The FTSE 100 surged on Wednesday as stocks reacted to news UK CPI fell to 7.9% in June.
London’s leading index jumped 1.70% to 7,580 as of 14.00pm on Wednesday.
The lower-than-expected 7.9% CPI inflation reading suggests the Bank of England may have room to slow down the pace of their rate hikes during the rest of 2023. Economists had predicted CPI would fall to 8.2% from 8.7%.
“Today’s year-on-year UK inflation print of 7.9% is a step in the right direction and evidence that the significant financial medicine in the form of interest rate hikes is taking effect. The big number of 7.9% is still well off the ‘no ifs or buts’ 2% target, and the cost of living crisis remains painfully evident,” said Saxo UK CEO, Charles White-Thomson.
“With this in mind, we should prepare for a 25bp hike by the Bank of England on August 03. The war to defeat inflation is not over and the Governor has nailed his colours to the 2% target.”
Housebuilders jump
As we wrote yesterday, there would likely be sharp moves in housebuilders on the open today should inflation deviate from economist expectations.
Indeed, the lower-than-expected inflation reading sparked a rally in housebuilders, with Persimmon up over 8% in early trade. Barratt Developments rose around 7%, and Taylor Wimpey added over 6%.
“Investors are taking the view that if inflation is on a sustained downward path, then the Bank of England might be less eager to keep pushing up interest rates. The market is desperate for that pivot moment where central banks call the end to the current rate rise cycle,” said Danni Hewson, head of financial analysis at AJ Bell.
Real Estate Investment Trusts were getting in on the action with Land Securities rising 8%. Rightmove jumped 6%.
GBP/USD
The prospect of diverging inflation rates could have set the Bank of England and the Federal Reserve on different monetary policy paths for the rest of 2023. Today’s data will allow the Bank of England to pause interest rate hikes later in the year should inflation continue to fall.
This would bring the BoE back in line with the Fed and makes the recent rally in GBP/USD look overdone.
GBP/USD was down 0.6% to 1.2951 at the time of writing. The weaker pound was providing support for the FTSE 100’s overseas earners.
“The inflation reading has dampened the outlook for interest rate hikes in the UK, much to the excitement of investors,” Danni Hewson said.