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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Markets rebound as US economy records fastest growth since 1984 – as it happened

United States US Federal Reserve United Kingdom Jay Powell Jerome Powell Omicron Diageo London Intel Corporation Annington
Trader Aaron Ford on the floor of the New York Stock Exchange last night, where an early market rally faded after the Federal Reserve signalled it plans to begin raising interest rates
Trader Aaron Ford on the floor of the New York Stock Exchange last night, where an early market rally faded after the Federal Reserve signalled it plans to begin raising interest rates "soon". Photograph: Allie Joseph/AP

Closing summary

Time to wrap up, with Reuters’ latest take on today’s strong US GDP report:

The U.S. economy notched its strongest growth in nearly four decades in 2021 after the government injected trillions of dollars in COVID-19 relief, and is seen soldiering on this year despite headwinds from the pandemic, strained supply chains as well as high inflation.

The Commerce Department’s report on Thursday showed the economy accelerating in the fourth quarter as businesses replenished depleted inventories to meet strong demand for goods. Last year’s robust growth supports the Federal Reserve’s pivot towards raising interest rates in March.

The sharp rebound in growth last year could offer some cheer for President Joe Biden whose popularity is falling amid a stalled domestic economic agenda after the U.S. Congress failed to pass his signature $1.75 trillion Build Back Better legislation. It, however, could diminish prospects of more money from the government. The government pumped nearly $6 trillion in pandemic relief.

“While Omicron will lead to weaker growth in the first quarter, activity is expected to rebound nicely once the latest pandemic wave abates and supply-chain glitches ease,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

“The Fed will need to be ‘humble and nimble’ as it navigates underlying economic strength, worsening labor shortages, and stubbornly high inflation.”

The economy grew 5.7% in 2021, the strongest since 1984. It contracted 3.4% in 2020, the biggest drop in 74 years. The stunning reversal came as gross domestic product increased at a 6.9% annualized rate in the fourth quarter. That followed a 2.3% growth pace in the third quarter.

Here’s today’s main stories too:

Here’s Danni Hewson, AJ Bell financial analyst, on the latest US growth figures, and the highlights from today’s financial results:

“And despite higher than forecast US GDP figures it’s impossible not to consider the factors that propelled the country to those heights. Firstly, we can’t forget where the country had been during the first Covid pummelling, secondly, all that stimulus lubricating the wheels is going to start to disappear which is why growth is forecast to slow considerably. And that’s the bit investors need to focus on, where economies are going and not just where they’ve been.

“And looking through some of today’s earnings updates both in the UK and the US, there’s good news and then there’s bad.

Mastercard’s profits were given a nice nudge thanks to the return of the traveller, a universal factor which also helped EasyJet which reported surging forward bookings. But cost pressures and supply issues are still continuing to dog businesses of all kinds. UK drinks maker Fevertree and US chip maker Intel Corp saw shares fall after both warned those lingering issues will impact profits in the near term.

“It’s something burger slinger McDonald’s has first-hand knowledge of, but as with all investments, there’s no one size fits all. Though shares fell after the market opened, they did recover slightly. Many of the factors which weighed down those golden arches have now been resolved and the buying power of the fast-food giant coupled with its brand loyalty and low-cost offer should put it on a better footing this quarter.

Wall Street’s volatility index has dipped today, as trading calmed down after some rather rocky sessions:

In the City, shares have ended the day higher with the FTSE 100 index up 85 points at 7554, up 1.1% today.

Banks and mining companies posted gains, along with online grocery tech company Ocado (which yesterday announced it had developed “game-changed” robots to allow cheaper, faster deliveries).

The strong US growth figures lifted European markets higher, after coming under pressure this morning.

Germany’s DAX gained 0.4%, while France’s CAC finished 0.6% higher, shrugging off earlier worries about rising US interest rates.

David Madden, market analyst at Equiti Capital, says the fear that was running through the markets faded.

Bargain hunters stepped into the fold, and now the DAX, the FTSE 100 and the CAC are have finished higher on the day.

It is similar scene in the US, where the S&P 500 is up over 0.8%. Earlier, it was announced the US economy grew by 6.9% in the final quarter of 2021, which easily beat the 5.3% forecast that economists were expecting. The reading was a sharp rise on the 2.3% growth was that seen in the third quarter of last year.

This is clearly good news for the health of the US economy, while it strengthens the case for an aggressive tightening policy from the Federal Reserve. The fact that US stocks are higher despite the solid GDP reading could be a sign that dealers are getting used to the idea there could easily be four or five rate hikes this year.

