The FTSE 100 was largely flat on Wednesday as UK inflation hit 10.1% for the second time this year and a weaker pound provided some support for the FTSE 100’s overseas earners.
The pound fell as the Bank of England said they would indeed begin quantitative tightening 1st November, but wouldn’t sell long dated bonds initially.
“The FTSE 100 dipped on Wednesday as UK inflation came in a smidge higher than expected to match the multi-decade highs seen in July,” said AJ Bell investment director Russ Mould.
“Food prices were the major contributor to the inflationary surge, which will only ramp up the pressure on the Bank of England to maintain a hard line on interest rates ahead of its next meeting in November.
Early weakness in the FTSE 100 was bought into and the index traded marginally higher at 6,939 at the time of writing.
Interest rate expectations
Interest rate expectations have fallen back since Jeremy Hunt’s appointment but today’s inflation reading all but confirmed interest rates would continue to rise sharply in the coming months.
“Expectations for the peak in interest rates in 2023 have fallen back from their highs of close to 6% p.a. since Jeremy Hunt, the replacement Chancellor, rolled back much of the proposed fiscal loosening in the “mini” budget,” said Chris Acari, Head of Capital Markets at Hymans Robertson.
“At time of writing, markets expect the bank of England base rate to peak around 5.3% next year, while consensus forecasts suggest the bank may raise rates slightly less than this.”
Housebuilders suffered on Wednesday after bouncing from the mini-budget lows. UK banks were also under pressure as the higher inflation data suggested more households are facing financial difficulties going into the winter.
It was the weaker pound and overseas stocks providing support for the index at lunchtime on Wednesday with HSBC the top riser, gaining 2.2%.
GlaxoSmithKline, BAE Systems, BP, Shell and AstraZeneca were among the FTSE 100 heavyweights gaining on Wednesday and offsetting losses in domestic names.