Federal Reserve leaves US interest rates on hold; QE purchases to end in March – business live

Jerome Powell doesn’t have much more information on the Fed’s approach to reducing its balance sheet, on top of the principles published today.

Policymakers haven’t had much discussion about the details yet, he explains, but will spend time on it at coming meetings.

But he does suggest the Fed could perhaps move sooner and faster than before. The economy is in a different place than in 2015, the last time it began tightening monetary policy.

Jerome Powell explains that both sides of the Fed’s mandate (price stability and maximum employment) are calling for a move away from highly accommodative policy.

There is ‘broad agreement’ on the FOMC that it will soon be time to raise rates, he explains.

And that first rate rise could come in March, Powell signals, despite the impact of Omicron, and global risks.

He says:

“I would say the committee is of a mind to raise the Federal funds rate at the March meeting, assuming that conditions are appropriate for doing so.

We have our eyes on the risks, particularly around the world.

We do expect some softening in the economy from omicron, but we think that should be temporary and we think the underlying strength of the economy should show through fairly quickly after that.

Federal Reserve chair Jerome Powell is holding a press conference now to explain today’s decision.

He says the US economy has shown great strength, cautioning that the omicron variant will hurt economic growth in the current quarter, but is also expected to drop off rapidly.

If the latest wave of Covid-19 passes quickly, then the economic impact should dissipate too.

The labour market has shown remarkable progress, Powell continues, with historically strong labour demand and wages rising at the fastest pace in many years.

Prices are also rising fast, of course. And here, Powell says high inflation has spread more broadly, but is expected to decline over the course of the year.

And in the light of inflation and employment developments, the economy no longer needs sustained high level of support, he explains – adding that the Fed needs to be nimble and remain attentive to risks.

The Fed has also issued a statement outlining its principles for reducing the size of its balance sheet.

This is the process of unwinding some of the asset purchases which were conducted in the pandemic to support markets and lower long-term borrowing costs, after those purchases are phased out in March.

Those principles show that the Fed expects to “significantly” reduce its balance sheet, and that the process is expected to begin after it has started raising interest rates.

Here’s the list, which doesn’t appear to have any surprises:

• The Committee views changes in the target range for the federal funds rate as its primary means of adjusting the stance of monetary policy.
• The Committee will determine the timing and pace of reducing the size of the Federal Reserve’s balance sheet so as to promote its maximum employment and price stability goals. The Committee expects that reducing the size of the Federal Reserve’s balance sheet will commence after the process of increasing the target range for the federal funds rate has begun.
• The Committee intends to reduce the Federal Reserve’s securities holdings over time in a predictable manner primarily by adjusting the amounts reinvested of principal payments received from securities held in the System Open Market Account (SOMA).
• Over time, the Committee intends to maintain securities holdings in amounts needed to implement monetary policy efficiently and effectively in its ample reserves regime.
• In the longer run, the Committee intends to hold primarily Treasury securities in the SOMA, thereby minimizing the effect of Federal Reserve holdings on the allocation of credit across sectors of the economy.
• The Committee is prepared to adjust any of the details of its approach to reducing the size of the balance sheet in light of economic and financial developments.

Stocks on Wall Street are still up for the day, with the Nasdaq Composite up 2.5% or 351 points at 13,888.

Financial experts broadly agree that the Fed is signalling that it will raise interest rates in March. Here’s some snap reaction:

America’s central bank has left interest rates on hold, and signalled that it expects to start raising borrowing costs soon.

Following a two-day policy meeting, Federal Reserve policymakers decided to maintain its key interest rate at its current record low of 0%-0.25%. But they believe it will ‘soon be appropriate’ to raise rates.

The FOMC also decided that it will continue to reduce the pace of its bond-buying stimulus programme, ending the asset purchases in early March.

It says:

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent.

With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate. The Committee decided to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March.

The FOMC also said that economic indicators show the economy continues to recover from the pandemic, with the US jobless rate dropping to 3.9% last month.

Indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months but are being affected by the recent sharp rise in COVID-19 cases. Job gains have been solid in recent months, and the unemployment rate has declined substantially.