Despite the recovery, US home sales dropped in December as a lack of supply hit the market.

Contracts to buy US previously owned homes fell by 3.8% last month, with the inventory of properties on the market at record lows. Pending home sales fell in all four regions.

Lawrence Yun, chief economist at the National Association of Realtors (NAR), explains:

“Pending home sales faded toward the end of 2021, as a diminished housing supply offered consumers very few options.”

The US economy could continue to recover this quarter, as the surge in Omicron cases falls back, says Robert Frick, corporate economist at Navy Federal Credit Union.

“Much of the strong growth in fourth quarter GDP was due to businesses building up inventories, and the numbers indicate consumer spending slowed in December either because of Omicron or because spending was frontloaded in October and November as holiday shoppers feared shortages.

With the Omicron wave falling quickly, shelves restocked and consumer demand generally strong, we should see the economy continue its healthy recovery this quarter.”

Back in the UK, the government wants to reverse a controversial privatisation deal by seeking to wrest ownership of 38,000 homes in the Ministry of Defence housing portfolio from the billionaire private equity boss Guy Hands.

The move is expected to lead to a legal battle between the MoD and Hands’ private equity firm Terra Firma over whether the government can take back full ownership of the homes.

In 1996, under the defence secretary Michael Portillo, the Conservative government sold 57,400 houses used by military service men and women and their families to Annington Homes for £1.7bn in a sale and leaseback deal. In one swoop, Annington became the biggest residential property owner in England and Wales. The MoD rented back the homes on a 200-year lease at a discount but also agreed to pay for their maintenance and refurbishment.

The value of the properties has ballooned under Annington’s ownership to many times their original purchase price, meaning the taxpayer has missed out on any profits from the property boom. They were valued by Annington at £7.6bn last year, while their vacant possession value is estimated at £10bn. The MoD is paying about £180m a year in rent plus £140m in repairs and upgrades.

Terra Firma, which purchased Annington from Nomura Holdings for £3.2bn in 2012, said it would challenge the MoD’s move, and that it expected to win in what it predicted would be a “very long and very expensive” court case.

At the time of the deal the MoD hoped to free up cash for renovation as the homes were falling apart.

However, the National Audit Office concluded in a 2018 review that taxpayers were between £2.2bn and £4.2bn worse off as a result of the arrangement. The NAO said the MoD had “lost out on billions of pounds’ worth of increases in asset values, while Annington has made a significantly higher return on its investment than expected”.

Here’s the full story:

Although 5.7% annual growth is certainly strong, it does follow a torrid 2020, which saw the downturn since the second world war.

That creates a strong ‘base effect’, as the relaxing of restrictions allows growth to recover.

But having said that, the US has recovered faster than other G7 nations, regaining its pre-Covid size by the middle of last year.

Intel’s shares are being pummelled after the semiconductor maker issued a lower-than-expected profit forecast.

Intel have dropped 7%, despite the company reporting record quarterly earnings last night.

Traders are disappointed that Intel forecast first-quarter earnings per share of 80 cents, compared to an expectation of 86 cents.

Chief executive Patrick Gelsinger warned that supply chain constraints would continue this year, and into next year as the “unprecedented demand” for chips continued.

Intel is also spending heavily on new capacity and improving its production technology, after Gelsinger - a Silicon Valley pioneer - rejoined Intel as CEO last year. Those investments could help it challenge rival AMD better, but will also weigh on profitability.

Today’s higher-than-expected GDP figures suggest the US economy is in a strong position to handle higher interest rates, argues Josie Dent, managing economist at the CEBR.

Indeed, yesterday [Fed chair Jerome] Powell acknowledged that the economy is in a much stronger position than the last time the Fed tried to increase interest rates, with a low unemployment rate and strong output growth.

Overall, Cebr is forecasting 3.8% growth in GDP in the US in 2022 as the recovery from 2020’s contraction slows.”

The markets are now pricing in five increases in US interest rates this year, after Powell made it clear that the Fed would act to bring down inflation, which hit a 40-year high of 7% last month.



President Biden has tweeted that last year’s 5.7% growth shows his economic policies are working:

Updated

Wall Street rallies after strong growth figures

The floor of the New York Stock Exchange
The floor of the New York Stock Exchange Photograph: Brendan McDermid/Reuters

Wall Street has jumped, as investors hail the faster-than-expected acceleration in US growth in the last quarter.

Stocks are higher in early trading, despite concerns that the US Federal Reserve will raise interest rates aggressively to tame inflation.

