Shell says it has not paid any windfall tax; European Central Bank hikes rates by 75 basis points – live | Currencies
Here’s our full story on the rebound in US growth in the third quarter.
The US economy grew at a 2.6% annual rate from July through September, snapping two straight quarters of economic contraction and overcoming punishingly high inflation and interest rates.
Thursday’s estimate from the commerce department showed that the nation’s gross domestic product – the broadest gauge of economic output – grew in the third quarter after having shrunk in the first half of 2022. Stronger exports and steady consumer spending, backed by a healthy job market, helped restore growth to the world’s biggest economy.
Still, the outlook for the economy has darkened. The Federal Reserve has aggressively raised interest rates five times this year to fight chronic inflation and is set to do so again next week and in December.
Fed chair Jerome Powell has warned that the Fed’s hikes will bring “pain” in the form of higher unemployment and possibly a recession.
The government’s latest GDP report comes as Americans, worried about inflation and the risk of recession, have begun to vote in midterm elections that will determine whether Joe Biden’s Democratic party retains control of Congress. Inflation has become a signature issue for Republican attacks on the Democrats’ stewardship of the economy.
Earlier, Lagarde called on eurozone governments to ensure support measures to help households cope with rocketing energy bills should be “temporary and targeted at the most vulnerable”. She said:
To limit the risk of fuelling inflation, fiscal support measures to shield the economy from the impact of high energy prices should be temporary and targeted at the most vulnerable.
Policymakers should provide incentives to lower energy consumption and bolster energy supply. At the same time, governments should pursue fiscal policies that show they are committed to gradually bringing down high public debt ratios.
Euro falls through parity with dollar
The euro has fallen further as ECB president Christine Lagarde is speaking, and is now down more than 1% against the euro, falling below parity. It’s at $0.9976.
Banking stocks rose after the central bank changed the terms of one of Covid-era programme of loans to lenders.
Viraj Patel, global macro strategist at Vanda Research, told Reuters:
The ECB is living on the edge of a dovish pivot. It’s clear that this is a central bank that wants to front-load rate hikes to control inflation. But they are also wary that they are not in control of a lot of external growth and market factors that can act as a circuit breaker to the hiking cycle.
You can watch the ECB press conference here.
A long-lasting war in Ukraine remains a serious risk, Lagarde said, and a weakening world economy could act as a drag on growth in the eurozone. Inflation may turn out to be higher than expected due to rises in food, energy and commodity prices.
The ECB hiked interest rates by 75 basis points today as expected, the third hike in a row, and expects to raise borrowing costs further (on a meeting by meeting basis).
It signalled it wants to start reducing its bloated balance sheet; cut a key subsidy to banks; but (surprisingly) made no hint about plans to start winding down its bond holdings after buying up trillions of euros of debt issued by eurozone governments.
As ECB president Christine Lagarde is reading out her statement at a press conference, Neil Wilson at Markets.com has summed up the “ECB, US data dump”:
ECB – hiked by 75bps in line with consensus but less hawkish tone overall, indicative of fewer rate hikes required to tackle inflation. Traders have pared bets, with key rate now seen peaking below 2.75% next year from 3% before. Euro-dollar offered a touch on the release to back below parity but no major move as yet. ECB is probably too optimistic – staff projections remain overly positive, though moderation in energy pricing seen as a reason to go slower.
US – inflation lower with PCE prices down to +4.2% from +7.3% previously, GDP a bit better rebounding 2.6% in the third quarter, durable goods ex-defence/air weaker down –0.7% vs +0.5% expected.
Stock futures volatile on the updates, rallying on the updates before erasing gains sharply. Stocks looking more and more volatile to large intraday swings as traders try to knit all these strands together into something cohesive and actionable. Meanwhile tech earnings and Meta are the major drag. Cyclicals doing better so Dow outperforming Nasdaq for now.
US economy rebounds in third quarter
The US economy grew at an annual rate of 2.6% in the third quarter, slightly better than expected.
The “advance” estimate from the Bureau of Economic Analysis showed a rebound from the second quarter’s 0.6% decline. Economists had expected growth of 2.4% in the third quarter.