Inflation, though, has hit a forty-year high of 7% – which the Fed says is partly due to the supply chain imbalances caused by Covid-19:

Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The path of the economy continues to depend on the course of the virus.

The easing of Covid-19 travel rules has helped to push oil to seven-year highs tonight, says Fawad Razaqzada, analyst at Think Markets.

Opec’s policy of only slowly increasing production each month has also driven up prices, creating a tighter market. But the cost of living squeeze may make it harder for oil to stay higher in the long term, he explains:

Crude oil prices have extended their upsurge and Brent has breached the psychologically-important barrier of $90 per barrel. The latest gains came despite an unexpected build in US oil stocks, suggesting the upward pressure is continuing to come from elsewhere. There is definitely an element of geopolitical risks being baked into energy prices right now, as tensions concerning Russia and Ukraine intensify. Additionally, the easing of travel restrictions across Europe has helped to boost demand expectations for crude oil. More to the point, the OPEC+ has continued to provide less oil than called on for, creating a tighter market than would have otherwise been the case.

But with inflation continuing to eat into consumers’ disposable incomes, further rises in fuel and energy prices may not become sustainable in the longer-term outlook. Crude prices will have to correct themselves because of demand concerns, if consumer incomes, already stretched due to inflation, are squeezed even further. The OPEC+ may also respond by releasing more oil back to the market as they have clearly met – and exceeded – their main objective: higher crude prices.

Stock markets across Europe have rallied, with the pan-European Stoxx 600 index having its best day since early December.

The Stoxx 600 gained 1.68% today, led by the energy sector, real estate firms and consumer cyclical stocks, followed by industrials, miners, financial stocks and tech.

Germany’s DAX gained 2.2%, while France’s CAC rose 2.1%, ahead of the FTSE 100’s 1.3% gain.

Michael Hewson of CMC Markets sums up the day:

A decent performance from energy and financials helped to support the FTSE100, with firmer energy prices and yields driving the gains on the UK index, with Shell hitting its highest levels since February 2020 and BP also higher.

We’ve also seen a belated bounce in travel shares after the uncertainty at the beginning of this week, as the imminent dropping of testing for fully vaccinated passengers sees a sharp rally in the likes of IAG, easyJet and Holiday Inn owner IHG.

Britain’s FTSE 100 index has racked up its best day in three weeks, as markets recover their nerve after a choppy January.

The blue-chip index has closed 98 points higher at 7,470 points, up 1.33% today.

IAG, which owns British Airways, led the risers, up 7.4% on optimism for a recovery in the travel sector this year.

Oil company Shell gained 5.6%, as the jump in crude oil prices will boost its profits.

Online grocery group Ocado rallied 5.7%, after announcing it has developed new robots to enable cheaper, faster deliveries, and require fewer staff in its warehouses.

At a launch event today, Ocado outlined how it was making its ‘grid’ systems cheaper, lighter and more efficient, as it looks to licence its robotic warehouse systems to more retailers.

The UK public’s inflation expectations have hit record levels, as people feel the effect of more expensive food, energy, goods and services.

The latest monthly survey from Citi and YouGov shows that people expect inflation to run at 4.8% over the next year, the highest since the survey began in late 2005.

That’s more than double the Bank of England’s inflation target of 2%, and not far from December’s 30-year high of 5.4%.

Longer-term inflation expectations also remained at record levels. Over the next five-to-ten years, those surveyed expect inflation to be 3.8% – matching last month’s reading.

“Today’s data, especially the level of long-term expectations, suggest elevated risk inflation expectations could become de-anchored to the upside as inflation accelerates in the months ahead,” Citi economist Benjamin Nabarro said.

“However, for now, we think expectations remain anchored overall.”

Brent crude oil has just hit $90 per barrel for the first time in over seven years.

The benchmark oil price has gained almost 2% today, a move that will add to inflationary pressures in the economy, and the cost of living squeeze in the UK, and beyond.

Prices have been pushed up by concerns over supply constraints, as demand increases, and the escalating tensions between Russia and NATO members over Ukraine.

