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.

TUI shares were weaker on Wednesday after the travel operator released 2022 full year results which demonstrated a material bounce back from the subdued activity during the pandemic.

Revenue more than doubled to €7.6bn and EBIT increased €1.1bn as holidaymakers took the first unrestricted opportunity since the start of the pandemic to get away.

“TUI is back on track, as pent-up travel demand and a return to more normal travel patterns helped jet-fuel profits in the fourth quarter,” said Sophie Lund-Yates, Equity Analyst at Hargreaves Lansdown.

“The number of passengers in the core Markets & Airlines business doubled – with the per-seat margin benefit shining through in the numbers. Demand for winter bookings is also looking bright which means all-in-all, TUI is doing well.”

Despite the solid set of numbers for 2022 and some encouraging signs for 2023, TUI shares were 6% weaker at the time of writing.

The travel company has rallied markedly since their October lows but are still down 40% in 2022. Travel disruption and concerns about the cost of living crisis have rocked investor sentiment around travel companies this year. Analysts highlighted the uncertainty around the ability of holidaymakers to afford higher priced holiday next year as a reason to be cautious on TUI shares.

“In 2022 holidaymakers have been willing to pay what it takes to get away for the first time in what feels like an age. However, if prices move too high then affordability becomes an issue,” said AJ Bell investment director Russ Mould.

“This could be a key test for TUI in 2023 and, given people have shifted to booking their holiday at shorter notice to avoid the risk of being caught off guard by disruption, the company has limited visibility on its future business.”

The global economy has received the welcome news the rate of inflation in the US has again slowed and raised hopes major central banks could be nearing the end of drastically sharp increases in interest rates.

The downside surprise in US CPI will add to the argument inflation is cooling and provide justification for easier monetary policy.

The FTSE 100 jumped above 7,500 as US CPI in November came in at 7.1% versus expectations of 7.3%. US futures surged and European stocks also added to gains in a sharp risk-on rally. S&P 500 futures were 3.1% higher at the time of writing.

The Federal Reserve are meeting to decide on interest rates with a decision due tomorrow evening. This reading is unlikely to impact tomorrow’s announcement. However, the chair’s press conference will be closely watched for any hints of a change in the trajectory of rates in 2023.

The Bank of England and ECB will release their interest rate decisions on Thursday.

FTSE 100 consumer stocks

The FTSE 100 consumer constituents dominated the top gainers on Tuesday as investors hoped the dynamics of the US economy would soon be seen in the UK.

Although the US economy’s composition and factors influencing inflation are very different to the UK, any sign of slowing inflation and better conditions for consumers has been jumped on by traders.

Ocado was the FTSE 100’s top gainer, adding 10%, while JD Sports, Next and Kingfisher all posted respectable gains.

Wealth management stocks were higher on hopes savers would soon be able to despot more in their investment accounts. Hargreaves Lansdown shares gained 5.6% and St James’s Place added 4%.

The FTSE 100’s rally was broad with only 13 of the 100 constituents trading negatively at the time of writing.