The FTSE 100 reversed very respectable early gains on Wednesday after the US CPI came in hotter than expected, sending equity investors running for the hills.
The US CPI release is one of two major events this week which have the potential to move markets as tensions around interest rates increase. A Year-on-Year US CPI reading of 3.5%, hotter than the estimated 3.4%, was not the outcome equity bulls would have hoped for.
“Every headline measure for the March CPI report came in ahead of economists’ expectations — which is exactly what stock bulls didn’t want to see,” said Bret Kenwell, US analyst at investment platform eToro.
“Month-over-month, year-over-year and Core CPI all came in hot, putting the Fed in a tough spot after they’ve recently reiterated an expectation for three rate cuts this year.”
The FTSE 100 was knocking on 8,000’s door going into US CPI and looked like it could break through the key psychological level. However, as the CPI numbers hit the wires at 1.30pm UK time, the FTSE 100’s gains of around 0.8% very quickly evaporated, and London’s leading index was trading negatively within the hour.
Having touched highs of 7,999 earlier in the session, the FTSE 100 was trading down 0.1% at 7,930. US equities opened the day in the red, and the S&P 500 was down over 1% at the time of writing.
US bond yields soared, adding to equity investor concerns.
US CPI promised to send waves through financial markets, and it delivered. Equity markets have melted higher despite central banks choosing not to cut rates in March. Today’s data suggests it could now be much later in the year before the Federal Reserve, Bank of England, and even the ECB will cut rates.
The ECB will decide on rates tomorrow, which is the other potentially market-moving event of the week.
A rate cut later in the year would be a major disappointment for investors, given that the earnings outlook for US equities is fairly flat for the rest of this year and that higher borrowing costs will not help improve the outlook.
Indeed, the number of US rate cuts this year will be an increasing concern. Coming into 2024, markets were pricing as many as 7 US rate cuts this year. That has dropped to one single rate cut.
Ultimately, many investors will have to rethink their view of the world.
Tesco
Tesco shares perked up on Wednesday after Britain’s largest supermarket said it increased market shares by balancing increasing premium sales and bolstering its efforts to fight off budget competition. Group sales grew 7.4% in 2023/24, driving a 10.9% increase in retail operating profit.
Tesco shares started the day with a steady increase and were over 5% higher before the US CPI reading. Unlike the rest of the market, Tesco held their own, and shares were trading 5.9% higher at the time of writing.
“Tesco is reaping the benefits of putting the customer first. For some time, it has been lowering prices on core lines in recognition that consumers are under financial pressure. That’s helped it to maintain appeal to a large number of shoppers and retain their loyalty while also helping it better compete against Aldi and Lidl. The results are clear to see – profit is going up; the business is in great shape; and it is growing market share,” said Russ Mould, investment director at AJ Bell.
“It’s helped that Tesco has benefitted from people trading down from higher end retailers. Accepting that a high interest rate environment means more careful monitoring of how money is spent, even wealthier individuals have taken steps to shift their spending habits.
“Whereas once they might have been happy to spend big at Waitrose or Ocado, some of these consumers have shifted to Tesco and found that its Finest range still offers the higher quality products they desire, but at a cheaper price point.”
Cyclical sectors suffered the worst losses after the CPI release, with miners and housebuilders feeling the pinch. Antofagasta was the worst hit, down 4%.
Ocado dropped 3%.
