The FTSE 100 closed marginally higher on Tuesday as sterling rose after a raft of UK economic data suggested that further Bank of England action on rates is nailed on.
Early weakness in the FTSE 100 due to stronger sterling was bought into by investors and the index closed the day up 8 points at 7,282.
Sterling strengthened after UK wage growth jumped to 7.3% in the three months to May while the unemployment rate rose to 4% over the same period.
Higher wage growth will be a concern for the Bank of England which will watch the reading closely as a gauge of inflation. With wage growth jumping to 7.3% the BoE will have little choice but to continue hiking.
“With sterling at a 15-month high the value of the overseas earnings which dominate the index is relatively less. The reason for the pound’s move higher is today’s UK jobs data,” said AJ Bell investment director Russ Mould.
“While there are some signs the tightness in the labour market is starting to ease, wage growth remains uncomfortably high in the context of the Bank of England’s efforts to get surging prices under control.
“If inflation is like toothpaste, to borrow the well-worn analogy, then the Bank is likely to have to make a big mess of the economy trying to get it back in the tube. Borrowers face more pain with the prospect of further rate hikes to come.”
FTSE 100 movers
Tuesday was a fairly uneventful day for individual movers with Land Securities topping the FTSE’s gainers as the REIT bounced back from a downgrade yesterday.
Highlighting some signs of confidence in the macroeconomic picture, cyclical sectors were among the gainers while more defensive sectors fell.
UK housebuilders Persimmon and Barratt Developments rebounded from some of the worst levels for months.
Unilever, Reckitt Benckiser and ConvaTec Group were among the losers.