Brent has now gained 14% this year, points out Victoria Scholar of Interactive Investor, who says it could see further gains:

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown, warns that motorists will face higher fuel bills:

“Consumers are belting up and bracing themselves for a fresh squeeze in the cost of living as a jump in the oil price is set to see forecourt prices ticking up again. With price rises coming from all directions, the prospect of filling up at the pumps becoming yet more expensive will be hard to swallow, especially for commuters steeling themselves for the return to the office as plan B restrictions are lifted.

Although the price of a barrel of Brent won’t immediately translate to mirror a similar price hike at the pumps, due to other factors to consider, such as refining capacity and demand for other oil fractions, petrol prices do follow oil’s trajectory albeit on a flatter curve. After Brent reached a three year high in October of $86.9, prices at the pumps hit a 12 month high a few weeks later of 147.72p and diesel at 150.96p. Already prices are edging back close to those levels, with average petrol prices at 146.06p and diesel 149.42p, according to the RAC.

Sales of new US single family homes in December have risen to their highest level in nine months.

Sales rose 11.9% last month, compared with November — but were still 14% lower than a year earlier.

Buyers took advantage of lower prices, with the median sales price dipping amid anticipation of higher interest rates.

Chad Moutray, chief economist at the National Association of Manufacturers, has tweeted the details:

The Bank of Canada has left interest rates on hold, at its monetary policy meeting today, but signalled that a rise is coming.

The Bank of Canada decided to keep its key interest rate at 0.25%, despite Canadian inflation hitting 30-year highs last month, citing the disruption caused by Omicron.

But, the BoC’s governing council also expects that interest rates will need to increase in future. It has removed its commitment to maintain rates at the effective lower bound, having concluded that economic slack has been now absorbed.

Announcing today’s decision, the BoC says:

CPI inflation remains well above the target range and core measures of inflation have edged up since October.

Persistent supply constraints are feeding through to a broader range of goods prices and, combined with higher food and energy prices, are expected to keep CPI inflation close to 5% in the first half of 2022. As supply shortages diminish, inflation is expected to decline reasonably quickly to about 3% by the end of this year and then gradually ease towards the target over the projection period.

Near-term inflation expectations have moved up, but longer-run expectations remain anchored on the 2% target. The Bank will use its monetary policy tools to ensure that higher near-term inflation expectations do not become embedded in ongoing inflation.

Wall Street has jumped at the start of trading, as technology stocks recover some ground after strong results from Microsoft last night.

The Dow Jones industrial average of 30 large US companies has risen by 447 points, or 1.3%, to 34,744 points, as investors await the Federal Reserve decision later today.

The tech-focused Nasdaq has rallied by 2.2%, having been through a rocky start to the year.

The mood has improved after Microsoft reported better-than-expected earnings and revenue for the fiscal second quarter last night, alongside a sales forecast that also exceeded estimates.

MS’s shares have jumped over 4% in early trading, after CEO Satya Nadella forecast continued strong demand for a wide range of digital services, including cloud computing services for businesses, and gaming.

Related: Microsoft beats expectations with $18.8bn profit

Britain’s inflation data is being shaken up to give a clearer picture of the cost of living, following warnings that it doesn’t show how poorer families suffer from rising prices.

The Office for National Statistics says it plans to restart publishing more detailed analysis of inflation on Friday.

This should help show how people’s individual inflation rate varies, depending on how much they earn, or whether they own or rent their property, for example.

In a blogpost today, Mike Hardie, head of inflation statistics at the ONS, says:

The headline CPIH measure, captures the average, but everyone has their own personal inflation rate. Some people may spend a larger proportion of their income on gas and electricity, or petrol if you commute via car daily.

This detailed analysis has previously shown that inflation was higher for low-income households in 2008 and early 2009, after the financial crisis.

It was suspended during the pandemic, because many items were unavailable. But “given the level of interest in the cost of living and inflation” the ONS will publish these experimental statistics for the Consumer Prices Index (CPI) on Friday.

The move comes after food writer and activist Jack Monroe exposed how prices for cheaper food products had surged, as availability fell – contributing to rising hunger and poverty.

