Central banks tipped to raise interest rates to 15-year highs this week; Ryanair profits surge – business live

Just in: Germany is on the brink of recession, after its economy contracted in the last quarter of 2022.

German GDP fell by 0.2% in the October-December quarter, statistics body Destatis has reported. That’s worse than expected – economists had forecast that GDP would be flat.

Germany’s economy was hit by soaring energy prices at the end of last year, driving up the cost of living. Inflation hit 11.6% in October, as Russia squeezed energy supplies to Europe.

Household spending fell during the quarter, pulling growth down, Destatis explains:

After the German economy held up well in the first three quarters despite difficult conditions, economic output decreased slightly in the fourth quarter of 2022.

In particular, the price-, seasonally and calendar-adjusted private consumer spending, which had supported the German economy in the course of the year to date, was lower than in the previous quarter.

A recession is commonly defined as two successive quarters of contraction, so Germany would be in recession if its GDP shrinks in the current quarter (January-March) as well.

Bond prices have rapidly rebounded since the start of the year from last year’s historic sell-off, as markets bet that interest rate rises will slow and, in the case of the US Federal Reserve, even go into reverse, the Financial Times points out.

But some investors have doubts, the FT says, so this week’s central bank decisions could cause jitteriness – as higher interest rates will slow growth.

“I think it’s just a matter of the market kind of waking up to what the macro environment really is, as opposed to what they hope it is,” said Monica Erickson, head of investment grade credit at DoubleLine Capital.

Erickson adds:

“[It] is going to be super difficult again for the Fed to . . . get inflation down to that magical 2 per cent number without putting us into a recession.”

Maureen O’Connor, global head of high-grade debt syndicate at Wells Fargo, said:

“The credit markets are effectively pricing in a no-recession outcome. But that’s not the consensus base case that most economists are forecasting.”

More here.

There could be splits at the major central banks this week over how high interest rates need to rise to tackle inflation.

Thomas Hempell, head of macro & market research at Generali Investments, predicts that the US Fed will slow its tightening pace with a 25 basis point hike on Wednesday, while the ECB and Bank of England will “will stay the course” by lifting their key rates by 50bp (half a percentage point).

Given still high inflation and the easing in financial conditions, Hempell expect a hawkish tilt for the outlook to prevail. But there could be “mounting rifts over the policy outlook”, he tells clients:

We expect the hawks to still prevail – for now. Most clearly so at the ECB. In a shaky December compromise, some hawks bended to slowing the rate hikes to 50bp in exchange for hawkish forward guidance and a binding commitment to quantitative tightening. Some doves have revoked this truce recently, pushing for smaller hikes after Feb. as headline inflation eased into single digits.

Yet more likely, the ECB will stay the course. Amid high core CPI (up 5.2% in Dec.), economic resilience (we no longer expect a winter recession), rising wages and hawkish pledges by President Lagarde we see the hawks still prevailing. Markets underestimate the terminal rate, which is at 3.5% in our books.

By contrast, as the Fed will (probably) hike by only 25bp, the focus will shift to the number of remaining like-sized hikes its policymakers expect, Hempell adds:

The Fed’s Dec. dots suggest further moves in both March and May. Markets, cheered by moderating inflation and weaker leading indicators, don’t buy this any longer. Dovish FOMC members are stressing more eagerly the Fed’s dual mandate (inflation and employment).

Ultimately, though, led by Chair Powell, the FOMC is still likely to lean towards a steady approach to inflation fighting as fin. conditions have recently eased. So expect the outlook language of “ongoing increases” (plural) to be maintained in the statement.

As predicted, European stock markets have dropped in early trading as investors brace for interest rates to be hiked to 15-year highs later this week.

The UK’s FTSE 100 index is down 46 points, or 0.6%, at 7719, away from the four-year highs set in mid-January.

Insurance group Legal & General are the top faller, down 2.3%, after announcing that long-serving chief executive Nigel Wilson to retire after more than a decade in the role.

Asia-Pacific-focused financial groups Prudential and Standard Chartered are both down around 2%, followed by retailer Frasers (-2%) and online grocery tech business Ocado (-1.7%).

Germany’s DAX and France’s CAC have both dropped around 0.5%.

Neil Wilson of Markets.com says all eyes are on the Federal Reserve, and what it says about the future path of monetary policy on Wednesday.