The Dow Jones industrial average has risen by 337 points, or 1%, to 34,505 points.

Chemicals producer Dow Inc (+4.9%), Microsoft (+2.1%), Nike (+2.1%) and Salesforce.com (+1.9%) are leading the risers.

The broader S&P 500 index has jumped by 1.2%, recovering some of its recent losses.

Neil Birrell, chief investment officer & fund manager at Premier Miton Diversified Growth Fund, says

“A raft of US economic data has shown that the economy is in robust health. The GDP data came in higher than expected for Q4 and jobless claims were a bit lower than expected. There can be little doubt that the Fed needs to act, but we know that already, it’s all about the speed and the scale of the policy move.

Markets are struggling to digest the macro environment at the moment, and it is likely to drive asset prices, even through the reporting season.”

The strong US recovery shows the value of the huge fiscal and monetary pandemic stimulus packages, says Claudia Sahm, director of macroeconomic research at the Jain Family Institute.

US economy grew at fastest pace since 1984

The U.S. economy grew last year at the fastest pace since Ronald Reagan’s presidency.

Today’s GDP report shows the economy expanded by 5.7% during 2021, as growth bounced back from the shock of the pandemic.

Government and central bank stimulus packages supported consumer spending and businesses, while vaccine rollouts have helped firms to reopen and rehire staff.

It’s the strongest calendar-year growth since the US gross domestic product — its total output of goods and services — surged by 7.2% in 1984.

It’s a strong recovery from 2020, when the US economy had shrunk by 3.4% as Covid-19 rocked the US and global economy.

Associated Press reports.

The economy ended the year by growing at a solid 6.9% annual pace from October through December, the Commerce Department reported Thursday.

Squeezed by inflation and still gripped by COVID-19 caseloads, the economy is expected to keep expanding this year, though at a slower pace. Many economists have been downgrading their forecasts for the current January-March quarter, reflecting the impact of the omicron variant.

For all of 2022, the International Monetary Fund has forecast that the nation’s GDP growth will slow to 4% for 2022.

Updated

Today’s GDP figures surpass expectations and suggest that the U.S. economy is accelerating faster than anticipated, says Richard Flynn, Managing Director at Charles Schwab UK.

That may put more pressure on prices (which could spur the Federal Reserve into raising interest rates more quickly).

Flynn says:

There is a heightened risk that an overheating economy could push inflation even higher. With booming growth, the tight labour market is pushing up wages, and inflation has spiked to its highest level in decades.

Real interest rates, adjusted for inflation, have been steeply negative for the past few years, contributing to very loose financial conditions.

“Despite a strong performance in Q4, the unfortunate reality is that U.S. economic performance continues to be driven by the pandemic. Today’s figures measure GDP up until the end of December 2021, excluding some of the recent surges in COVID-19 cases. Indeed, there’s been weakness across U.S. stock indices in the first weeks of 2022, as investors digest some of the risks facing the economy: receding monetary and fiscal liquidity, persistent effects from the pandemic, and a rise in inflationary pressures.”

US GDP
US GDP growth (annualised) Photograph: BEA

US economy grew faster than expected in Q4

The US economic recovery picked up speed in the final quarter of the year.

GDP rose by 1.7% in the October-December quarter, or at an annualised rate of 6.9%.

That’s much stronger than the 2.3% annualised growth recorded in July-September, and faster than expected.

The acceleration of growth in the fourth quarter was led by an upturn in exports as well as accelerations in inventory investment and consumer spending, the GDP report says.

It says:

The increase in exports of goods was widespread, and the leading contributors were consumer goods, industrial supplies and materials, and foods, feeds, and beverages. The increase in exports of services was led by travel.

Consumer spending, or personal consumption, grew by 3.3% during the quarter, up from 2% in Q3, while business investment rose by 2%.

Inventories surged as firms stocked up on goods to meet high demand, and to protect themselves from the supply chain crisis.

Updated

The number of Americans filing new claims for unemployment benefit has dropped.

There were 260,000 new ‘initial claims’ filed last week, a drop of 30,000 compared with the previous week.

It suggests demand for labor remained strong this month, with workers keen to hold onto staff.

Wall Street futures have pushed higher, with the S&P 500 index now expected to rise around 0.4% when trading begins in an hour.

As this chart shows, it’s been a choppy week!

Indian tech company Ola has announced plans to invest £100m in the UK to open a research and development facility for a planned electric car, in a significant boost to the British automotive industry.