The Bank of England is also expected to raise borrowing costs by 75 basis points next week to fight inflation.
Jeremy Batstone Carr, European strategist at wealth manager Raymond James, said:
The European Central Bank is between a rock and a hard place as it looks to control inflation without tanking the economy, and has decided that potentially tipping the region into a recession is a necessary evil in order to control spiralling inflation.
The eurozone is facing challenges that will be familiar to much of the rest of the world, with headline regional inflation running at a year-on-year rate of 10%, five times the target level. In response the ECB has raised its base interest rate by a further 0.75 points as it prioritises its core mandate of ensuring price stability. However, the attempt to cushion the blow to households and businesses from rising costs is likely to create issues elsewhere by imparting a marked downward pressure on economic activity by dramatically increasing the cost of borrowing.
While its US and UK counterparts are acting to reduce of the size of the balance sheet, the ECB is taking a different route and shunning the quantitative tightening path. A bigger priority for the ECB will be the trend in bond yield spreads between the peripheral and core member states. The Bank unveiled its new Transmission Protection Instrument this summer, and even though it has had no cause to use the facility thus far, its mere presence ensures that spreads remain within the boundaries of acceptability. But, as markets face ongoing pressures, the ECB may intervene using this tool to control disorderly dynamics.
The euro has dropped 0.7% versus the dollar to $1.0005 following the ECB’s move.
Some speedy analysis from Carsten Brzeski, global head of macro at ING:
The ECB just announced another jumbo rate hike by 75 basis points, bringing interest rates in the eurozone very close to neutral levels.
Contrary to the rate hike decisions in July and September, the size of today’s rate hike seems to have been uncontested and broadly supported by all ECB members. Next to the expected rate hike, the ECB also announced changes to the current Targeted-Long-Term-Refinancing Operations (TLTRO), in terms of the applied interest rate and earlier repayment dates. Also, the ECB decided to set the remuneration of minimum reserves at the ECB’s deposit facility rate. More details will be released after the press conference.
In slightly more than three months, the ECB has now hiked interest rates by a total of 200bps. It’s the sharpest and most aggressive hiking cycle ever. In the previous two hiking cycles since the start of the monetary union, it took the ECB at least 18 months to hike rates by a total of 200bps.
Today’s rate hike provides further evidence of the extreme paradigm change at the ECB. A year ago, ECB president Christine Lagarde still said at a press conference that “the lady is not tapering”. Now, the ECB has conducted the most aggressive rate hikes in its history, despite a war in Europe, little signs of an overheating economy but rather indications of a looming recession and record high inflation, which is mainly driven by high energy and commodity prices. A couple of years ago, the same ECB but different main characters might have decided differently. The current ECB, however, has woken up very late to the fact that even if inflation is driven by supply-side factors, too high inflation for too long can damage a central bank’s credibility and plant the seeds for unwarranted second-round effects.
At the current juncture of a looming recession and high uncertainty, normalising monetary policy is one thing but moving into restrictive territory is another thing. With today’s rate hike, the ECB has come very close to the point at which normal could become restrictive. At the press conference starting at 2.45pm CET, ECB president Christine Lagarde might provide the first insights into how far the ECB is still willing to go.
The ECB also said:
The governing council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the Asset Purchase Programme for an extended period of time past the date when it started raising the key ECB interest rates and, in any case, for as long as necessary to maintain ample liquidity conditions and an appropriate monetary policy stance.
Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, tweets:
Michael McDonough, chief economist at Bloomberg, tweets:
ECB hikes rates by 75bps and signals further rises
The European Central Bank has raised interest rates by 75 basis points, as expected, taking the deposit rate to 1.5%, and signalled further rate hikes in the months to come. It said in a statement:
The Governing Council today decided to raise the three key ECB interest rates by 75 basis points. With this third major policy rate increase in a row, the Governing Council has made substantial progress in withdrawing monetary policy accommodation. The Governing Council took today’s decision, and expects to raise interest rates further, to ensure the timely return of inflation to its 2% medium-term inflation target.
