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London stocks rose on Wednesday as the latest UK inflation data boosted rate cut expectations.
Data released earlier by the Office for National Statistics showed that consumer price inflation rose in July for the first time since December, but less than expected and the monthly figure was actually negative.
CPI rose by 2.2%, up from 2% in June and May but coming in below expectations of 2.3%. It is now back above the Bank of England’s 2% target but this won’t last as the monthly numbers imply it should fall for the next two consecutive months.
It’s not always clear to readers so we always point out that the annual figure isn’t really the one we should be looking at. Inflation hasn’t increased, it actually decreased since last month. The month-over-month figure for inflation in July was -0.2% lower than June.
Inflation had to go up year over year as a negative -0.4% was falling off the annual figure from last July. The next two numbers to be replaced by the upcoming August and September figures are 0.3% and 0.5% respectively.
On the back of this, we would expect the overall inflation number next month to drop back to 2%, and then dip below 2% in September. Why headlines insist on saying inflation increased this month is beyond us; compared to last month, inflation dropped -0.2%.
Having said that, the ONS said that some elements were still positive. The largest upward contribution came from housing and household services where prices of gas and electricity fell by less than they did last year. The largest downward contribution came from restaurants and hotels, where prices of hotels fell this year having risen last year.
The figures also showed that core CPI, which strips out food, energy, alcohol and tobacco, fell to 3.3% in July from 3.5% in June. Meanwhile, the CPI services annual rate fell to 5.2% in July from 5.7% a month earlier.
Ruth Gregory, deputy chief UK economist at Capital Economics, said the smaller-than-expected rise in CPI inflation and the sharp fall in services inflation to a two-year low “will reassure the Bank of England that the disinflation process is on track and opens the door to more interest rate cuts later this year”.
UK equity markets rose on the back of the release. Flutter Entertainment surged to the top of the FTSE 100 gainers, having said late on Tuesday that it was lifting full-year guidance after a better-than-expected second-quarter performance.
The company now expects US revenue of between $6.05bn and $6.35bn and adjusted EBITDA of $680m to $800m. This is up from previous guidance of $5.8bn to $6.2bn revenue and adjusted EBITDA of $635m to $785m.
Revenue outside the US is expected to be between $7.85bn and $8.15bn, while adjusted EBITDA is set to be $1.69bn to $1.85bn. This is up from previous guidance of $7.65bn to $8.05bn and $1.63bn to $1.83bn, respectively.
Ladbrokes owner Entain also gained.
Housebuilders were the other big winner of the day as lower rates and inflation brighten the near term outlook for them. Berkeley, Taylor Whimpy and Barratt all gained around 3% and Persimmon nearly reaching a 4% increase. Only 19 of the 100 were in the red at the time of writing.
Official data published on Tuesday showed annual wage growth excluding bonuses, a measure of underlying price pressures, slowed to its lowest in almost two years at 5.4 per cent. After this month’s quarter-point reduction in the benchmark interest rate to 5 per cent, BoE governor Andrew Bailey said “we need to make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much”.
This is pointing out the obvious of course, but they also need to be careful not to ‘not cut’ interest rates and smother growth. If rates do stay higher for longer, it will be harder for the government to come through on their growth plans.
Finding a happy medium is always the best way, but right now the Bank of England has to push on talk of rate cuts rather than admit that inflation is now under control and cuts are coming. It is, and they are.
In the US, inflation fell to 2.9 per cent in July, bolstering the case for the Federal Reserve to cut interest rates at its meeting in September. The annual rise in the consumer price index was just 0.1 percentage points below June’s rate and undercut economists’ expectations that the figure would hold steady at 3 per cent.
It also marked the smallest annual increase since March 2021 and is the first time since then that the headline CPI figure has dipped below 3 per cent. Core CPI, which excludes volatile food and energy prices, rose by 3.2 per cent, compared with 3.3 per cent in June, according to data published by the Bureau of Labor Statistics on Wednesday.
However, the all-important monthly figure was still positive coming in at 0.2%. The only reason the yearly figure fell below 3% was due to the fact that last July’s monthly figure was 0.3% giving the annual number a drop of 0.1%. This latest data will raise hopes that the Fed is succeeding in quelling price pressures and will be welcomed in the White House. US voter disquiet about inflation has been a headwind for Democrats in this year’s presidential election campaign. Fed officials have sought more evidence that US inflation is cooling sustainably before lowering borrowing costs as Americans show signs of reining in their spending. The US central bank has held rates at a 23-year high of 5.25–5.5 per cent for more than a year. US stock futures fluctuated between small gains and losses following the data release. It has been a fairly mute response but then the data does seem to be roughly as expected. Maybe the huge equity swings on the back of inflation numbers is a thing of the past……..
Contracts tracking the benchmark S&P 500 index gained 0.2 per cent on the cash open, while those tracking the tech-heavy Nasdaq 100 edged 0.3 per cent higher. In government bond markets, the policy-sensitive two-year Treasury yield rose 0.05 percentage points to 3.99 per cent, while the 10-year yield rose 0.01 percentage point to 3.86 per cent. Yields rise as prices fall.
Increases in housing-related expenses accounted for nearly 90 per cent of the 0.2 per cent monthly increase for CPI, according to the BLS. The energy index was unchanged in July, following two consecutive months of declines.
Still to come this week is UK GDP on Thursday morning followed by US Jobless Claims and Philadelphia Fed Manufacturing Index along with Industrial production.
Then on Friday it’s UK Retail Sales, US Housing Starts and Michigan Consumer Sentiment.
The major numbers for the week are behind us, but predicting what will move the market, is never easy.
More from us at the weekend with our ‘Week In Review’. Until then, have a good rest of the week and we hope your portfolios profit from a little stability.