Two key things remain unknown – how high and for how long. I don’t think even the Fed knows the answers to these questions at the moment, but it will undoubtedly want to push back against the dovish read the markets have taken.

Stocks are “on the back foot this morning”, he explains, as attention shifts to this week’s Federal Reserve meeting, as well as the European Central Bank and Bank of England meetings on Thursday.

Wilson adds:

Despite the weakness this morning for risk assets, global stock indices are set to close to the month firmly higher. The FTSE 100 is up around 4% this month but lags peers after a much more resilient 2022 than most.

The Nasdaq is up around 11% and the DAX 8% higher in January as investors looked through signs of economic weakness and instead decided that peak inflation was behind.

Sweden’s economy ended 2022 on a weak note, with the economy shrinking in the last quarter as inflation and the war in Ukraine hit households and businesses.

Preliminary GDP figures from the Swedish Statistics Office this morning shows that gross domestic product (GDP) fell 0.6% in Q4, compared with the previous quarter.

Economists surveyed by Bloomberg had expected an expansion of 0.2%.

Neda Shahbazi, economist at Statistics Sweden, says:

“GDP decreased in December, indicating a weak ending of last year.

The development for 2022 as a whole was however slightly above the historical average seen during the last decades, but this is mainly explained by low economic activity during the first half of 2021 rather than a clear increase in GDP during 2022.

UK gambling firm 888 has announced the departure of its chief executive, and suspended VIP activities in the Middle East.

888 has told the City that Itai Pazner is immediately leaving office as CEO and as a director.

The Group’s non-executive Chair, Lord Mendelsohn, is assuming the position of Executive Chair on an interim basis while the Board searches for a permanent CEO.

888 also announced the suspension of VIP activities in the Middle East region, following an internal compliance review which found that some best practices have not been followed in regard to KYC (Know Your Client) and AML (Anti-Money Laundering) processes there.

While further internal investigations are underway, “the Board has taken the decision to suspend VIP customer accounts in the region, effective immediately”, it says.

Lord Mendelsohn says:

“The Board and I take the Group’s compliance responsibilities incredibly seriously. When we were alerted to issues with some of 888’s VIP customers, the Board took decisive actions.

We will be uncompromising in our approach to compliance as we build a strong and sustainable business.”

Shares in 888 dropped 7.5% at the stock market open….. and were down 12% after 15 minutes trading.

Consumer goods giant Unilever has appointed Hein Schumacher to replace Alan Jope as chief executive – a move welcomed by board member and activist shareholder Nelson Peltz.

Schumacher, 51, is currently the chief of Dutch dairy business FrieslandCampina.

He joined Unilever in October last year as non-executive director, and will become CEO from 1st July.

The FTSE 100 company, whose brands include Dove soap, Hellmann’s mayonnaise, Domestos bleach, and Marmite, told the stock market last September that Jope had decided to retire at the end of 2023.

Billionaire activist investor Nelson Peltz, who heads investor Trian Partners, said he strongly supports Hein “as our new CEO and look(s) forward to working closely with him to drive significant sustainable stakeholder value.”

Peltz, who has been pushing for a major shake-up of Unilever’s vast operations, says:

“I first met Hein when I served as a director at the H.J. Heinz Company from 2006 to 2013 and was impressed by his leadership skills and business acumen.

Earlier this month, Jope said Peltz had brought “all kinds of good ideas” to the company since joining the board last May.

Shares in Unilever have risen 0.8% at the start of trading, near the top of the FTSE 100 leaderboard.

Victoria Scholar, head of investment at interactive investor, points out that Unilever’s shares had a tough start to 2023, shedding over 3% compared with a gain for the FTSE 100 of almost 3%.

She says:

Unilever’s outgoing CEO Jope has been at the helm since January 2019, steering the business through the ups and downs of the pandemic. Since his appointment, shares in Unilever are little changed, underperforming other stocks in the sector. Shares jumped when he announced his departure last year, suggesting investors are hungry for a change in leadership. Jope came under heavy criticism during his time as CEO over his failed attempts to acquire GSK’s consumer health business.

While Unilever is in the consumer staples sector, a part of the market that is typically viewed as relatively resilient to an economic downturn, the business is facing challenges from rising costs and the risk that consumers trade down to unbranded, cheaper alternative products. Unilever has been trying to offset cost pressures by increasing prices, but this could dampen demand amid the cost-of-living pressures and can weaken relationships with retailers who are also dealing with already squeezed margins.

