FTSE ticks higher as US inflation surges to 5%

Update: US inflation data shocked markets as consumer goods prices jumped 5% in May but the Federal Reserve remains unconcerned.

Update: The FTSE 100 managed to make gains as US inflation surged to a far higher-than-expected 5%, sparking fears that the trend of rising prices may not be as ‘transitory’ as thought.

The blue-chip index added 0.4%, or 29 points, to trade at 7,110 as the US Consumer Price Index jumped higher than the 4.7% forecast, registering a 5% increase – the highest inflation has been since 2008, just before the financial crisis hit. US Labor Department data also reported a 3.8% rise in the core inflation rate, which strips out volatile food and energy prices, the sharpest increase in nearly three decades.

US stocks edged higher, with the S&P 500 adding 0.4% to 4,238 points, putting it on track for a new closing record, while the Dow Jones was up 0.6% and the technology-focused Nasdaq climbed 0.4%.

Danni Hewson, an analyst at AJ Bell, said while markets had been expecting a big number, US inflation has ‘thrown a curve ball’ and will ‘no doubt spark a few uncomfortable conversations’ at the Federal Reserve.

Markets have been jittery for weeks on concerns that the Fed will taper its bond buying programme and an interest rate hike could be on the way. Although the Fed had dismissed the recent creep in inflation as ‘transitory’ and a product of the post-pandemic reopening, especially considering the steep fall in oil prices last year, today’s figures may prompt a rethink.

‘Investors have been bullish so far but today will fire a bit of a warning shot,’ said Hewson.

‘The speed of recovery needs to be considered and a careful hand needs to stand ready to turn off those stimulus taps if the heat becomes too much to handle.’

Tilney Smith & Wiliamson chief investment strategist Daniel Casali, said if ‘supply bottlenecks remain acute and policy remains accommodative’ as the US economy continues to open up, then the ‘tail risk of higher future – and potentially, structural – inflation has increased’.

‘Even so, the Fed believes inflation to be transitory and has not indicated that it is set to tighten monetary policy,’ he said.

‘For the moment, this macro backdrop remains favourable for equities over long-duration nominal bonds.’

While the trajectory of US inflation will no doubt be a worry for investors, there is less concern about the dynamic in Europe, as the European Central Bank (ECB) confirmed a ‘significantly higher’ pace of bond purchasing despite the acceleration of the coronavirus vaccine programme across the eurozone.

Anna Stupnytska, a global economist at Fidelity International, said that although the ECB revised its growth and inflation forecasts for this year and next upwards, it ‘remains downbeat on prospects for inflation, which moves further below the target over the forecasting horizon’.

‘This outlook for subdued inflationary pressures after the pandemic will provide legitimate justification to the ECB to remain dovish beyond 2021,’ she said.

This morning’s blue-chip winners continued to add to gains, with BT (BT) up 6.4%, or 11p, to 195p after French telecoms group Altice took a 12% stake, making it the biggest shareholder. Auto Trader (AUTO) was up 5.8%, or 33p, to 611p despite swinging to a loss, as investors grow excited about the prospects for online car sales.

 

(10:12) FTSE crosses 7,100 despite inflation anxiety

The FTSE 100 sneaked past 7,100 this morning despite investors anxiously awaiting US inflation data for clues as to the direction of central banks’ monetary policy.

The blue-chip index was up 0.3%, or 21 points, at 7,102 by mid-morning, ahead of not only a European Central Bank (ECB) policy meeting but the latest inflation reading from the US.

The spectre of rising prices has been weighing on markets and the two events today may provide investors with a steer on whether central banks will start to tighten their monetary policy and when they might hike interest rates. 

Spreadex analyst Connor Campbell said there was an ‘air of anxiousness to the markets’ but not without good reason.

‘For [ECB president] Christine Lagarde and the gang, increased optimism of an economic recovery in the eurozone – to be backed by a new set of forecasts this afternoon – and a region-wide inflation reading that is now beyond the 2% target are the main points of focus,’ he said.

‘And that could cause the ECB to start talking about tapering its €1.85tn bond-buying programme.’

In the US, the Consumer Price Index readings could be ‘more market-friendly’ as inflation is expected to decline month-on-month. ‘It is worth noting however, that the same was expected last month, and instead we got a pair of recent highs,’ said Campbell.

Autotrader (AUTO) was the biggest riser among UK blue chips, up 5.9%, or 34p, to 612p despite the car classifieds website’s profits going into reverse, with pre-tax profit down 37% to £157m for the year. However, investor sentiment was buoyed by the company being ‘in pole position to capitalise on the shift to online car sales’, said Hargreaves Lansdown analyst Susannah Streeter.

BT (BT) was up 3% to 188p after French telecoms giant Altice took a 12% stake in the group, becoming its largest shareholder, but said it has no intention to make a takeover bid and instead sees BT as a ‘compelling opportunity’.

The mid-cap FTSE 250 index ticked 0.2%, or 38 points, lower to 22,721. Luxury car maker Aston Martin Lagonda (AML) slumped 5.2% to £19.79 a day after winning an engineering award for its DBX model. Restaurant Group (RTN) slipped 3.4% to 134p as it started a formal process to recruit a new chair after Debbie Hewitt announced she was leaving to join the English Football Association.

Gabelli going out on high

Gabelli Value Plus (GVP ) climbed 2.4% to 170p as Associated Capital Group, an affiliate of GVP’s manager, confirmed it would abstain from next month’s continuation vote. Its refusal to do so sparked a corporate governance dispute with the board last year which wanted to pursue a voluntary liquidation of the poorly performing North American fund, in line with the majority of its shareholders. Annual results showed a strong rebound from pandemic lows with net asset value (NAV) surging 64% in the year to 31 March.

In other investment trust news, Aquila European Renewables (AERS ) jumped 2.1% to 95p after it increased its commitment to the construction of The Rock wind farm in Norway by up to €35.6m.

Octopus Renewables Infrastructure (ORIT ) slipped 1.2% to 105.9p on plans to raise £100m with new shares priced 103.5p. The issue price represents a 6.3% premium to the latest NAV and a 3.5% discount to yesterday’s closing price.

Investment company news brought to you by Citywire Financial Publishers Limited.