Market report

Bank dilemma as economy shrinks, markets fall

Bank of England
The Bank of England faces a dilemma (pic: Terry Murden)

The UK economy shrank in April for the second month in a row, as the CBI warns that the country is flirting with recession.

Gross domestic product (GDP) declined by 0.3%, following a 0.1% drop in March, according to figures published by the Office for National Statistics.

Services were down by 0.3% while production fell by 0.6% as businesses have struggled with increasing supply and labour costs.

It was the first time that all main sectors had contributed negatively to a monthly GDP estimate since January 2021.

Over the three months to April, GDP was up by 0.2%, slowing sharply from growth of 0.8% in the three months to March.

A Reuters poll had pointed to 0.4% growth in the February-April period.

Sterling has already fallen around 8% against the dollar this year, even though markets are pricing in a fifth consecutive interest rate rise from the Bank of England to tackle the surge in inflation.

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The Bank of England now faces raising rates for a fifth consecutive month to control rampant inflation at 9%, while adding to business costs.

Martin Beck, chief economic adviser to the EY ITEM Club, said: “The economy is experiencing rising, supply-driven inflation at the same time that demand is weakening, leaving the MPC in a challenging place in advance of its interest rate decision this month.

“But while the MPC isn’t short of reasons to raise rates, it will also be mindful of the risks of tightening policy at a time when some growth indicators have started to flash red. For example, GDP fell in both March and April, while consumer confidence fell significantly in April.

“On balance, the EY ITEM Club thinks a majority will put inflation concerns above growth concerns and vote for a 25bps rise in Bank Rate.”

Global markets tumbled and the S&P 500 in the US fell into bear territory.

Wall Street closed sharply lower as traders fretted over higher than forecast inflation figures reading and expectations of a potentially bigger hike in rates by the Federal Reserve on Wednesday.

At the close, the S&P 500 was 3.88% weaker, while the Dow Jones Industrial Average was down 2.79%, and the Nasdaq Composite took the worst hit, down 4.68%.

The S&P 500 fell to a new intraday low for the year and its lowest level since March 2021, as investors digested last Friday’s news that inflation had not peaked as hoped and the consumer price index had risen 8.6% year-on-year in May, its fastest increase since December 1981.

Wall Street
Wall Street tumbled

The FANG+ index of mega-cap growth stocks – Facebook (Meta), Apple, Amazon, Netflix and Google (Alphabet) etc – is down 37.5% since the start of the year.

The money markets are now pricing in US rates of between 3.75% and 4% in a year’s time.

London tumbles on inflation and rate fears

The FTSE 100 closed down 111.71 points (1.53%) at 7,205.81 but off its low of 7174.02, dragged sharply lower.

“Once again in 2022 the FTSE 100 is doing a smidge better than other global markets but, before UK investors get too excited, a big slide in sterling is a significant contributing factor to the outperformance,” says AJ Bell investment director Russ Mould.

“The mood out there is pretty grim, with the relief rally seen in late May starting to feel like a distant memory.”

Mining stocks were in the red, with Glencore down 4.79%, Antofagasta losing 2.76%, Anglo American 2.62% weaker, and Rio Tinto Group 1.93% lower.

Adding to global worries is a fresh spike in Covid-19 cases in Beijing, causing further tight restrictions.

The Nikkei 225 in Japan closed down 3.01%, the Hang Seng at Hong Kong was 3.4% off, while South Korea’s KOPSI closed 3.3% lower.

James Fisher CEO stepping down

Marine services company James Fisher and Sons said Eoghan O’Lionaird intends to step down as chief executive once a successor for his position has been appointed. A search for his replacement is in progress.

Angus Cockburn, chair, said: “On behalf of the board, I would like to thank Eoghan for his service and considerable contribution to James Fisher.

“The group has an experienced management team which is tackling the challenges faced by the business and the board believes that a solid business will emerge to build on the opportunities offered by the energy transition.

“The board remains committed to its strategy of driving recovery in revenue and profitability, exiting non-core businesses and reducing debt during 2022.”

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