Writing in last weekend’s Observer, she explained:

In 2012, 10 stock cubes from Sainsbury’s Basics range were 10p. In 2022, those same stock cubes are 39p, but only available in chicken or beef. The cheapest vegetable stock cubes are, inexplicably, £1 for 10. Last year the Smart Price pasta in my local Asda was 29p for 500g.

Today, it is unavailable, so the cheapest bag is 70p; a 141% price rise for the same product in more colourful packaging. A few years ago, there were more than 400 products in the Smart Price range; today there are 87, and counting down.

Related: We’re pricing the poor out of food in the UK – that’s why I’m launching my own price index | Jack Monroe

Monroe is drawing up an inflation index, which will track basic goods price changes at the budget end of the scale. It’s brilliantly named the Vimes Boot Index (after Sir Terry Pratchett’s City Watch commander who reasoned that the rich were so rich because they manage to spend less money).

Currently, the ONS tracks 700 everyday goods and services bought by UK households around the UK, and online, to give over 180,000 price points.

But it also plans to monitor many more products, to get a better long-term picture of inflation.

Hardie says this ‘radical’ plan, outlined last November, will give statisticians a better insight of what people are actually spend:

We are currently developing radical new plans to increase the number of price points dramatically each month from 180,000 to hundreds of millions, using prices sent to us directly from supermarket checkouts.

This will mean we won’t just include one apple in a shop – picked to be representative based on shelf space and market intelligence – but how much every apple costs, and how many of each type were purchased, in many more shops in every area of the country.

While it will not show us what each consumer has bought, protecting their privacy, it will show exactly what has been sold and for how much, giving us even more detail on how inflation is affecting UK households.

Monroe has welcomed the focus on people’s own personal inflation rate:

Here’s some reaction, from Johnny Runge of NIESR:

Here’s Jack Leslie of Resolution Foundation:

And here’s Andrew Leicester of Frontier Economics:

PS: If you’ve not read Men At Arms, here’s Vimes’s theory:

Take boots, for example. He earned thirty-eight dollars a month plus allowances. A really good pair of leather boots cost fifty dollars. But an affordable pair of boots, which were sort of OK for a season or two and then leaked like hell when the cardboard gave out, cost about ten dollars. Those were the kind of boots Vimes always bought, and wore until the soles were so thin that he could tell where he was in Ankh-Morpork on a foggy night by the feel of the cobbles.

But the thing was that good boots lasted for years and years. A man who could afford fifty dollars had a pair of boots that’d still be keeping his feet dry in ten years’ time, while the poor man who could only afford cheap boots would have spent a hundred dollars on boots in the same time and would still have wet feet.

After a buoyant morning, European stock market are still solidly higher.

The UK’s FTSE 100 index of blue-chip shares has now climbed by 1.8%, to 7508, above its levels before Monday’s tumble.

Airline group IAG is now 7.5% higher, boosted by optimism for a travel sector recovery this year. On Monday, the government announced Covid-19 tests for fully vaccinated travellers arriving in England will be scrapped from 4am on 11 February.

Software group Aveva (+5%), oil giant Shell (+4.9%) and broadcaster ITV (+4.6%) are also top risers, with banks also stronger.

Stocks have pushed higher across Europe, with Germany’s DAX and France’s CAC indices both up around 2.5%.

Anxiety over US interest rate rises, and the Ukraine crisis, seems to have eased.

Fawad Razaqzada, analyst at Think Markets, say shares are being boosted by optimism that the economic recovery is going to speed up in the months ahead.

Travel restrictions continue to ease across Europe as omicron cases decline and more people get double or tripled vaccinated. There is a lot of pent up demand for holidays within Europe. Hopefully, we will see confidence returns and people start going on holidays more often this year.

So, I certainly am feeling positive towards the European stock markets compared to Wall Street.

Indeed, European markets are more likely to suffer smaller setbacks going forward because unlike the Fed, the ECB is going to keep printing more QE money for longer.

Over in the US, demand for mortgages has dropped, as borrowers are deterred by higher interest rates.

Applications for mortgage refinance applications, fell 13% last week and were 53% lower year over year, according to the Mortgage Bankers Association’s seasonally adjusted index.

