News: FTSE slips after Fed turns dovish following second rate hike and US enters ‘recession’

29/07/2022

By Gavin Lumsden, Jeremy Gordon - The FTSE 100 continued to drift lower through Thursday, mirroring a pullback in global markets after unexpected news the US economy had contracted for the second quarter in a row, meeting the standard definition of a recession.

The UK blue-chip index was trading down 34 points, or 0.5%, at 7,314 at 3.30pm, while Wall Street was also weak on opening.

The S&P 500 slipped 0.6%, as the mood music shifted from investors embracing the more 'dovish' tone struck by the Federal Reserve when raising interest rates yesterday to concern about whether the US central bank can tame elevated inflation without throttling the economy.

US GDP fell at an annualised rate of 0.9% last quarter, the government said in its advance estimate, a much worse result than the 0.5% growth forecast by economists in a Reuters poll. Following a 1.6% slip in the first quarter of 2022, the economy has now shrunk for two quarters in a row.

The decline was driven by weak readings for investment, government spending and business inventories.

'Importantly, consumer spending held up. This is arguably the most important indicator of underlying growth, so this can be taken as a positive from a disappointing set of data,' said Rob Clarry, investment strategist at wealth manager Evelyn Partners, formerly Tilney Smith & Williamson.

The analyst explained that while two quarters on the trot of GDP contraction mean the world's biggest economy has entered a 'technical recession', the National Bureau of Economic Research (the body responsibility for determining whether the US is in a recession), is likely to decide otherwise. Key indicators it looks at, such as the job market and real incomes, present a stronger picture, though Clarry added there were clear concerns.

'The Federal Reserve continues to face a challenging balancing act in bringing down inflation without damaging economic growth, and this data points to an increasingly narrow path for a soft landing,' he said.