The FTSE 100 joined a global equity rally on Thursday after US CPI rose 3.2% in July, lower than the 3.3% consensus estimate but higher than last month’s 3% read.
Today’s release confirmed US CPI is well past its worst levels and is settling at a level that removes the need for sharp interest rate hikes. Investors cheered the release, with the S&P 500 trading over 1% higher and the FTSE 100 gaining 0.3%.
“After today’s data, the probability of a Fed rate rise has decreased, and this is already being reflected in the markets – stock futures are up while two-year treasury yields and the dollar are both down,” said Richard Flax, Chief Investment Officer at Moneyfarm.
“After two consecutive lower-than-expected CPI prints, some investors are perhaps overoptimistic in looking for a rate cut in Q1 2024. We’re likely to hear a lot about the Fed being data-dependent, as the Fed remains wary of declaring victory too soon.”
With markets currently pricing interest rate cuts in early 2024, the Federal Reserve will remain firmly in focus as a shift in expectations of the first-rate cut could rock equity markets to the same extent initial rate hikes did 18 months ago. In addition, any further pick-up in inflation will be bearish for stocks.
The Federal Reserve will next meet in September to decide on rates, and investors will be closely watching for any hints of the trajectory of rates going into next year.
“Overall, inflation is grinding back towards target and the labour market is slowly cooling, but the FOMC will want to see yet more data before deciding in September if progress has been fast enough to warrant a pause, or if the balance of risks calls for another hike to ensure inflation targets are met. Market pricing currently favours a pause, but the market has underpriced the Fed’s actions before,” said Ryan Brandham, Head of Global Capital Markets, North America at Validus Risk Management.
FTSE 100 movers
After receiving two broker price target increases, InterContinental Hotels was the FTSE 100’s top gainer – Jefferies now has a 6,400p price target. InterContinental Hotels shares were 7% higher at 6,049p at the time of writing.
The FTSE 100’s losers were dominated by companies trading ex-dividend, including Rio Tinto and Fresnillo.
Spirax‐Sarco Engineering shares were off by 4% after reporting a 7% decline in operating profit in the first half. abrdn was down over 11% as selling resumed after issuing a trading update earlier this week.