The average interest rate for 30-year fixed-rate mortgages rose again, as the financial markets anticipated US interest rates rising this year. That made it less attractive for homeowners to switch deals.

Mortgage applications to purchase a home fell just 2% for the week and were 11% lower than a year ago.

Home secretary Priti Patel must now decide whether UK tech tycoon Mike Lynch should be extradited to the United States, after his attempt to delay a ruling was rejected this morning, explains the Telegraph’s James Titcomb:

Wednesday’s ruling means the Home Secretary now has 48 hours to make a decision.

She may choose to reject extradition on a rare legal ground known as specialty, or can take the unusual step of letting the judgment lapse.

Should Ms Patel approve his extradition, Mr Lynch will have 14 days to appeal last summer’s ruling, which could mean a final decision taking another year.

British technology entrepreneur Mike Lynch has lost the latest stage of his legal battle against extradition to the United States to face fraud charges, Reuters reports.

The High Court in London has said Britain cannot delay its decision on whether to allow the extradition of Lynch to the US until the impending judgement in a civil claim against him is made public.

U.S. prosecutors want the 56-year-old to stand trial in the United States on fraud charges connected to the sale of Autonomy, the software company he founded and led, to Hewlett-Packard (HP) in an $11 billion deal in 2011.

Here’s the details:

Lawyers for Lynch had failed to stop extradition proceedings at London’s Westminster Magistrates’ court last year, pending the outcome of HP’s civil case against him.

The district judge in the Westminster court agreed he should be extradited and sent the case to British Home Secretary Priti Patel to certify the extradition order. However, Patel also wanted to wait until after the verdict was given in the civil trial before making her decision.

The judge, however, refused to move the deadline to March, instead ruling that Patel should decide by Christmas, a ruling which Lynch then challenged in the High Court.

However, the High Court judge Jonathan Swift on Wednesday rejected his application, saying it was for the lower court judge to conclude if there were grounds to delay the extradition decision.

More here: Reuters: UK tech tycoon Mike Lynch fails in bid to delay extradition ruling

Related: British businessman Mike Lynch faces extradition to US

Related: Mike Lynch extradition question is a sovereignty issue for UK business | Nils Pratley

Cambridge-based Autonomy had been a major UK technology success story, after developing complicated pattern recognition technology to handle unstructured data.

Hewlett-Packard paid $11bn (£8bn) for Autonomy as part of the US company’s effort to boost its software arm, and pivot away from hardware such as office printers. But it then wrote off $8.8bn in late 2012, saying it had found “serious accounting improprieties” at Autonomy.

Related: Hewlett-Packard blames Autonomy ‘improprieties’ for $8.8bn writedown

Lynch denies any wrongdoing in both the civil and criminal cases.

In 2019, the former chief financial officer of Autonomy was jailed for five years, after a US jury found him guilty of fraud over the sale to HP.

Related: Ex-Autonomy CFO jailed for five years over Hewlett-Packard fraud

The UK advertising watchdog has banned a high-profile marketing campaign by Swedish alt-milk brand Oatly after ruling its green claims were misleading.

The Advertising Standards Authority (ASA) launched an investigation into the campaign after receiving 109 complaints from members of the public and the campaign group A Greener World.

In one national newspaper ad the company, which attracted investment from Blackstone, Oprah Winfrey and Jay-Z last year ahead of floating on the US stock market in May, claimed “climate experts say cutting dairy and meat products from our diets is the single biggest lifestyle change we can make to reduce our environmental impact”.

The ASA said consumers would understand the claim to be a “definitive, objective claim that was based on scientific consensus,” when instead it was the opinion of one climate expert.

Related: Oatly ads banned by UK watchdog over ‘misleading’ green claims

French consumer confidence has dipped, as households grew more worried about inflation.

Statistics body INSEE’s index of consumer morale slipped to 99 points this month, from 100 in December.

The share of households considering that prices rose during the past twelve months hit its highest level since July 2011, up again this month after a surge in November.

France’s inflation rate hit 3.8% late last year, the highest since 2008, with energy, food and goods price all adding to the cost of living squeeze.

