Wall Street, the FTSE 100, and European markets were lower on Wednesday as a US debt-ceiling deal remained unresolved – and investors digested new data showing UK inflation fell 8.7% in April, down from 10.1%, for the first time since August last year.
However, food inflation remains near 20% and core price inflation is at a 30 year high, according to the Office for National Statistics (ONS).
Following the latest UK inflation data, the pound (GBPUSD=X) rose against the US dollar and the Euro (GBPEUR=X) as elevated inflationary pressures raised fresh concerns about the outlook for Britain’s economy.
FTSE 100 and European stocks
The FTSE 100 (^FTSE) was down 1.89% to 7,616.55 points in afternoon London trade, while the CAC 40 (^FCHI) in Paris fell 1.79% to 7,246.90 points. In Germany, the DAX (^GDAXI) was also down, by 1.71% to 15,877.32 points.
Kingfisher (KGF.L) was one of the top risers on the FTSE 100 index after it reported first quarter sales of £3.3bn +0.8% but down 2% on a constant currency basis. The home improvement retailer reiterated its full-year guidance and said its on track with plans to reduce inventory levels this year. Home construction companies Taylor Wimpey (TW.L) and Persimmon (PSN.L) were bottom of the basket.
Meanwhile, shares in M&S (MKS.L) were outperforming in the UK after its annual profit topped expectations and the retailer announced plans to restore its dividend.
US and Asia markets
In the US, Wall Street opened in the red with no resolution in sight on a US debt-ceiling deal.
Washington's debt-ceiling negotiations are lasting longer than expected. Speaker Kevin McCarthy reportedly left Tuesday’s meeting saying to his Republican colleagues, "We are nowhere near a deal yet." Just hours earlier, he said:"I think, at the end of the day, we can find common ground."
Read more: Netflix to charge £5 for sharing passwords
In Asia, markets were mixed.Tokyo’s Nikkei 225 (^N225) was down 0.89% to 30,682.68 points, while the Hang Seng (^HSI) in Hong Kong lost 1.58% to 19,123.88. In mainland China, the Shanghai Composite (000001.SS) was also in the red, down 1.26% to 3,205.35 points.
Matthew Ryan, head of market strategy at global financial services firm Ebury said the inflation data has mixed implications for the pound.
“The data has relatively mixed implications for sterling. On the one hand, the persistence of elevated inflationary pressures, particularly in the core index, may raise fresh concerns about the outlook for Britain’s economy. We continue to contest that a UK recession in 2023 will be avoided, though clearly the still acute cost of living crisis presents a material downside risk to this outlook.
“On the other hand, today’s data makes additional Bank of England interest rate hikes increasingly more likely. In our view, the latter will be of more pressing importance for investors in the near-term, hence the rally in the pound following today’s data,” he said.
In commodities, oil prices were higher again on Wednesday as traders considered the impact of Saudi Arabia’s warning, suggesting OPEC+ may cut crude supplies again to boost prices.
“Saudi Energy Minister Prince Abdulaziz bin Salman told short-sellers to watch out during his most recent comments on the market which come a little before the next OPEC+ meeting on 4th June. Coming over the weekend again, traders may not be in quite the same mood to test the group's resolve as the market gapped significantly higher last time. That said, a failure to follow through could see prices move sharply in the other direction,” Craig Erlam, senior market analyst at OANDA, said.
UK inflation dropped to 8.7% in April as the measure of price rises slipped out of double digit figures for the first time since last summer but high food prices persist.
This figure is down from the 10.1% that was recorded in March, according to the Office for National Statistic (ONS).
The sharp drop was down to slowing energy price rises from the extreme hikes seen a year ago.
Giles Coghlan, chief market analyst, consulting for HYCM, commented: “Inflation has finally fallen to single figures this morning, and while the IMF now says that the UK economy will grow by 0.4% this year, it would be remiss to suggest that we are out of the woods just yet.
“After all, this morning’s CPI data still came in hotter than many analysts expected. Even though the large price rises we witnessed a year ago have now dropped out of the annual comparison, the fact that core inflation remains at 6.8% shows just how entrenched it is in the economy. For the Bank of England and Governor Bailey – who indicated on Monday that we would see a much sharper drop today – this is very concerning and reveals that more work still needs to be done to bring inflation down to the BoE’s 2% target.”
Coghlan further noted that the markets are pricing in two further interest rate hikes in the months to come, with a potential terminal rate of 5.2% in the summer, “which should instigate an uptick in demand for GBP and EURGBP sell-off”.
Investors will also be looking for indications on the future outlook of US interest rate policy when the latest US Federal Minutes are released later.
Watch: Debt Ceiling Crisis: Roubini Says Markets Will Crash Without a Deal