Market report: UK inflation snapshot acts as a balm to soothe unruly markets
Susannah Streeter, head of money and markets, Hargreaves Lansdown: ‘’The UK inflation snapshot will come as a relief and is already acting like a balm to calm unruly markets. The FTSE 100 has opened higher as investors appear to have taken some comfort from the easing of inflationary pressures. Housebuilders are on the front foot in early trade, as interest rate cuts are forecast to come a little more swiftly. That’s expected to accelerate the recovery we’ve seen in the housing market. These expectations have been buoyed by a welcome update from beleaguered Vistry, showing profit guidance is on track.
UK consumer price increases were expected to stay in a holding pattern, or even head slightly upwards, but the rate edged down to 2.5% in December from November’s 2.6%. Consumer caution appears to be spreading, with restaurants and hotels dropping prices slightly by 0.1% on the month, perhaps to try and lure in more reluctant customers. On an annual basis, prices still rose 3.4%, but it’s a marked change from the price increases customers have had to deal with. Core CPI, which excludes volatile food and fuel prices, is also moving in the right direction, dropping from 3.5% to 3.2%. This reading has made it more likely that the Bank of England will plump for an interest rate cut in February. Three policymakers voted for a reduction at the last meeting, given their concerns about stagnating economy. The economic picture hasn’t improved and risks deteriorating. Financial markets are now pricing in the chance of a cut at above 80%, up from just over 60% yesterday.
The inflation reading will relieve pressure on UK Chancellor Rachel Reeves, who has been criticised for tax changes in the Budget which could lead to price rises ahead and hold back growth this year. Government borrowing costs have begun to edge downwards, with the yield on 10-year gilts heading lower, but it remains above 4.8%, at multi-decade highs as investors assess Britain’s debt burden. Sterling is still bumping around at lows not seen since October 2023 against the dollar, as the Federal Reserve is expected to go slower than the Bank of England on interest rate cuts, which has been beefing up the greenback. It’s trading at 1.18 against the euro but has started to gain back some ground.
The S&P 500 is expected to trade flat at the open as investors wait on tenterhooks for the latest US inflation snapshot. Although on Tuesday the increase in headline producer prices came in slightly weaker than expected, at 0.2% rather than 0.3% for December, there were still some worrying jumps, such as the climb in airfares – with prices leaping by almost 8%. So, all eyes will now be on the US consumer price gauge due out later. Although it’s not the Fed’s preferred measure of inflation – with the personal consumption expenditures index grabbing more attention from policymakers – it will still indicate if prices are retaining heat and warming up even further. With employers taking on more staff than expected, and vacancies rising, demand in the economy is looking robust. If there’s a jump in the core rate of inflation in the US it could quash hopes of an interest rate cut this year and could lead to fresh market jitters.
Curry’s is the latest UK retailer to call the increase in National Insurance Contributions unhelpful, as they increase costs on an ‘overburdened’ retail sector. Nevertheless, Curry’s pulled a cracker of a trading statement, with Christmas sales bringing cheer. Revenues rose 2% over the peak festive period, with laptops and mobile phones selling particularly well. The retailer has raised full year profit guidance to between £145 million and £155 million. The welcome revision upwards and strong sales momentum reported has boosted the share price in early trade by more than 11%. Shareholders have been fired up by the upgraded profit guidance and clearly believe the retailer is in a much fitter shape to weather the increase in payroll costs.
Royal Mail has been benefitting from a surge in online sales over Christmas, with its parcels business firing on more cylinders. Revenues lifted 2.4% across Royal Mail during the so-called golden quarter, with sales of parcels up 3.2%. Given the competition from a raft of low-cost delivery rivals, it’s a highly encouraging performance. It means the company is on track to return to profit this year just as the takeover deal of Royal Mail’s parent company IDS heads closer to completion. EP Group owned by Daniel Kretinsky, the Czech billionaire, clearly sees big opportunities ahead for the parcels business and it’s likely automation will be speeded up. Already investment in new parcels hubs is paying off, with centres in Daventry and Warrington processing more than 75 million parcels during the Christmas period, up 23% year-on-year.
Brent Crude has gained back ground following a fall on Tuesday and is hovering around $80 a barrel. Data pointing to resilience in the US economy and the continuing drawdown on crude stocks indicating buoyant demand is keeping upwards pressure on prices. The effect of the latest US sanctions on Russia are also still taking hold, with supply disruption in oil tanker flows around the world. But a lid is expected to be kept on prices thanks to hopes of a ceasefire in Gaza being kept alive, which would help calm tensions in the Middle East.’’