The proportion of people predicting prices will keep rising over the next twelve months increased, INSEE says today, to well above its long-term average

© Provided by The Guardian
French consumer confidence report – inflation expectations Photograph: INSEE

Households also grew less optimistic that living standards will rise in the next year. Fewer reported that the standard of living in France has improved during the past twelve months.

But at 99, the index was a litte higher than expected.

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

Central bankers are in the spotlight today, putting investors on edge as they brace for higher interest rates and the withdrawal of monetary stimulus.

Anxiety about the prospect of higher US interest rates has been hurting markets in recent weeks. The US Federal Reserve is setting policy today, and is expected to signal that its hiking cycle will begin in March.

With US inflation surging to 7%, and unemployment back down at 3.9%, the Fed can make a case for tightening. But it faces a communications challenge to spooking markets which have grown used to loose monetary policy, with four rate hikes this year now being priced in.

Jim Reid, strategist at Deutsche Bank says Fed chair Jerome Powell faces “an interesting day of communications”, particularly when outlining how he’ll approach quantitative tightening (QT).

That’s the process of running down the Fed’s balance sheet which has swelled through its bond-buying stimulus programme, which is on track to end in March.

The year-to-date selloff of real rates and equity markets began with the Fed surprising markets by how much they were already considering an early and aggressive use of QT to augment their tightening of policy, so any incremental information will be devoured.

While it’s likely too early for the Fed to deliver specific QT details today, our economists believe it’s possible Chair Powell begins to socialise a range of potential QT outcomes to start the give-and-take involved with guiding market expectations.

The Bank of Canada is also meeting today, and it could possibly raise interest rates – as it tries to pull inflation down from a 30-year high of 4.8%

Trading in overnight swaps markets suggests there’s about a 70% chance the BoC will raise the benchmark interest rate to 0.5% from its emergency low of 0.25%, Bloomberg reports.

Adam Cole of Royal Bank of Canada thinks the BoC will hold off from hiking today, but says it’s a very close call.

Inflation trends have been evolving largely in line with the BoC’s latest forecasts but that still represents price growth substantially above the 2% target rate. The Bank’s quarterly Business Outlook Survey showed business capacity pressures and labour shortages intensifying significantly – along with expected inflation and wage growth.

It’s already been a volatile week, particularly on Wall Street, where the Dow Jones industrial average has bounced back from 1,000-point falls twice in a row.

European markets are set for a higher open, after plunging on Monday and then recovering a little yesterday.

But with tensions over Ukraine still high, it could be another volatile day.

Related: Biden threatens Putin with personal sanctions if Russia invades Ukraine

The agenda

• 7.45am GMT: French consumer confidence report
• Noon: US weekly mortgage applications
• 1.30pm GMT: US goods balance for trade
• 3pm GMT: Bank of Canada interest rate decision
• 7pm GMT: US Federal Reserve interest rate decision
• 7.30pm GMT: Fed chair Jerome Powell’s press conference

The market rally is continuing. The FTSE 100 index is now up 1.5%, or 115 points, at 7486 points, meaning it’s recovered almost all of Monday’s tumble.

AJ Bell investment director Russ Mould points out that the FTSE 100 has outperformed other markets this year — it’s up around 1.4% in January, while Americas’s S&P 500 has lost over 8%.

“With today’s US Federal Reserve meeting firmly in view the UK’s flagship stock index has become somewhat dislocated from other global benchmarks thanks to the absence of big technology companies in its ranks.

“For years this under-representation for tech held the FTSE 100 back, now the dominance of relatively cheap tobacco, resources and banking stocks is playing in its favour. For the year to date it is up slightly while the Nasdaq in the US is down double digits.

“How long this trend continues remains to be seen. The Fed’s update comes with the first US rate hike, perhaps of four or five this year, expected in March.

“It remains to be seen if its members will do anything to calm the recent volatility in the markets, particularly given the current tensions between Russia and the Ukraine.

“While its primary job is to keep a lid on inflation, the Fed has shown a willingness in the past to consider the market response when determining its policy.”

Travel stocks are flying higher today.

British Airways parent company IAG is now up 5.6%, while holiday operator TUI (+5.5%) is leading the risers on the FTSE 250 index of mid-sized companies.