Ola launched its taxi app that rivals Uber in cities including London, Birmingham and Cardiff in 2018, but it is pushing into electric vehicles with a recently launched road-going scooter and a planned electric car.

The new facility will be based in Coventry, the traditional West Midlands centre of the UK automotive industry. It will create 200 jobs in design and engineering. Workers at the plant will also research battery technology.

Ola was founded in India in 2010 by Bhavish Aggarwal, and it now claims to be the world’s third-largest ride-hailing app. This week its electric vehicle arm, Ola Electric, raised $200m in funding at a reported $5bn (£3.7bn) valuation – previous backers include Softbank, the major Japanese technology investor. It is also reportedly planning a stock market float to raise as much as $2bn.

Oil is trading at fresh seven-year highs today, amid concerns that the Ukraine crisis could disrupt energy markets.

Brent crude has risen to $90.64 per barrel, having hit the $90/barrel mark yesterday for the first time since 2014.

The energy team at SP Angel say:

  • Crude prices surged on Wednesday, with Brent climbing to US$90/bbl for the first time in seven years, amid tensions between Ukraine and Russia, the world’s second-largest oil producer, that have fanned fears of energy supply disruptions to Europe
  • OPEC+ has also missed its planned supply increase target in December, highlighting capacity constraints that are limiting supply as global demand recovers from the COVID-19 pandemic

The FT’s Colby Smith has a good take on last night’s Federal Reserve press conference, where America’s top central banker took a tough line on fighting inflation:

Jay Powell had always said that if inflation was in danger of spiralling out of control, the Federal Reserve would be willing to bring out the hammer to knock prices down.

On Wednesday, in his most hawkish press conference since the start of the pandemic, the chair of the Fed gave the clearest signal yet that such a moment was fast approaching.

“Powell essentially said to the markets and the economy, ‘put on your seatbelt, we are getting ready to take off’,” said Nathan Sheets, global chief economist at Citigroup and a former under-secretary at the US Treasury. “If inflation doesn’t fall as they expect, the Fed is prepared to be vigorous.”

The Fed’s drive towards tighter policy was apparent not just from what Powell said about the path forward for monetary policy, but also what he refused to divulge about the US central bank’s plans for interest rates later this year.

“Powell was distinctly not willing to rule out more frequent [or] larger rate hikes,” Sheets said.

More here: ‘No more Mr Nice Guy’: Fed chair signals tougher stance on inflation

UK retailers report disappointing January sales

A shopper on Oxford Street in London this month.
A shopper on Oxford Street in London this month. Photograph: Andy Rain/EPA

UK retailers have suffered weak January sales, as the Omicron variant kept people away from the shops over the festive period.

Retail sales were poor for the time of year for the first time since September, according to the CBI’s latest Distributive Trades Survey.

A net balance of 23% of retailers said trading was below normal, the weakest reading since March.

The poll took place between 22 December and 18 January, when Covid-19 cases were surging, and Plan B restrictions meant many people were working from home.

But..... sales are expected to remain below seasonal norms in February, with the cost of living squeeze likely to leave people with less to spend in the shops.

Ben Jones, Lead Economist at the CBI, says:

“It was not surprising that retail sales dropped back below seasonal norms in January, given the spread of Omicron, the reintroduction of restrictions late last year and increased consumer caution.

“Even as cases fall and Omicron-related restrictions are rowed back, retailers will be looking to the year ahead with a degree of concern. The sector faces an inflation double whammy, as rising energy and transport costs erode households’ spending power and retailers’ own costs continue to mount.

“It is vital that the Government comes forward with measures to protect the most vulnerable consumers, who will struggle the most with anticipated price rises.”

Retailers also reported that their stock levels were too low, as the supply chain crisis continues to hamper deliveries:

Economic activity appears to have picked up in the UK last week, as firms try to recover from the shock of Omicron.

Retail footfall in the UK increased by 2%, to 80% of the level seen in the equivalent week of 2019. Visits to high streets rose by 4%, as more shoppers ventured out as Covid-19 cases fell from recent record highs.

People spent more, with credit and debit card purchases rising 2% last week.

Restaurants saw a welcome increase in customers too, after the usually busy Christmas period was wiped out by Omicron. The number of UK seated diners increased by 5 percentage points in the week to Monday, to 97% of its pre-pandemic levels.

But many businesses are still reeling from a drop in trading this month. A third reported that their turnover had decreased compared with normal expectations for this time of year, with over half blaming the pandemic.

