The FTSE 100 soared on Wednesday as UK investors cheered a material drop in inflation, which may mark the end of the cost-of-living crisis and the interest rate tightening cycle.
UK CPI plunged to 4.6% in October from 6.7% in September. UK inflation is now less than half the 11% peak recorded last year.
The FTSE 100 was up 0.9% in a broad risk-on rally shortly after midday on Wednesday. Gains in London followed a bumper rally in US stocks overnight after US inflation fell to 3.3%.
It is now widely accepted the Bank of England and Federal Reserve are done with their respective rate hiking cycles.
In addition, lower inflation opens the doors to rate cuts, and markets were pricing in 80bps of UK rate cuts next year on Wednesday.
“The FTSE 100 maintained the head of steam it had built up on Tuesday afternoon as UK inflation followed yesterday’s US reading and came in below expectations,” said AJ Bell investment director Russ Mould.
“With confidence there will be no rate increases before the end of the year the market is now looking ahead to the prospect of rate cuts. Whether falls in inflation will stall and whether the Bank of England is as keen as Rishi Sunak to declare mission accomplished in the fight against rising prices remains to seen.
“What will encourage observers in Threadneedle Street is the fall in services inflation – further falls in this area could be the precursor to a pivot towards bringing rates down.
“For now, investors are in the mood to celebrate, and the prospects of a big Santa Rally are building as we head towards December.”
Equity bulls have been out in force over the past 24 hours, but investors should remain cautious about upticks in the inflation rate in the coming months, potentially souring sentiment.
Banks and housebuilders rally
As one would expect, interest rate-sensitive sectors, including housebuilders and banks, rose on Wednesday as gilt yields fell.
Although the two UK-centric sectors displayed signs of optimism on Wednesday, the gains weren’t exuberant, suggesting the drop in inflation had already been priced into stocks.
Taylor Wimpey gained 1.5%, while Barratt Developments added 1%. Banks continued their recovery from a disappointing round of earnings, with Lloyds perking up by 1.5% and Natwest shares 3% to the good.
While interest rates may not rise again in the current hiking cycle, there are still nagging doubts about the economy and the ‘long and variable lags’ of the sharp increase in rates over the past two years. This may cap UK-focused equity gains.
There was strength across the mining sector after China released a relatively upbeat set of industrial and consumer economic indicators.
Glencore and Anglo American were up over 4%.
Experian was the top gainer, rising 6%, after profit before tax on an actual currency basis rose 48%.