European stock markets are expected to open lower, as investors brace for central bank decisions in the UK, eurozone and the US later this week.

These major central banks are expected to raise interest rates to their highest levels since the financial crisis, which could further slow the global economy, as they battle the highest inflation rates seen in decades.

The Bank of England is expected to raise UK interest rates on Thursday, from 3.5% to probably 4%, which would be the highest since autumn 2008. The BoE may also upgrade its growth forecasts.

The European Central Bank is also expected to hike borrowing costs by 50 basis point (half a percent).

The US Federal Reserve makes its decision the night before, and could slow its tightening programme – perhaps lifting US interest rates by another quarter-point.

Stock markets have rallied in recent weeks, lifted by signs that price pressures are easing, and hopes that China’s easing of Covid-19 restrictions may lift the global economy.

Many investors are optimistic that central banks will ease off on interest rate increases, after sharp rises through 2022, as Michael Hewson of CMC Markets explains:

Last week’s sudden surge of exuberance from US markets appears to be being driven by a belief that not only will the US economy avoid a hard landing, but that the Federal Reserve will not only signal another step down in its rate hiking cycle to 25bps but will also signal a pause.

This belief that we could see a pause in the Fed’s rate hiking cycle was given legs last week, when the Bank of Canada signalled that it was doing exactly that to further assess the impact of recent rate hikes on the wider economy.

But, central bankers could spoil the party this week – if they push back against those expectations.

Hewson says:

The strong start to 2023 appears to have given way to a little bit of caution for markets in Europe as we look to this week’s trifecta of central bank meetings, and what sort of outlook is painted by the Federal Reserve, ECB and Bank of England, and more importantly how many more rate hikes can we expect to see after next week.

This caution looks set to translate into a lower open for markets in Europe this morning ahead of Q4 German GDP numbers which are expected to show the economy in Germany ground to a halt.

The UK’s FTSE 100 is expected to drop around 50 points at the open, or 0.6%, to 7717, the futures market suggests.

Ryanair says it grew its market share in several key EU markets during the last quarter.

Most notable gains, it says, were in Italy (from 26% to 40%), Poland (27% to 38%), Ireland (49% to 58%) and Spain (21% to 23%).

Overall, Ryanair operated at 12% above its pre-Covid capacity over the last nine months.

Chief Executive Officer Michael O’Leary said in a statement that demand is strong:

With Asian tourists now returning and a strong US dollar encouraging Americans to explore Europe, we’re seeing robust demand for Easter and summer 2023 flights.

Turmoil in the airline industry is an opportunity for Ryanair to keep growing, O’Leary adds:

Over the past 3 years, numerous airlines went bankrupt and many legacy carriers (incl. Alitalia, TAP, SAS and LOT) significantly cut their fleets and passenger capacity, while racking up multi-billion-euro State Aid packages.

These structural capacity reductions have created enormous growth opportunities for Ryanair.

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

Strong trading over Christmas and the New Year have helped budget airline Ryanair to triple its profits in the last quarter, compared with pre-Covid levels.

Just two days after UK regional airline Flybe ceased trading and cancelled all its scheduled flights, Ryanair has reported that its profits jumped in the last three months of 2022

Ryanair says “strong pent-up travel demand” over the October half-term holiday and the Christmas/New Year holiday season had stimulated strong traffic and fares across all markets, with “no adverse impact from Covid or the war in Ukraine”.

It has reported a profit-after-tax of €211m in October-December 2022, compared to €88m in the same quarter pre-Covid. A year ago, it made a €96m loss in the quarter, when pandemix restrictions and the Omicron variant hit demand.

During the quarter, traffic jumped 24% to 38.4m passengers – 7% higher than pre-Covid levels, while fares were 14% higher than before the pandemic.

Ryanair expects the current quarter to be loss-making, as Easter falls in April this year. But it is sticking with its recently upgraded forecast of an after-tax profit of between €1.325bn and €1.425bn for the full year to the end of March.

Chief financial officer Neil Sorahan says demand is strong, telling Reuters that:

Bookings are showing no signs of recession at this point in time,”

“We had record bookings in week two and week three of January, very robust demand into Easter and the summer without fare stimulation.

The agenda

• 9am GMT: German Q4 2022 GDP report

• 10am GMT: Eurozone consumer and business confidence report for January

• 3.30pm GMT: Dallas Fed index of US manufacturing for January