Firms are also short of workers, the ONS adds:

In mid-January 2022, 13% of businesses reported a shortage of workers; the accommodation and food service activities industry reported the highest percentage (28%), with 60% of these businesses reporting that employees are now working increased hours because of the shortages.

Pound hits one-month low against resurgent US dollar

Sterling has hit a one-month low against the US dollar, as expectations of US interest rate rises push up the greenback.

The pound dipped below $1.34 for the first time since 27th December, down half a cent today.

After last night’s hawkish press conference from the Fed, the dollar has strengthened. It’s hit its highest level since July 2020 against a basket of currencies.

Neil Wilson of Markets.com says:

The Fed gave the green light to lifting rates in March but chose to keep on with asset purchases until them, rather than ending them sooner. Quantitative tightening – reducing the balance sheet – will come some time later. The hawkishness came from Jay Powell in the press conference. He stressed that the economy and labour market are in much better shape than in 2015, the last hiking cycle.

Powell dropped some remarks that can only lead us to think the Fed is minded to raise rates more aggressively than the dots and markets had thought. “I think there’s quite a bit of room to raise interest rates without threatening the labour market,” he said. Powell didn’t rule out hiking every meeting, pointing to as many as seven 25bps hikes this year.

The US dollar exchange rate over the last two years
The US dollar exchange rate over the last two years Photograph: Refinitiv

Dario Perkins of City firm TS Lombard tweets:

Fever-Tree drinks

Posh mixer maker Fevertree has warned that costs will rise faster than expected this year.

Shares in Fevertree have dropped almost 7% this morning, after it reported that cost headwinds in 2022 will be more significant than it had anticipated.

Fevertree, which makes a range of tonic waters and sodas plus ginger beer and lemonade, grew its sales by 23% last year, including 33% growth in the US, in the face of “unprecedented macro uncertainty and supply chain disruption”.

CEO Tim Warrillow cautioned that restrictions at hospitality venues could weigh on growth, even though there’s less disruption than in 2021:

The Group continues to deliver impressive growth in every one of our key markets, however, I am of course mindful that short-term logistics challenges and cost pressures remain, along with On-Trade restrictions, albeit at a much lower level than this time last year.

Home drinking and cocktail making boosted Fevertree, though. It reports a good performance from ‘off-trade’ (sales in supermarket etc) as at-home consumption and interest in premium long mixed drinks becomes increasingly established.

Updated

UK travel industry forecasts summer boom amid surge in holiday bookings

Saga Cruise’s Spirit of Discovery

Saga, the travel and insurance group specialising in products and holidays for over-50s, has joined easyJet (see earlier post) in reporting a bounce back in bookings -- lifting optimism for a recovery this summer.

Saga said it has seen strong bookings for its cruises in the period from 1 August to 26 January.

The company said that for this 2022/2023 financial year, which runs from 27 January, cruises have a booking load factor of 86% in its first half and 73% for the full year.

Euan Sutherland, chief executive of Saga, says:

“While Omicron has impacted travel bookings through December and January, our outlook for cruises in 2022/2023 and beyond is positive.”

The company said that the cruises operation produced profits on an adjusted basis in the period to 26 January, but a pre-tax loss of £45m to £50m.

Here’s the full story:

FTSE 100 benefits from move into value stocks

While other markets are struggling, the UK’s FTSE 100 has now popped into positive territory.

The blue-chip index is 24 points higher, up 0.3%, while Germany (-0.5%) and France (-0.35%) are still lower after big losses in Asia overnight.

Banks and mining companies are leading the charge, including Standard Chartered (+4.5%), HSBC (+2.8%), Rio Tinto (+2.1%) and Barclays (+1.8%), along with packaging firm DS Smith (+1.4%).

The London market cops a lot of flack for its old-economy focus (it was dubbed Jurassic Park last year, for its lack of innovative technology companies and its focus on dividends over growth).

But the current move away from innovative but unprofitable tech firms is working in the Footsie’s favour, after Federal Reserve chair Jay Powell failed to stop January’s market rout.

Russ Mould, investment director at AJ Bell, points out that the FTSE 100 is outperforming other indices so far this year (it’s up 1.5%, while the US S&P 500 is down over 8%).

“It’s what Powell didn’t say that troubled investors. The key concerns are how aggressive the Fed will be with raising rates – will they go up at every meeting this year, and will they go up by more than 0.25 percentage points each time?

“Powell said the central bank would be guided by the data and so growing investor fears that the Fed might be quite aggressive in its efforts to curb inflation remain intact as there was no clarity on exactly what would happen and when.

