Stocks in London closed down on Wednesday as a hotter-than-expected inflation read in the UK worsened investor fears of another rate hike from the Bank of England on Thursday.
The FTSE 100 index closed down 10.13 points, or 0.1% at 7,559.18 on Wednesday. The FTSE 250 ended 174.71 points lower, or 0.9%, at 18,571.45. The AIM All-Share closed down 2.16 points, or 0.3%, at 783.02.
The Cboe UK 100 ended down 0.1% at 754.15, the Cboe UK 250 closed down 0.9% at 16,289.81, and the Cboe Small Companies ended down 0.2% at 13,187.42.
According to the Office for National Statistics, the UK annual inflation rate was unchanged at 8.7% in May, where it had landed in April.
Inflation had been expected to cool to 8.4%, according to market consensus cited by FXStreet, so the latest figure was hotter-than-forecast.
Core consumer prices, which exclude volatile categories such as food, energy, alcohol and tobacco, rose 7.1% on-year in May. Market consensus had expected the reading to be unchanged from 6.8% in April.
Danni Hewson, head of financial analysis at AJ Bell, said the print showed that inflation in the UK was proving ‘as sticky as superglue’ and has ‘cemented’ the prospect of a rate rise from the BoE on Thursday, as well as raising expectations that the hike may be higher than previously expected.
Up until Wednesday morning, the market had widely been expecting another quarter-point hike. However, the hotter-than-expected inflation print threw a spanner in the works, with some analysts now even forecasting a return to a 50 basis point hike.
‘The prospect of the Bank of England potentially taking UK rates to 6% by early next year is alarming, particularly if you think that the current 4.5% level is already causing stress among consumers and businesses,’ Hewson said.
The Bank of England announces its interest rate decision at 1200 BST on Thursday. A press conference with Governor Andrew Bailey follows at 1230 GMT.
The pound was quoted at $1.2727 at the London equities close on Wednesday, down from $1.2743 at the close on Tuesday.
Shortly after the release of the inflation data, however, sterling traded at around $1.2770.
Ricardo Evangelista, senior analyst at ActivTrades, said that the markets’ initial reaction to the inflation print led to sterling gains as investors, anticipating interest rate rises, drove demand for the currency.
‘However,’ he continued, ‘this head of steam quickly dissipated and sterling gave away the gains, as the wider picture is pound-negative. The impact of further monetary tightening on the British economy is likely to hinder economic activity and ultimately cause a contraction, and generate currency weakness.’
In London, housebuilders were among the worst-performing stocks at the close on Wednesday.
Barratt Developments, Persimmon and Taylor Wimpey were 3.9%, 4.1% and 3.5% lower, respectively.
The stocks came under pressure from the heat of Wednesday’s inflation numbers, as concerns of a slowdown in the housing market gathered pace. AJ Bell’s Danni Hewson said it was ‘no surprise’ to see housebuilders among the top fallers as the prospect of higher borrowing costs ‘could prove damaging to the property market as affordability issues become more acute.’
Berkeley fared slightly better than its housebuilding peers on Wednesday, but still ended down 1.6%.
The housebuilder reported a fairly solid set of annual results, posting increases in both profit and revenue, and reaffirmed its guidance.
In the year to April 30, Berkeley reported pretax profit of £604.0 million, up 9.5% year-on-year to £551.5 million. Profit was slightly ahead of guidance of £600 million.
Revenue rose 8.6% to £2.55 billion from £2.35 billion.
Chief Executive Officer Rob Perrins said: ‘Looking forward, we are well-placed to meet our guidance for the next two financial years and continue investing in our existing regeneration sites, but will remain cautious in committing to new investment until the conditions for growth are in place.’
Berkeley said it expects to deliver pretax profit of at least £1.05 billion across its next two financial years combined, which is likely to be slightly weighted to financial 2024.
In the FTSE 250, Rathbones closed 3.8% lower at 1,886.00 pence after Barclays cut the investment manager to ’under weight’ from ’equal weight’ and lowered its price target to 1,950p from 2,050p.
‘We downgrade Rathbones to ’under weight’ as a result of its lower growth outlook, risks around integrating M&A and its relative re-rating versus faster-growth peers,’ Barclays analysts explained.
Elsewhere in London, Halfords jumped 9.0% after the motoring and cycling products retailer lifted its annual dividend, despite a fall in profit, and reported a surge in revenue.
Halfords said revenue for the year ended on March 31 jumped 15% to £1.59 billion from £1.38 billion. Pretax profit, however, fell 55% to £43.5 million from £96.6 million.
Looking ahead, the firm expects year-on-year profit growth in financial 2024 and is comfortable with the current analyst consensus of £53.3 million for underlying pretax profit.
It added that trading since the start of the new financial year has been strong.
In European equities on Wednesday, the CAC 40 in Paris and the DAX 40 in Frankfurt both ended 0.6% lower.
Stocks in New York were largely lower at the London equities close, with the Dow Jones Industrial Average flat, the S&P 500 index down 0.4%, and the Nasdaq Composite down 1.2%.
US Federal Reserve Chair Jerome Powell signalled that further interest rate hikes were likely on Wednesday.
In written testimony ahead of a Capitol Hill appearance, Powell said ‘nearly all’ Fed policymakers agreed on the need to ‘raise interest rates somewhat further by the end of the year.’
Powell’s comments reiterated his stance last week after the Fed took a pause on rate hikes following 10 straight increases.
The dollar was mixed following Powell’s testimony.
The euro stood at $1.0949 at the European equities close on Wednesday, higher against $1.0909 at the same time on Tuesday. Against the yen, the dollar was trading at JP¥142.00, higher compared to JP¥141.26.
Brent oil was quoted at $76.92 a barrel at the London equities close on Wednesday, up from $74.86 late Tuesday. Gold was quoted at $1,930.37 an ounce, lower against $1,935.21.
In Thursday’s UK corporate calendar, there are full-year results from DS Smith and Mulberry as well as trading statements from Whitbread and Serco.
The economic calendar has an interest rate decision from the Swiss National Bank, in addition to the early-awaited BoE decision, and the US weekly unemployment claims report at 1330 BST.
Financial markets in China will be closed on Thursday and Friday for the Dragon Boat Festival holiday.
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