The FTSE 100 opened down sharply on Monday as traders reacted to UK wage data that created doubts about the Bank of England’s interest rate trajectory.
Strong growth in UK wages serves as a reminder the inflation problem hasn’t gone away and, crucially, interest rates may not fall as quickly as some would like.
“Regular pay in the UK rose 5.2% in the three months to October, edging up from the previous period and beating expectations. The increase was driven by private sector wages, while public sector growth slowed, and manufacturing led the way,” said Matt Britzman, senior equity analyst, Hargreaves Lansdown.
“Adjusted for inflation, real wages continued to climb, but the stronger print has all but assured the Bank of England will hold rates steady on Thursday, with markets pricing in a 93% chance of no change. Investors are now in wait-and-see mode, watching whether the labour market cools in the wake of the Budget, with February’s rate cut prospects looking like a coin toss.”
Markets were on edge with both the Federal Reserve and the Bank of England set to decide on interest rates this week. However, it is not so much the decisions themselves that are the concern, but what they may say about their course of action for next year.
Whether they cut or not this week is of little consequence. Traders are more interested in how many times they will cut next year, and will pour over commentary provided alongside the rate decisions for insights about inflation and the wider economy.
Many economists, and even central banks, have been wrongfooted by inflation and economic performance in 2024, making the start of 2025 a particularly precarious time for markets.
Adding to concerns about interest rates and inflation, uncertainty around China is lingering, which weighed on commodity companies on Tuesday.
“Energy and pharma stocks weighed on the FTSE 100, causing the index to fall 0.7% to 8,203,” said Russ Mould, investment director at AJ Bell.
“Investors are growing concerned that China’s bold plan to grow its economy faster isn’t working and that spells weaker demand for commodities.”
Bunzl was the FTSE 100’s top faller after the distribution group said it expected operating profit to be hit by deflation, particularly in Europe. The group did say it expected robust revenue growth in the coming year but disappointment about operating profit sent shares down by over 5%.
“It’s rare to see Bunzl doing anything other than plod along so a warning from the distribution company has caught the market by surprise,” Russ Mould explained.
“The company says stickier than expected deflation will hit profit and that’s upset the share price.
“Bunzl supplies items needed by companies to do their work but nothing that’s sold to customers, making it an essential cog in the wheel. It makes a small margin on supplying products, but a deflationary environment can act as a headwind if it has already bought a lot of stock at higher prices and has to sell them for less than originally expected.”