“The only thing we can really take from the Fed’s latest meeting is that interest rates are almost certainly going to go up in March.

“Once again, the FTSE 100 was an outlier among global markets, with 2022 proving to be quite a year for the underdog. For the past decade the UK market has been like the last child to picked for a team in gym class, no-one having faith in its abilities for fear it wouldn’t perform well. But the FTSE 100 is now one of the best performing major markets this year on a relative basis.

“For once, investors are eager to own the FTSE’s ‘old economy’ companies in banking, tobacco and oil, as these are value stocks which are once again in fashion.”

Updated

Electricals retailer AO World is reviewing its operations in Germany, as rising costs and the relaxation of lockdown rules hit sales.

AO’s revenues in Germany fell by 24% year-on-year in the last quarter, twice as fast as in the UK.

It has now launched a strategic review of the German business, which it says is facing several challenges, including rising competition and supply chain problems:

Our German business is being significantly impacted by a number of recent material changes to the local trading environment: competition in the online market has intensified whilst online penetration has returned to pre-pandemic levels; digital marketing costs have substantially increased against pre-pandemic levels; and supply remains constrained.

We expect these trends will continue for the foreseeable future in the German market.

Shares in AO have dropped 2.7% to 103p. Back at the start of 2021 they were worth over £4, after a surge in demand from locked-down customers.

Norway’s sovereign wealth fund has reported a 14.5% return for last year, helped by the boom in technology shares.

Norway’s Government Pension Fund Global, which invests the profits from Norway’s North Sea oil boom, achieved a return of 1,580bn kroner (£133bn) in 2021.

That lifted the fund’s value at the end of last year to 12,340bn kroner, or just over £1trn.

Nicolai Tangen, CEO of Norges Bank Investment Management which oversees the fund, says the stock market boom last year boosted its returns.

“The good results are mainly due to very strong developments in the equity market throughout the year. There was good return in all sectors, but the investments in technology and financials performed particularly well.

The investments in technology returned an impressive 30.2 percent.”

UK watchdog to study music streaming market

The UK’s competition watchdog has launched an in-depth study into the booming music streaming market, to assess whether the big record labels and services such as Spotify hold “excessive power”, and whether artists and fans are getting a fair deal.

The Competition and Markets Authority (CMA), which was called on to launch the study following a scathing report by a cross-party committee of MPs last year calling for a “complete reset” of a streaming model which it believed only benefited big labels and superstar acts.

Music streaming now dominates fans’ listening habits and accounts for 80% of the £1.7bn total UK industry income last year. Spending on subscriptions to services such as Spotify, Apple Music and Amazon Music hit £1.3bn, compared with just £135.6m on vinyl albums, and £150m on CDs.

“Whether you’re into Bowie, Beethoven or Beyoncé, most of us now choose to stream our favourite music,” said Andrea Coscelli, the CMA chief executive.

“A vibrant and competitive music streaming market not only serves the interests of fans and creators but helps support a diverse and dynamic sector, which is of significant cultural and economic value to the UK.”

Here’s the full story:

And here’s a recent feature looking into the music streaming sector:

Germany’s DAX share index is having a tough morning too, down 1.4% this morning.

The technology sector is leading the selloff, with software group SAP down almost 8% despite reporting strong growth in cloud computing sales.

Online food ordering service Delivery Hero (-5%), laboratory equipment maker Sartorius (-5.1%), e-commerce group Zalando (-2.9%) and chemical firm Linde (-2.3%) are also in the fallers.

The yield, or interest rate, on two-year UK government debt has hit its highest in over a decade.

Two-year gilt yields have risen to 0.993% this morning, the highest since May 2011.

That follows a rise in U.S. Treasury yields, after the Federal Reserve signalled it would raise interest rates in March, as it prepares to start reducing its balance sheet.

Yields measure the rate of return on a bond, and move inversely to prices. The 2-year yields fell below zero in 2020, in the rush for safer assets.

Diageo sales jump

The reopening of hospitality venues, and higher demand for premium spirits, has boosted drinks maker Diageo.

Diageo, whose brands include Johnnie Walker whisky, Smirnoff vodka, Tanqueray gin and Baileys Irish Cream, grew its sales by 15.8% in the second half of 2021.

Operating profits jumped 22.5%, with operating margins also widening.

The world’s largest spirits maker has benefited from shoppers stocking up on spirits and beers at home during the Covid-19 pandemic, with wealthier consumers splashing out on more expensive brands.