Inflation remains far too high and will stay above the target for an extended period. In September, euro area inflation reached 9.9%. In recent months, soaring energy and food prices, supply bottlenecks and the post-pandemic recovery in demand have led to a broadening of price pressures and an increase in inflation.
European shares drift lower ahead of ECB rate decision
European stock markets are drifting lower ahead of the European Central Bank’s policy decision, due at 1.15pm BST. The FTSE 100 index in London has turned negative, while the German Dax is down 0.9%, the French index has lost 1% and the Italian market slid 0.8%.
The central bank is widely expected to raise its deposit rate by 75 basis points to 1.5% to combat high inflation. Markets will also be looking for clues to further rate hikes when ECB president Christine Lagarde speaks at a press conference half an hour later.
“We will do what we have to do, which is to continue hiking interest rates in the next several meetings,” ECB chief Christine Lagarde said recently. Finnish central bank chief Olli Rehn echoed this: “There’s a stronger case for front-loading and determined action.”
Neil Wilson, chief market analyst for Markets.com, said:
ECB officials have been warning of self-reinforcing inflation dynamics of late as headline consumer price inflation for the euro area races above 10%. The ECB has raised rates twice in recent months from –0.5% to 0.75% and most think it will deliver a second 75bps hike this week.
Minutes from the September meeting point to growing consensus that the central bank needs to take decisive action to pushing rates to at least neutral, which is estimated at slight above the 1-2% range. This suggests a very strong chance the governing council agree on raising rates by 75bps to 1.5%, with another hike later in the year of 50bps and then a final hike in February.
With a 75bps seemingly certain, the questions around this meeting relate to quantitative tightening, mopping up excess liquidity and the terminal rate. As far as QT goes, it’s probably way too early for the governing council to be actively discussing this – Lagarde has made it clear that rates would need to be at neutral first. If the ECB tops out with hikes in February then it can then look to QT in Q2 2023, perhaps.
France’s TotalEnergies doubles profits to $9.9bn, announces new Russian writedown
France’s TotalEnergies also doubled net profits in the third quarter, to $9.9bn.
This compares with a profit of $4.8bn a year earlier, and $9.8bn in the second quarter.
The French oil company announced a new impairment of $3.1bn related to its Russian assets, adding to $7.6bn of writedowns in the first half of the year. The overall writedown is one of the largest booked by Western companies, albeit below BP’s more than $25bn charge for exiting the country.
However, unlike BP and Shell in London, TotalEnergies has held on to its investments in Russia, including minority stakes in Novatek, Yamal LNG and Arctic LNG 2.
The French firm’s chief executive Patrick Pouyanne said at an investor presentation last month that it was becoming “complex” for Western firms to receive dividends from Russian joint ventures and stake holdings. He said then:
I’m not convinced we will continue to have any flows from Russia in the months to come.
Shell expects not to pay any windfall tax in 2022 because of North Sea investment relief
Shell said it has not paid any windfall tax despite making record profits so far this year, as the business said it was investing heavily in the North Sea.
The company said that it does not expect to pay any extra tax this year despite the government’s decision in May to put a windfall tax on North Sea oil and gas producers.
Finance chief Sinead Gorman told reporters that the company had done enough over recent months to avoid the tax, which allows companies to obtain tax relief in exchange for investment. She said:
Heavy capex [capital expenditure] has meant that we haven’t had extra tax coming through in this quarter yet.
I do expect to see that extra tax … to happen quite early in the first quarter of 2023, but we’ll see what plays out with prices as well.
We simply are investing more heavily than we have, and therefore we don’t have profits which we can be taxed against.
The oil giant made a $9.5bn profit in the three months to September, taking profits so far this year to over $30bn. It will hand back money to shareholders by raising its dividend by 15% and a $4bn share buyback.
As explained earlier, the windfall tax announced by then-chancellor Rishi Sunak in May, a 25% energy profits levy, allows companies to get 91p in tax relief for every pound invested in UK energy.
https://www.theguardian.com/business/live/2022/oct/27/shell-profits-double-95bn-european-central-bank-hike-interest-rates-lloyds-profits-slide-business-live Shell says it has not paid any windfall tax; European Central Bank hikes rates by 75 basis points – live | Currencies