Stocks in London rallied on Wednesday morning as UK consumer price inflation for November came in lower than expected, as investors price in UK and US interest rate cuts in 2024.
The FTSE 100 index opened up 102.93 points, 1.4%, at 7,740.96. The FTSE 250 was up 206.21 points, 1.1%, at 19,522.19, and the AIM All-Share was up 3.16 points, 0.4%, at 748.55.
The Cboe UK 100 was 1.3% at 772.41, the Cboe UK 250 was up 1.1% at 16,990.02, and the Cboe Small Companies was up 0.2% at 14,437.70.
Data from the Office for National Statistics showed headline inflation fell below 4% annually, and markedly faster than market forecasts.
The ONS said the consumer price index rose 3.9% annually in November, cooling sharply from the 4.6% increase recorded in October. The inflation reading came in below FXStreet-cited market consensus of 4.4%.
The recent peak for annual inflation in the UK was 11.1% in October 2022, which the ONS estimated to be the highest since 1981. November’s reading was the lowest since September 2021.
Core inflation also fell faster than expected, having proved fairly stubborn in recent months.
Core consumer prices, which exclude energy, food, alcohol and tobacco, rose 5.1% annually, coming in below market expectations of a 5.6% rise. They had increased by 5.7% in October.
Sterling was quoted at $1.2659 early Wednesday, down sharply from $1.2734 at the London equities close on Tuesday.
‘UK inflation has come in much lower than expected for November and markets are now pricing a whopping 140bp of cuts next year. That’s maybe pushing it, but investors are right to be thinking about several cuts next year, despite the Bank of England’s recent pushback,’ said Dutch Bank ING.
Last week, the Bank of England kept bank rate at the historically high level of 5.25%, with some of its policymakers even voting in favour of a further 25 basis point hike.
The largest downward contributions to inflation in November came from transport, recreation and culture, and food and non-alcoholic beverages, the ONS said.
‘The fall in headline CPI...seems to be fairly broad-based at first glance. We’re seeing discounting across the board on consumer goods, from clothing to household goods, and cars. Lower fuel and food contributions helped too. But the Bank of England will be particularly comforted by the further surprise fall in services inflation, which came down to 6.3%, having peaked at 7.4% over the summer,’ ING continued.
According to Trading Economics forecasts, investors are now pricing in a 25 basis point rate cut in the second quarter of next year, with another to follow in the third quarter.
Danni Hewson, AJ Bell’s head of financial analysis, noted: ‘There’s a long way to go to chip off that last 1.9% and it’s impossible not to think about the potential impact the situation in the Red Sea could have on the cost of goods and energy.’
Top gainers in the FTSE 100 index were Intertek, up 3.1%, Barclays, up 2.5% and Vodafone, up 2.4%. One of the only large-cap firms in the red was DS Smith, down 2.2%, as UBS cut the stock to ’neutral’ from ’buy’.
In the FTSE 250, specialty pharmaceutical firm Indivior added 4.3%, as it settled a patent dispute with Teva subsidiary Actavis concerning the latter’s abbreviated new drug application for generic buprenorphine and naloxone sublingual film.
Among London’s small-caps, Petrofac rocketed 40%.
The energy infrastructure firm announced said it has seen ‘exceptional’ new order intake across Engineering & Construction and Asset Solutions, totalling $6.8 billion in 2023 so far. It expects the backlog to be around $8.0 billion by the year.
It announced the second contract award under the six-project $14 billion framework agreement with TenneT, working alongside Hitachi Energy, with Petrofac’s portion of the contract worth around $1.4 billion.
The firm said it expects revenue of about $2.5 billion in 2023, in line with guidance, and a business performance loss before interest and tax of around $180 million.
In European equities on Wednesday, the CAC 40 in Paris and the DAX 40 in Frankfurt were up 0.3%.
The UK inflation data added to the optimism about potential rate cuts in the US, which continued to propel global equities higher.
Richmond Federal Reserve President Thomas Barkin entered the debate on the direction of interest rates in the coming year.
He suggested the US central bank would cut interest rates if recent progress on inflation continued in contrast to comments from other policymakers who pushed back more aggressively against rate cut bets.
‘Barkin’s words that suggested that the Fed could cut rates if recent progress inflation continues sent the Nasdaq 100 to a fresh record for the third consecutive day and the S&P 500 to a fresh [year-to-date] high and near an [all time high] record as well,’ said Swissquote Bank’s Ipek Ozkardeskaya.
The Dow Jones Industrial Average closed up 0.7%, the S&P 500 rose 0.6% and the Nasdaq Composite ended up 0.7%.
The euro traded at $1.0967, a little lower than $1.0972. Against the yen, the dollar was quoted at JP¥143.59, down from versus JP¥143.88.
In Asia on Wednesday, the Nikkei 225 index in Tokyo closed up 1.4%. In China, the Shanghai Composite closed up 0.6%, while the Hang Seng index in Hong Kong was up 0.6%. The S&P/ASX 200 in Sydney closed up 0.7%.
Gold was quoted at $2,041.74 an ounce early Wednesday, slightly higher than $2,039.44 on Tuesday.
Brent oil was trading at $79.29 a barrel, up from $78.81.
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