Diageo says prices increases in some countries boosted its results, alongside stronger sales to bars and restaurants (the ‘on-trade’ sector) as customers returned to hospitality venues.

The positive price/mix benefit was primarily driven by mix, reflecting the strong growth of premium plus brands, particularly in scotch, tequila and Chinese white spirits, as well as the continued recovery of the on-trade channel in Europe and North America and the partial recovery of Travel Retail.

There was also a price benefit, primarily from price increases in Latin America and Caribbean, Africa and North America.

A range of Diageo owned whiskies.
A range of Diageo owned whiskies. Photograph: Andrew Milligan/PA

Richard Flood, investment manager at Brewin Dolphin, said:

“Diageo has produced a great set of results with a strong increase in sales, margin, and profits over the past six months.

The continuing shift by consumers to spirits consumption has benefited the company, as this is a sector of the drinks market that it dominates.

Diageo has been able to successfully navigate the challenges of Covid with its strong presence in both the off-trade, as well as the pubs sector – or on-trade – which is expected to recover further as Covid fades, leaving Diageo well positioned for the future.”

Updated

Private rents in Britain are rising at their fastest rate on record, piling more pressure on households feeling the strain of the cost of living crisis.

The average advertised rent outside London is 9.9% higher than a year ago as tenants making plans for a post-pandemic life jostle for properties, according to the website Rightmove.

Meanwhile, London rents have hit a new record and are higher now than before the start of the pandemic after a bounceback in demand fuelled by the gradual return to the workplace and more overseas students looking for a place to live.

The average advertised asking rent outside London is £1,068 a calendar month, said Rightmove. In London it is £2,142.

The increases have been attributed to a mismatch between the number of tenants looking for a place and the stock of available properties. Tenant demand is 32% higher than this time last year, but the number of available properties is 51% lower, said the website.

France’s CAC share index has dropped by 1.3% in early trading, Spain’s IBEX is down 1%, while Italy’s FTSE MIB is 0.7% lower.

Charles Henry Monchau, CIO at Bank Syz, sees more volatility ahead, as the recent market jitters hasn’t deterred the Fed from pressing on with normalising monetary policy.

What is clear from yesterday’s critical Federal Reserve announcement is that markets still need to go through an adjustment process and price-in the fact that the Fed will need to normalise policy through rate hikes and shrinking of the Fed balance sheet.

The FOMC statement also implies no Fed put at this stage, i.e. the Fed will not place itself into a corner and backtrack on its plans to normalize monetary policy just for the sake of putting a halt to equity market correction. So, while we stay bullish on equities, the worsening of liquidity conditions implies a bumpy road ahead with more volatility.

FTSE 100 drops

The London stock market has opened lower, with the blue-chip FTSE 100 index losing 45 points or 0.6% to 7423 points.

Silver producer Fresnillo (-5%), hedge fund Pershing Square (-4.75%) and technology investor Scottish Mortgage (-3.1%) are leading the fallers.

Banks are holding up better (higher interest rates help profit margins), with Standard Chartered up 1.5%.

The smaller FTSE 250 index, which is more domestically focused, has lost 1.2%.

EasyJet sees summer recovery after Omicron hit

FILE PHOTO: An Easyjet Airbus aircraft takes off from the southern runway at Gatwick Airport in Crawley, Britain, August 25, 2021. REUTERS/Peter Nicholls/File Photo
An Easyjet Airbus aircraft taking off at Gatwick Airport. Photograph: Peter Nicholls/Reuters

There’s lots going on in the City this morning too, including budget airline easyJet reporting that the Omicron variant has hit takings.

EasyJet’s load factor, a measure of how many seats were filled, fell to 67% in December, from over 80% in October and November.

It attributed the fall to “the impact that Omicron had on customers’ confidence and ability to travel during December”, which led to reduced ski travel.

easyJet saw significant levels of late flight transfers out of December due to travel restrictions and concerns over Omicron.

This pulled load factor over the last quarter down to 77%, missing guidance of over 80%.

But brighter times could be ahead, with easyJet seeing an increase in bookings after the UK Government decided to remove all travel testing requirements.

Johan Lundgren, easyJet chief executive said:

Booking volumes jumped in the UK following the welcome reduction of travel restrictions announced on 5 January, which have been sustained and then given a further boost from the UK Government’s decision earlier this week to remove all testing requirements. We believe testing for travel across our network should soon become a thing of the past.

We see a strong summer ahead, with pent up demand that will see easyJet returning to near 2019 levels of capacity with UK beach and leisure routes performing particularly well.

