- Inflation rises at slowest pace this year
- Bonds and interest-rate sensitive stocks chased higher
- Bank rates still set to go up next month
Shares in downtrodden housebuilders and property companies were chased higher after the latest inflation data for June came in below expectations, raising hopes the Bank of England might slow the pace of interest rate increases.
Leading the FTSE 100 higher were Persimmon (PSN) up 6.3%, Segro (SGRO) up 5.9%, Land Securities (LAND) up 5.7% and Barratt Developments (BDEV) up 5.4%.
In the FTSE 250 mid-cap index, which jumped 2.6% on the inflation news marking its best day since February, Great Portland Estates (GPE) led the charge with a gain of 8.4% followed by Derwent London (DLN) and Redrow (RDW) up 7.4% and Crest Nicholson (CRST) up 6.7%.
WHY ARE STOCKS RALLYING?
According to the ONS (Office for National Statistics), UK consumer prices rose by the slowest rate this year at 7.9% in June compared with 8.7% the previous month and a high of 10.4% in February, while core inflation rose by 6.9% against expectations of a 7.1% increase.
On a monthly basis, the increase slowed to just 0.1% against 0.8% in May and a three-month average of 0.9%, driven by lower transport, housing and energy costs.
The news sent investors rushing to buy UK government bonds in the hope the Bank of England would slow the pace of interest rate rises in its fight against inflation.
Traders had expected a half percentage point rise in the base rate early next month, but those forecasts were quickly reduced to a quarter percentage point after this morning’s positive surprise.
Stocks which are tied to interest rate expectations, such as housebuilders and property companies, and ‘long income’ investments such as infrastructure and renewable funds, which have lagged the market badly year-to-date, were the biggest risers on the day.
‘Today’s inflation news has spurred investors with an appetite for risk to go fishing for bargains in the space in the hope that property market won’t experience a severe collapse,’ commented Danni Hewson, head of financial analysis at AJ Bell.
NOT OUT OF THE WOODS YET
Emmanuel Cau, head of European Strategy at Barclays investment bank, described the inflation report as ‘a step in the right direction’ as it showed the Bank of England’s tightening was having a positive effect, but added the central bank ‘still has its eye on wage pressures’ and is still a long way from cutting interest rates.
‘This is tentative evidence that UK inflationary pressures might finally be turning a corner,’ added Hussain Mehdi, macro investment strategist at HSBC Asset Management.
‘Nevertheless, with economic activity remaining broadly resilient – and crucially the labour market still too hot – the Bank of England will remain under significant pressure to deliver further policy tightening. We would not push back against market pricing of a 6% terminal bank rate and think rate cuts are unlikely until late 2024.’
Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (Ian Conway) and the editor of the article (Dan Coatsworth) own shares in AJ Bell.
