crucial for Shell to play a leading role in the energy transition.
This allows us to support our customers as they shift to cleaner energy. It's also the best way for us to contribute to the security of energy supplies.
Today's results, the progress we are making with our $8.5bn share buyback programme and the reduction of our net debt to $48.5bn all show we remain on track, and give us the confidence to plan future shareholder distributions and disciplined investments that will accelerate our strategy.
Shell cashes in on energy crisis
Shell has followed rival BP in posting a surge in profits over the first quarter thanks to the chaos in energy markets.
The FTSE 100 company reported adjusted profit of $9.1bn (£7.2bn), almost triple what it made during the same period last year and $1bn more than forecast.
Energy firms have cashed in on the recent rise in oil and gas prices, which has been exacerbated by the war in Ukraine. This has prompted calls for a windfall tax, though the Government has resisted such as move, warning it would discourage investment.
Shell also reported a $3.9bn charge from its decision to withdraw from Russia, including its major Sakhalin-2 liquefied natural gas project with Gazprom.
It's warned the move will cost it as much as $5bn, though that's significantly lower than the $25bn hit BP is expecting.
5 things to start your day
1) Barclays defies green activists to back oil and gas Bank pledges to help Europe detach itself from dependence on Russian fossil fuel
2) Workplace lawsuits over 'banter' hit record high Former colleagues clash over what they deem to be acceptable office humour
3) Can a Ferrari 'unicorn' save Aston Martin? Sports carmaker aims to replicate the success of its Italian rival as it banks on Ferrari veterans
4) Virgin Atlantic flight aborted mid-air after pilot training mix-up Airline blames blunder that occurred on Monday on “rostering issue”
5) Elon Musk’s SpaceX rockets linked to death of endangered birds Habitats at risk from traffic, noise, heat and rocket launch explosions, draft report finds
What happened overnight
Hong Kong stocks started Thursday with a healthy advance after the Federal Reserve lifted interest rates but played down any chance of a huge 75 basis-point lift in the near future.
The Hang Seng Index climbed 1.41pc, or 293.63 points, to 21,163.15.
The Shanghai Composite Index dipped 0.07pc, or 2.21 points, to 3,044.85 as traders returned from an extended break this week, while the Shenzhen Composite Index on China's second exchange dropped 0.66pc, or 12.39 points, to 1,866.49.
Coming up today
Corporate: Trainline (full year); Endeavour Mining, Shell, Virgin Money (interims); BAE Systems, Barratt Developments, Derwent London, Hiscox, IMI, Mondi, Next, Rathbone Brothers, Reach (trading statement)
Economics: Bank of England interest rate decision (UK), jobless claims (US)