The UK economy shrank in the third quarter according to data released this morning. GDP contracted by 0.2% in the period and set the UK on a path towards recession, albeit a shallow one.

The main culprit behind the reduction in economic activity was soaring inflation that would clearly impact the economy at some point. The Bank of England has recently said the UK is heading towards a prolonged recessions and this morning’s data suggests we could already be in one.

“Technically speaking the UK won’t be in recession until it suffers two consecutive quarters of negative growth. But given the bleak economic picture and forecasts from the Bank of England, it’s quite clear this reading marks the start of what we expect to be a significant recession for the UK economy,” said Joshua Raymond, Director at online investment platform XTB.com.

Services, manufacturing and retail activity all declined in the quarter in a broad slowdown that was also impacted by the Queen’s funeral.

“It’s no surprise the service sector is shrinking, people are going as long as they can between haircuts or resurrecting lockdown methods of trimming their own locks. People are having to spend more to buy less, and they’re terrified of what a cold winter might do to already battered budgets,” said Danni Hewson, AJ Bell financial analyst.

“The manufacturing sector is struggling with a double whammy of rising energy prices and a shortage of some raw materials for some as supply issues are finally working their way through the system, but all 13 subsets of the sector were in decline.”

The initial market reaction was fairly muted with GBP/USD clinging onto gains and the FTSE 100 shrugging the data off to rise 0.3% in early trade, before falling back.

Although today’s GDP read is a stark warning for the UK economy, the better than US CPI data yesterday is by far the biggest news in town and was helping to boost risk sentiment on Friday.

The FTSE 100 reversed early losses and exploded higher after US CPI inflation missed expectations.

US October Consumer Prices rose only 0.4% month-on-month versus expectations of 0.6% and Core consumer price rose 0.3% vs 0.5%.

The immediate market reaction saw US bond yields fall with the dollar and US equity futures surge. NASDAQ futures were 3.3% higher at the time of writing. The FTSE 100 spiked around 60 points in the minutes after the announcement.

Markets were also marking down expectations of another 75 bps hike in December. If this starts a trend of lower inflation numbers, perceptions of when the Fed will ‘pivot’ will adjust and support equities.

FTX collapse

European markets had started the day on the back foot after the FTX crypto exchange effectively became worthless.

The bankruptcy of FTX had dragged on US exchanges overnight as markets accessed the wider implications of the severe losses it would mean for individuals and businesses. Although crypto is seen as an alternative to mainstream finance, crypto has become embedded into the financial system as such dramatic losses will see a huge loss of wealth for many across the world.

“It has been a wild week in Cryptoland, with the implosion of the FTX crypto exchange, which is now reported to have an $8bn black hole at the heart of it. At the beginning of the week its founder Sam Bankman-Freid was reportedly worth $16bn, Bloomberg reckon 95% of that disappeared in a single day, the fastest pace of one person losing money in history.” said Steve Clayton, Head of Equity Funds, Hargreaves Lansdown.

FTSE 100 Corporate Results

It was again a busy day for the FTSE 100 in terms of corporate updates. Companies reporting today included AstraZeneca, Centrica, Haleon and National Grid.

Centrica was the FTSE 100’s top gainer after the utility company said they expected results for the 2022 FY to be at the top end of sell side analyst expectations.

“British Gas owner, Centrica, who recently reopened the rough gas storage facility announced that trading has been strong and the company steered analysts toward upgrading their numbers. The strength is coming from their upstream oil and gas production operations, whilst retail profitability is struggling. The company announced a further £25m of funding for customer assistance as people struggle with their rising energy bills,” said Steve Clayton

AstraZeneca shares built up steam during the session and helped add a notable number of points to the FTSE 100. AstraZeneca shares added 3.5% after reporting a whopping 37% increase in nine month revenue to $33.1bn.

“This was a strong performance by AstraZeneca reflecting good growth from its higher value medicines. But what’s really exciting is its continuing high hit rate in terms of R&D successes. 19 Major regulatory approvals since the last update help underpin the outlook for sustainable long-term growth, and there is likely to be more to come with 18 Phase III read-outs expected in 2023,” said Derren Nathan, Head of Equity Research at Hargreaves Lansdown.

Tate & Lyle made progress in the six months to 30 September as revenue grew 20% and adjusted operating profit increased by 29%.

The increase in revenues were the result of a shift in focus to new innovative healthier products with their new products revenue jumping 19%.

Further signalling a move away from the group’s roots in treacle and syrups, the company said the integration of the recently acquired Chinese dietary business was going well.

Tate & Lyle shares were 1.5% higher at 725p at the time of writing.

As with most companies, Tate & Lyle are subject to the inflationary pressures that may dent margins in the future, but the group actually produced some pretty healthy margin expansion in the first half after they exited a number of low-margin businesses.

“Tate & Lyle’s shift, from golden syrup and treacle to sweeteners and thickeners, looks to be a pretty sweet move right now. Revenue popped over the first half as higher prices were gobbled up by customers looking for ways to create healthier food and drink,” said Matt Britzman, Equity Analyst at Hargraves Lansdown.

“Inflation remains a significant headwind, pretty much across the board, with a cost of around £85m over the first half. but it’s being managed well, with a range of initiatives from renewed contracts, higher prices and cost cutting exercises.”