Cruise operator Carnival (+5.1%) and budget airlines easyJet (+4.6%) and Wizz Air (+2.6%) are also stronger.

Germany’s Lufthansa has rallied 5.6%, helping drive Europe’s travel and leisure index is by 4%, as investors grow confident about the sector’s recovery potential this summer.

More passengers took Wizz Air flights over the Christmas period despite the rise of the Omicron variant, and the carrier said it was cautiously optimistic about the continued recovery of air travel during the spring.

The budget airline reported it carried 7.8 million passengers during the three months to the end of December, even more than it did in 2019 before the coronavirus pandemic, while its planes were more than three-quarters (77%) full.

The Hungary-based and London-listed carrier sounded an upbeat note in its trading statement to the London Stock Exchange despite reporting an operating loss of €213.6m (£179m) for the final three months of 2021.

Wizz Air said it continued to take the hit from Covid travel restrictions, which hurt passenger demand. Despite this, the company has been ramping up its staff numbers, aircraft fleet, airport bases and routes before an anticipated full return to pre-pandemic flight levels by late spring.

Related: Wizz Air passenger numbers rise to 7.8m despite Omicron fears

The latest Omicron variant clearly hit Wizz’s recovery, as Victoria Scholar, head of investment at interactive investor, explains:

“Wizz Air reported a third quarter operating loss of €213.6mn and said it expects that loss to deepen in the fourth quarter. Omicron is clearly taking its toll on the low-cost carrier with profits set to worsen before they finally get a pick-up in spring.

Not only has Wizz Air come up against reduced demand in the face of the latest Covid-19 variant, but also it has been facing a series of cost pressures from the inflationary background with wages and energy prices rising sharply.

“Buy now, pay later” giant Klarna is putting further pressure on banks and credit card firms by launching its first physical card in the UK.

The card will allow customers to delay payments for up to 30 days when used at high street shops, having previously only offered buy-now-pay-later (BNPL) products online for UK customers. The Swedish company said it intends to add more of its payment options, including splitting purchases into three monthly payments, to the card over time.

Klarna confirmed it had built up a waitlist of 400,000 consumers in the UK, which it claimed showed “strong demand for a new approach to credit,” following a successful launch in Germany and Sweden.

Related: Klarna: ‘buy now, pay later’ firm to launch card in the UK

European markets have all rallied in early trading, with France’s CAC and Germany’s DAX indices both 1.25% higher.

© Provided by The Guardian
European stock markets Photograph: Refinitiv

Stocks have opened higher in the City.

The FTSE 100 index of blue-chip shares has jumped by 91 points, or 1.25%, to 7462 points as it continues to rebound from Monday’s 2.6% tumble.

British Airways parent company IAG (+3%), oil giant Shell (+2.3%) mining group Glencore (+2.5%), and hotel operators Whitbread (+2.6%) and InterContinental (+2.8%) are among the risers.

© Provided by The Guardian
The FTSE 100 index Photograph: Refinitiv

Trading in the US equities remains hectic, unpredictable and full of surprises, says Ipek Ozkardeskaya, senior analyst at Swissquote.

The escalating tensions in the Ukrainian border, Joe Biden threatening Vladimir Putin with personal sanctions if Russia invades Ukraine, and the IMF cutting the US and Chinese growth outlooks yesterday are all creating volatility and confusion — alongside expectations of a hawkish Federal Reserve

Ozkardeskaya argues that Fed hawks should chill out — spooking the markets today won’t help them tackle inflation.

The hawkish fears include that the Fed could announce the end of the QE taper as soon as today, that it could hint at back-to-back rate hikes instead of one rate hike every quarter, that it could surprise with a 50bp point hike in March instead of a more likely 25bp raise, or it could even choose not to wait until March and hike the rates this week.

Yet, these hawkish expectations are certainly a bit far stretched; the Fed can’t trigger a financial crisis to fix the inflation problem. There is a greater chance we meet a confident, yet a comforting Fed at today’s announcement. If the Fed wants to carry on with its hawkish plans, it needs to get the risk appetite under control.