Weaker than expected UK and US CPI inflation data has set the scene for a potentially tumultuous instalment of central bank action from the Bank of England and Federal Reserve over the next 24 hours.
Equity markets rallied sharply yesterday as US CPI fell to 7.1% and investors positioned for a dovish tweak to the Fed’s perspective on interest rates.
“Tonight’s rates decision from the US Federal Reserve remains finely poised but a less aggressive rate hike seems likely – the FTSE 100 dipped a little this morning as investors remain in ‘wait and see’ mode ahead of the decision,” said Russ Mould, AJ Bell investment director.
If either the Fed or BoE give any indication of hawkishness going into 2023, one would expect significant volatility in equities.
FTSE 100 housebuilders
The majority of FTSE 100 constituents were trading negatively on Wednesday ahead of the Fed’s decision at 7pm. There was pronounced weakness in those stocks particularly exposed to interest rates including UK banks and housebuilders.
“Housebuilders acted as a drag on the index, suggesting worries about the housing market and the impact of higher borrowing costs on demand persist,” Mould said.
Ocado was the FTSE 100’s top faller as heightened volatility in the retail technology company persisted. The company’s shares were as much as 10% higher at one point in yesterday’s session.
Rio Tinto and the rest of the FTSE 100’s diversified miners were also among the fallers after posting substantial gains in November. Precious metals miners Fresnillo was up 2.5% as gold prices held above $1,800 after a surge yesterday.
The FTSE 100 is down 1.2% so far in December following a significant rally from lows around 6,800 in October.
Whether the FTSE 100 is able to deliver a seasonal ‘Santa rally’ and produce a positive performance in December will likely be dependent on what happens over the next two days.