European stocks reversed course after Wednesday afternoon’s US inflation, but largely clung on to earlier gains, though it was a bearish start in New York as investors re-assessed the interest rate outlook on the back of the red-hot data.
The Federal Reserve’s latest dot-plot suggested three rate cuts could materialise this year. Since the March meeting, however, data has been robust and the odds of a trio of rate cuts in 2024 has dwindled.
‘It’s hard for investors to hang onto their sunny disposition when inflation keeps raining off the planned rate cut parade,’ AJ Bell analyst Danni Hewson commented.
‘Where once investors had seen at least three rate cuts this year with May’s meeting looking like a real contender for when the switch would be flipped, there’s now a sense the can is being kicked further and further into grass that keeps on growing. No surprise then that US markets tumbled on the news as even the most bullish investors are forced to take stock.’
The FTSE 100 index ended up 26.42 points, 0.3%, at 7,961.21. It had traded a touch below the 8,000 point mark shortly before the US inflation reading, however.
The FTSE 250 closed up 38.40 points, 0.2%, at 19,801.75, and the AIM All-Share rose 4.21 points, 0.6%, at 755.19.
The Cboe UK 100 ended up 0.4% at 795.63, the Cboe UK 250 ended marginally lower at 17,201.76, and the Cboe Small Companies fell 0.1% to 14,745.87.
In European equities on Wednesday, the CAC 40 in Paris fell 0.1%, while the DAX 40 in Frankfurt edged up 0.1%.
The Dow Jones Industrial Average was 1.2% lower at the time of the European equities close. Both the S&P 500 and Nasdaq Composite slumped 1.1%.
The pound was quoted at $1.2546 late Wednesday afternoon in London, down sharply from $1.2672 at the equities close on Tuesday. The euro stood at $1.0743, slumping from $1.0856. Against the yen, the dollar was trading at JP¥152.88, surging from JP¥151.65.
According to the Bureau of Labor Statistics, the year-on-year rate of US consumer price inflation picked up to 3.5% last month, from 3.2% in February, taking it further above the Fed’s 2% inflation target.
The rate of consumer price inflation had been expected to pick up to just 3.4%, according to FXStreet cited consensus.
The annual core rate of inflation, so excluding food and energy, was 3.8% in March, where it had stood in February. It had been expected to ease to 3.7%, according to FXStreet.
Kathleen Brooks, research director at XTB said the immediate aftermath of the CPI report ‘has been a bloodbath.’
‘The market has once again recalibrated to US rate cut expectations, and the verdict is that that first rate cut may not come until November. The market is now pricing in less than 2 rate cuts from the Fed for this year. What a turn around, only a few months ago the market was expecting 6 cuts.’
At 1900 BST on Wednesday, minutes from the Fed’s last meeting are released. The US central bank late last month maintained interest rates at between 5.25% and 5.50%.
During that meeting, its summary of economic projections were released. The dot-plot chart still suggested three rate cuts could be in the offing this year.
However, confidence in three rate cuts from the Fed, beginning in June, is being tested.
According to the CME FedWatch Tool, there is a 79% chance the Fed leaves rates unmoved in June. This time last week, there was more than a 60% chance that it would cut at that meeting.
Its next decision is on May 1.
In London, Tesco shares rose 3.3%, ending the best large-cap performer.
The Hertfordshire-based supermarket chain said pretax profit surged to £2.29 billion in the financial year ended February 24, from £882 million a year prior.
Revenue climbed 4.4% to £68.19 billion from £65.32 billion.
The company announced a final dividend of 8.25 pence per share, bringing the total to 12.10p, up 11% from 10.90p paid for financial 2023.
On the back of the results, Tesco announced a new £1.0 billion share buyback programme to be conducted over the next 12 months, including £250 million funded by the special dividend paid to the group by Tesco Bank in August 2023.
Ocado had spent most of the day higher in a positive read across, before sinking as the red-hot US data hurt sentiment. Ocado shares fell 1.9% on Wednesday.
Stocks in the rate sensitive property and housebuilding sectors also fell. Barratt Developments fell 1.2% and Segro gave back 1.4%.
Elsewhere in London, XP Power surged 8.0%. The maker of power control systems maintained its yearly expectations and said it expects trading to improve as demand in its semiconductor equipment unit starts to pick up.
XP Power said revenue in the first-quarter to March 31 fell 17% on-year to £64.6 million. It declined 15% at constant currency. Order intake was 29% lower at £43.7 million.
The company said on Wednesday: ‘As expected, revenue in Q2 is likely to be slightly lower than Q1 due to ongoing customer destocking, and we continue to expect trading to improve during 2024 as channel stock levels reach equilibrium and as demand for Semiconductor Manufacturing Equipment begins to increase. Order intake in Q2 will provide greater clarity on the timing and trajectory of this improvement.
‘We are confident that our market positions remain strong and that the group is well positioned to prosper as our key markets resume their trajectory of healthy long-term growth.’
Chamberlin tumbled 17%, after results in its most recent quarter came in below expectations.
The specialist castings and engineering group based in Walsall, West Midlands issued a trading update on the three-month period ended February 29. The company’s financial year runs to May 31.
Underlying demand across Chamberlin during its financial third quarter was below management’s expectations.
‘Schedules over the period were lower than previously forecast by our customers and were further impacted by delays with the startup of certain new programs,’ the company said.
It noted that lower sales during the third quarter of financial 2024 have hurt profit and working capital.
Brent oil was quoted at $89.31 a barrel late in London on Wednesday, down from $89.82 late Tuesday. Gold was quoted at $2,334.91 an ounce, down against $2,347.44.
Thursday’s economic calendar has an inflation reading from China overnight, before the Europe Central Bank interest rate decision at 1315 BST.
In the local corporate diary, kitchen and bathroom products seller Norcos releases a trading statement.
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