Jonathan Sullivan, Managing Director in Accenture’s Travel Industry, says airlines need systems that can cope with more disruption:

Because leisure travel is notoriously seasonal, the key differentiator in airlines’ long-term survival will be the ability to offer and deliver more services and products that tempt and delight customers.

“While that sounds simple, the industry must overcome the obstacle of its dated underlying systems. Modern digital systems are essential to digitally sell and manage a broader variety of add-on services, including from third parties. These systems also need to gracefully cope with the reality that travel plans may be changed or rescheduled at short notice.

Deutsche Bank’s US economists now expect the Fed to raise US interest rates five times this year, one more than their previous base case.

Strategist Jim Reid explains:

The biggest takeaway was the Chair’s emphasis that this cycle was different from the last round of tightening, in that inflation is well-above target, the labour market is historically tight, and growth projections remain above long-run potential.

While the Chair demurred when asked what that specially meant for parameters of monetary policy, he did not rule out a faster pace of rate hikes or larger increments, adding that the Fed had plenty of room to tighten given the state of the labour market.

So March, and every subsequent meeting should be treated as live with a 50bp hike at some point an increasing possibility, Reid adds.

Luigi Speranza, chief global economist at BNP Paribas Markets 360, now expects the Fed to raise interest rates six times this year, after last night’s hawkish comments from Jerome Powell:

We read Fed Chair Powell’s comment that this cycle is different from the previous one as an indication that the Fed’s bias is for a steeper tightening than the markets and we had envisaged.

We have moved our call for this year to six 25bp hikes from four previously and now expect the fed funds target range at 2.25-2.50% at end-2023, 25bp higher than we had previously forecast.

Our new base case for six hikes this year poses challenges to our bullish outlook for US equities. However, it is not sufficient to derail it on a standalone basis if earnings growth remains strong, in our view.

Last month, the Fed’s officials predicted they would increase rates three times in 2022, while the markets had been pricing in four increases.

Updated

Introduction: Hawkish Powell rattles markets

U.S. Federal Reserve Chairman Jerome Powell addressing a news conference last night
U.S. Federal Reserve Chairman Jerome Powell addressing a news conference last night Photograph: US Federal Reserve/Reuters

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Global markets are rattled today after the US central bank signalled it is ready to raise interest rates as it battles the highest inflation rate in forty years.

Federal Reserve chair Jerome Powell struck a notably hawkish tone at last night’s press conference, saying officials were minded to raise interest in March, and didn’t rule out an aggressive string of interest rate rises at coming meetings.

Powell told reporters there was “quite a bit of room to raise interest rates without threatening the labor market”, as it also prepares to shrink its balance sheet which has swelled to $9trn .

He also warned that inflation remains above the Fed’s long-run goal and supply chain issues may be more persistent than previously thought.

Investors are bracing for a sharp rise in interest rates this year, after Powell hinted that the Fed could tighten policy faster than in its last hiking cycle, with growth and inflation are higher than in 2015.

As Powell put it:

We are going to need to be, as I’ve mentioned, nimble about this. The economy is quite different this time.

Powell’s hawkish comments wiped out Wednesday’s Wall Street rally, and has sent shares reeling in Asia-Pacific markets to their lowest level in 15 months.

“The Fed’s gone from being the market’s best friend, to a possible enemy,” said Kyle Rodda, analyst at the online trading platform IG in Sydney, adding that the Fed was set on “bringing inflation down, rather than protecting asset prices”.

Japan’s Nikkei has led the way, plunging more than 3% while the Kospi in Seoul found itself in similarly negative territory. The market in Hong Kong was off 2.5% and Sydney shed nearly 2%.

MSCI’s broad gauge of regional markets outside Japan fell more than 2% to its lowest level since November 2020.

European stock markets are set to drop sharply, as January’s market turbulence continues.

Also coming up today

We find out how the US economy fared in the final three months of 2021, when the first estimate of GDP for October-December is released.

Economists predict that growth sped up, to an annualised rate of 5.5%, from 2.3% in Q3, before the Omicron variant hit at the end of the year

In the UK, car production has fallen to its lowest level since 1956, as rising energy costs and computer chips shortages hurt the recovery.

The agenda

  • 7am GMT: GfK survey of German consumer confidence
  • 11am GMT: CBI distributive trades survey of UK retail
  • 1.30pm GMT: US Q4 GDP report
  • 1.30pm: US weekly jobless figures
  • 3pm GMT: US pending home sales
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