The FTSE 100 was down slightly on Wednesday as investors assessed the latest instalment of US inflation data and a surprise contraction in the UK economy.
Today’s US inflation report was highly anticipated and when markets learned of the 3.7% CPI read, global equity markets slipped in the immediate market reaction, before reversing the move.
Economists had predicted US CPI to increase 3.6% and the 3.7% print did little to ruffle investors’ feathers, although it set a tentatively bearish tone.
Month-on-Month Core US Inflation – the reading closely watched by interest rate setters at the Federal Reserve – came in at 0.3%, slightly higher than the 0.2% expectation.
Slightly higher core inflation will increase the chance of the Federal Reserve hiking this month, but it doesn’t nail on a rate hike. The current consensus is for the Federal Reserve to keep rates on hold at their meeting next week.
Uncertainty around rates may cause some risk aversion in the coming days.
The FTSE 100 was down 0.15% at the time of writing on Wednesday.
UK banks and housebuilders were among the top risers on Wednesday after UK GDP contracted in July. The poor reading raised hopes the Bank of England would hold off hiking rates at the next meeting.
Indeed, if poor economic data continues, the BoE may be forced to cut rates which would support the UK housing market.
Interest rate decisions
The Bank of England will announce their rate decision next Thursday, a day after the Federal Reserve’s decision on Wednesday. Both events have the potential to move markets but the outcome is far from certain and the BoE has form for surprising markets.
Before that, the ECB will reveal their next move on rates tomorrow.
“The European Central Bank’s (ECB) next interest rate decision, on Thursday, looks like a very close call,” said Henk Potts, Market Strategist at Barclays Private Bank.
“Markets have been pricing in around a 40% chance of a quarter point rate increase. The ECB has moved to a data-dependent approach and, as such, is likely to be influenced by the deceleration in price pressures highlighted in August’s inflation report and the lacklustre level of gross domestic product growth (0.1%) in Q2.”