FTSE nears pre-pandemic peak as US inflation tops 7%

A surge in US inflation to 7% helped push the FTSE 100 closer to its pre-pandemic peak of 7,700 but Wall Street seemed unbothered by the rising cost of living.

Update: The FTSE 100 pushed closer to its pre-pandemic peak as US inflation hit 7% in a stronger-than-expected printout, but Wall Street had prepared for even hotter data as it shrugged off the increase.

The UK blue-chip index was up 0.9%, or 66 points, at 7,557 at 3.30pm, as the price of goods and services in the US continued to rise at a pace not seen since the early 1980s. The consumer prices index measure of annual inflation hit 7% last month, marking the seventh consecutive month in which inflation has topped 5%.

The figures put paid to the Federal Reserve’s initial insistence that post-pandemic inflation was ‘transitory’ and would subside as pent-up demand faded and supply chains got back on track. Instead, the US central bank is now planning a swift rise in interest rates and has indicated that it will raise rates three times in 2022, following the path set by the Bank of England which delivered a surprise hike to borrowing costs in December.

Fed chair Jerome Powell said yesterday there is a ‘mismatch between demand and supply’.

‘We have a very strong demand in areas where supply is constrained,’ he said. ‘If we see inflation persisting at high levels longer than expected and we have to raise interest rates more over time, we will.’

Despite the higher than expected inflation reading, US markets were unbowed, with the S&P 500 pushing 0.4% higher and the technology-focused Nasdaq adding 0.8% on opening. The US dollar fell against most currencies.

‘It looks like the market had prepared for even hotter inflation, which obviously didn’t materialise,’ said Fawad Razaqzada, analyst at ThinkMarkets.

‘The dollar’s weakness could be short-lived. In the slightly longer term outlook it is difficult to see how the dollar will stay soft, if other central banks fail to move at least in line with the Fed’s pace of tightening.’

A surge in the price of core goods rather than services was to blame for the high inflation rate. Car prices have been a key feature of inflation reports and prices rose 2.1% in December, as omicron put supply chains under further pressure. Food prices were also up 0.5% over the month.

David Goebel, investment strategist at Tilney Smith & Williamson, said economists were now calling a peak in inflation and expect ‘inflationary pressure to subside slowly over the course of 2022, although remaining well above target’.

‘We are starting to see tentative signs that this may be the case, but it is too early to say with any conviction,’ he said.

‘Further severe Covid-19 variants or continuing stubbornly high energy prices represent two obvious rises to this scenario.’

He said falling inflation will also see bond holders facing ‘deeply negative yields’ leading investors to favour equities over fixed income.

‘Looking ahead, a period of weaker growth will be difficult to avoid in light of rising omicron cases and surging numbers of self-isolating people,’ said Robert Alster, chief investment officer at Close Brothers Asset Management.

‘Wages remain the key driver of inflation, which while rising robustly, are still slower than inflation.’

He said interest rates could rise as soon as March as ‘pressure remains on the Fed to act’ and accelerate the pace of tapering bond purchases. 

 

(10:04) FTSE nears pre-pandemic peak as miners surge

The FTSE 100 hit a post-pandemic high this morning driven by mining stocks and a crop of bumper trading updates, as investors await inflation data from the US.

The blue-chip index rose to 7,545 in early trading, its highest level since January 2020, before retracing some of its steps to trade up 0.6%, or 42 points, at 7,533.

That came after lower-than-expected inflation in China opened the door for the government to provide more support to the slowing economy, while US Federal Reserve chair Jerome Powell confirmed the central bank will raise interest rates further if required to tame soaring prices, ahead of an inflation printout later today.

Neil Wilson, analyst at Markets.com, said: ‘The FTSE 100 had been tracing out a neat new range this year but this morning it’s managed to break free and make a new post-pandemic high at 7,545.

‘The positive march means 7,700 remains the target – the old pre-pandemic peak in January 2020.’

Bullish sentiment in markets was mirrored in commodities as the price of a barrel of West Texas Intermediate oil moved above $81 while Brent Crude neared $84 a barrel.

That benefited mining and energy majors, which have also been supported by shrinking oil inventories, as demand continues to grow despite the emergence of the omicron Covid-19 variant. Among FTSE 100 commodity stocks: 

  • BHP (BHP) was up 3.8%, or 86p, at £23.60;
  • Antofagasta (ANTO) was up 3.1%, or 42p, at £13.84;
  • Glencore (GLEN) was up 2.9%, or 11p, at 399p;
  • BP (BP) was up 2.1%, or 7p, at 377p;
  • and Royal Dutch Shell (RDSA) was up 1.6%, or 29p, at £17.88.

The blue-chip index also gained from a positive trading update from Sainsbury’s (SBRY), which reported a jump in profits following a bumper festive trading season. The shares were up 1.4% at 283p after the supermarket upped its full-year profit guidance by £60m to £720m.

Sophie Lund-Yates, analyst at Hargreaves Lansdown, said Sainsbury’s had taken on the discount supermarkets with success, following ‘massive investment in reducing prices, helping the supermarket up its market share’.

JD Sports (JD) gained 2% in early trading before falling back to a loss of 2%, changing hands at 214p, after a busy Christmas period led it to revise its full year profits upwards to £875m, ahead of market consensus of £810m.

The FTSE 250 was also boosted by strength among retailers, with the ‘mid-cap’ index trading up 0.5%, or 108 points, at 21,136. Homeware retailer Dunelm (DNLM) led the charge, up 7.1%, or 96p, at £14.36 after delivering a record quarter as Christmas sales boomed. Total sales were up by £46m compared to the previous period and the firm now expects profits before tax for the first half to be around £140m, up from £112m in the same period last year.

Among investment trusts, growth funds continued to recover after their New Year falls with Baillie Gifford US Growth (USA ), Baillie Gifford China Growth (BGCG ), Chrysalis Investments (CHRY ) rallying over 3%. CC Japan Income and Growth (CCJI ) added 3.6% to 156p in early trading, while BlackRock World Mining (BRWM ) reflected the strength in miners, up 2.5% at 615p. 

Third Point Investors (TPOU ) put on 2.2% to $27.60 from a 13% discount as the London-listed US hedge fund published details of how some investors can convert their shares into the underlying master fund at a narrower gap to their asset value.

JLEN Environmental Assets (JLEN ) slipped 1.3% to 102.5p from a 5% premium as it launched a share placing and offer at 101p.

Schroder UK Public Private (SUPP ) shed 2.7% to 32.4p on a 25% discount after the former Woodford Patient Capital announced a €12m (£10m) investment in Back Market, an online retailer of refurbished electronics.

 

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