Must read: UK GDP, Fed rate decision, Shell, Entain, Robert Walters

Our head of investment rounds up the morning's big news.

GLOBAL MARKETS 

Most European indices have opened cautiously higher ahead of the Federal Reserve’s expected interest rate pause today. The FTSE 100 is trading around the flatline, dragged down by Entain (LSE:ENT) after its acquisition of STS Holding. It follows a mixed session in Asia with the Nikkei in Japan closing sharply higher by almost 1.5% but markets in China came under pressure. 

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UK GDP 

UK GDP in April rose by 0.2% month-on-month and increased by 0.5% year-on-year, both matching analysts’ expectations. GDP is now 0.3% higher than its pre-pandemic 2020 level. Services output rose by 0.7% year-on-year, outpacing forecasts, but manufacturing output and industrial output both shrunk by 0.9% and 1.9% respectively. 

The UK economy has rebounded from March’s weakness, thanks to strong demand in bars and pubs as well as a recovery for car sales and education. However, industrial action continues to drag amid the Junior Doctors’ strike. The Office for National Statistics also said April’s strength was offset by a poor month for housebuilders, estate agents, computer manufacturing and the ‘often-erratic pharmaceuticals industry’.  

The economic growth figures follow strong wage growth and employment data on Tuesday which sent UK gilt yields sharply higher. The Bank of England’s governor Andrew Bailey said inflation is ‘taking a lot longer’ than hoped to ease back. The tightness in the labour market and April’s robust growth figures most likely pave the way for another rate hike from the UK central bank next Thursday.

FEDERAL RESERVE 

US CPI inflation rose by 4% in May, a two-year low, with core CPI which strips out the more volatile elements coming in at 5.3%. 

Markets are pricing in a near certainty that the Federal Reserve will keep rates on hold at its target range of 5-5.25% at the conclusion of its two-day policy meeting today. This will mark the first pause in the current rate hiking cycle since it started in March 2022 and follows ten consecutive rate increases.

However, Fed Chair Jay Powell is likely to make it clear that the central bank remains open to further rate increases later in the year, given that inflation remains significantly higher than the 2% target, particularly when looked at through the lens of the Fed’s preferred measure of inflation, PCE prices, which increased by 4.7% in April, highlighting the lingering price pressures stateside. 

The expected ‘skip’ this month has provided a tailwind for markets, with Wall Street’s major averages closing in the green and the S&P 500 and the Nasdaq touching their highest levels since last April. The potential pause has also been weighing on the US dollar which dropped to a 3-week low.

SHELL CAPITAL MARKETS DAY 

Shell (LSE:SHEL) is returning cash to shareholders by raising its dividend by 15% and upping its share buyback programme to at least $5 billion from $4 billion from the second quarter of this year. Shell is aiming to reduce its annual operating costs by $2-3 billion by the end of 2025 and capital spending cut from $23-27 billion to $22-25 billion for 2024 and 2025. 

The oil giant reiterated its climate targets, including becoming net-zero by 2050. But it is keeping its oil output unchanged until 2030 and is aiming to retain its spot as the world leader in LNG. 

It is Shell’s Capital Markets Day in New York today with CEO Wael Sawan, who took up the role in January, attempting to win support from investors by upping its dividend and buybacks and committing to oil production until the end of the decade. Sawan has scrapped plans to cut oil production by 1-2% per year, following BP (LSE:BP.) which earlier this year scaled back its greenhouse gas emissions targets. Shell’s rationale is that it has already reached its 2030 oil reduction target. But no doubt this will further infuriate climate change protesters who already stormed Shell’s AGM last month. 

Shares in Shell are modestly lower over the past 12 months. They peaked in March and have largely been under pressure ever since. Underlying oil prices have been weakening with brent crude shedding around a third over the past year, weighed down by concerns about the weaker global demand outlook.

ENTAIN 

Entain is acquiring Poland’s sports betting operator STS Holding for £750 million. The owner of Ladbrokes and Coral said the offer is priced at 24.8 Polish zlotys per STS share with a payment of £450 million in cash for the acquisition. 

Reflecting the deal, shares in Entain have fallen sharply by over 9% this morning while shares in STS Holdings have surged. Inorganic growth is a mainstay of this sector with big players pursuing bolt-on acquisition to access more markets. Entain’s acquisition of STS will bolster its sports betting footprint in Eastern Europe.

Shares in Entain have outperformed rival 888 Holdings (LSE:888) over the last year, but have underperformed Flutter Entertainment (LSE:FLTR) which is the standout winner with a gain of over 90% during the past 12 months.

ROBERT WALTERS 

Robert Walters (LSE:RWA) warned that fiscal 2023 profit would come in ‘significantly lower than current market expectations’. Net fee income in the first two months of the second quarter slumped by 10% year-on-year. Shares in the recruitment firm have plunged by almost 15% in today’s session, landing the stock down nearly 24% so far in 2023. 

Just this week, the latest UK labour market statistics pointed to a drop in job vacancies which fell for the eleventh consecutive period. With above-target inflation, sluggish growth, and rising interest rates, businesses have become increasingly cautious about their hiring plans. A lot of companies are carrying out either hiring freezes or job cuts to combat the macroeconomic uncertainty, which has been weighing on the recruitment industry, laid bare by the disappointing outlook for Robert Walters.