- FTSE 100 closes 158 points lower
- Wall Street nursing big falls
- US inflation at its highest level since May 1981
4.50pm: Spectre of inflation haunts markets
The FTSE 100 index ended sharply lower on Friday, mirroring big falls on Wall Street after US CPI numbers showed inflation jump to a 41-year high amid spiralling energy and food prices.
At the close, the UK blue-chip index was down 158.69 points, or 2.1% at 7,317.52, above the day's low of 7,294.20 but well below the session peak of 7,476.21.
In New York, around London’s close, the Dow Jones Industrial Average was 813 points, or 2.6% lower at 31,458, while the broader S&P 500 index dropped 2.9% and the tech-laden Nasdaq Composite tumbled 3.6%.
The US May CPI rose by 8.6% year-over-year, versus forecasts of 8.3%, the highest reading since 1981. Core inflation, which ignores more volatile prices such as food and fuel, eased to 6% in May from 6.2% a month earlier but higher than the 5.9% expected.
Michael Hewson chief market analyst at CMC Markets UK commented: “There’s been no sign of a respite in selling pressure today coming to the end of a negative week as investors become increasingly concerned about the effects sticky inflation is expected to have on margins, consumer confidence, as well as company earnings.”
Hewson added: “US markets closed sharply lower yesterday, spooked by concerns that today’s May CPI report may well prove to be stickier than predicted, which in turn could mean the Fed is much more aggressive when it comes to normalising monetary policy.
“Today’s CPI report confirmed for May those fears as headline inflation jumped to a 41-year high, coming in at 8.6% and making it all the more likely that we will see 50bps rate hikes at the next three Fed rate meetings. Any thoughts that we might see a pause in September now appears a remote prospect, with US markets opening sharply lower, even after yesterday’s big declines.”
3.30pm: Drab showing for Footsie
If you are waiting for a late afternoon rally by the Footsie after worrying US inflation data, wait on …
The FTSE 100 is down 173 points (2.3%) at 7,303 having seen its losses on the day roughly double in the blink of an eye upon the release of the US consumer price index (CPI) data.
“Demand continues to outpace the supply capacity of the US economy and with supply factors showing little sign of near-term improvement, the onus is on the Fed to dampen the demand side of the equation with ongoing rate hikes,” opined James Knightley, the chief international economist at ING.
“The breadth of inflation pressures in the economy should alarm the Fed and will certainly keep the hawks in the ascendancy and weaken the case for those arguing for a potential pause in the Fed hiking path in September."
The pound is down 1.24% against the dollar at 1.2335.
3.10pm: Rising US inflation ramps up worries
London's blue-chip shares are tumbling ever more sharply, part of a worldwide sell-off, with US shares joining the rout.
The Footsie has plunged 175 points or 2.3% to 7,301, wiping out any gains made of the past two weeks.
What's spooked markets around the globe is the surprise increase in US inflation to a 40-year high of 8.6%, together with another strong rise in core prices.
This raises the odds that the US central bank will need to extend its series of 0.5% interest rate hikes into the autumn.
Michael Pearce at Capital Economics is not the only one to suggest that it also "opens the door" to a larger 75 basis point move at next week’s Fed meeting.
As was said by economist Robert Solow in 1979, the problem for the Fed is “To try effectively to wipe out hard core inflation by squeezing the economy is possible but disproportionately costly. It is burning down the house to roast the pig.”
This, says Marc Ostwalt, economist and strategist at ADM Investor Services, who regurgitated the quote, "sums up the Fed's and every other central bank's dilemma".
1.42pm: US inflation ramps up worries
The pound and the FTSE both slumped lower as US inflation has come out higher than expected for last month, up 8.6% year-over-year versus the 8.3% that was predicted.
This is the highest since 1981.
Core inflation, which ignores more volatile prices such as food and fuel, eased to 6% in May from 6.2% a month earlier but higher than the 5.9% expected.
As an immediate reaction the dollar strengthened, sending the pound to new lows near $1.24 (down 0.7% today) and the US dollar index spiking to 103.82, close to the 22-year highs seen a month ago.
In London the Footsie slumped to an intraday low of 7,374.46, down 1.8%.
The inflation engine is "running steaming hot and there is still plenty more to come," said market analyst Naeem Aslam at AvaTrade.
He said inflation "isn’t near its peak levels, and unfortunately, there is a lot more of these soaring numbers to come. Traders and investors are concerned as recession odds are only increasing with every day passing.
"Higher inflation has become an emotional matter now for consumers as it has started to seriously erode their disposable income. Consumers are constantly being pushed in a corner, and higher inflation is making them to make difficult choices."
1.10pm: Sterling pounded
Not that many of us can afford holidays these days but the pound is not doing Brits many favours, falling to its lowest level in more than three weeks against the dollar.
Sterling is trading at US$1.2435, down three-fifths of a cent. It was last at this level in mid-May.
A wobbly pound is considered good news for the FTSE 100 but if that is the case then we’re in bigger trouble than it seems as the index is down 92 points (1.2%) at 7,384.
"Eyes are locked firmly on the release of the US Consumer Price Index due out later, and it’s the anticipation of the bleak scenario which this data is set to reveal which is causing this fresh jump of anxiety," said Susannah Streeter at Hargreaves Lansdown.
"Prices are expected to show a year-on-year increase of 8.3%, the highest in almost 40 years and there are expectations the Federal Reserve may have to pull more tightly on the reins to slow it down. Signs that prices had spiralled even higher last month, are likely to set off a fresh round of selling, but a lower than expected reading could prompt a wave of buying which would top off a volatile week for stocks."
Gold is slipping a little ahead of the US inflation data but remains well within the range of recent weeks, noted Craig Erlam.
The yellow metal is trading at US$1,836an ounce, down US$16.70 (0.9%) on the day.
“Today could be the day it [gold] breaks out with all eyes on the CPI reading. A stronger reading would be a massive blow to risk appetite and be seen as further evidence of the job the Fed has to get price pressures under control. Which means yields could jump again along with the dollar, pressuring the yellow metal. A weaker reading could deliver the opposite,” Erlam opined.
12.30pm: US markets to get off the canvas but still be a bit groggy
US markets were expected to open little changed on Friday ahead of a key inflation report, which will likely show sustained price pressures during the month of May and influence the outcome of the Federal Reserve’s policy meeting next week.
Analysts are expecting the main consumer price index (CPI) to stabilise around last month’s level of 8.3% and core CPI, which excludes food and energy prices, at 5.9%. Rising fuel prices and global supply-chain disruptions are likely to have kept the CPI reading elevated, they said.
Futures for the Dow Jones Industrial Average fell 0.2% in pre-market trading, while those for the broader S&P 500 index lost 0.1%, and contracts for the Nasdaq-100 were up 0.2%.
US stocks were battered yesterday, with the S&P 500 losing up to 2.4%, as the US 10-year yield consolidated above the 3.05 mark. The US dollar index, meanwhile, climbed above the 103 level.
Swissquote Bank senior analyst Ipek Ozkardeskaya said the highly anticipated inflation report could provide a negative surprise as the positive pressure on food and energy prices and the unexpected uptick in second-hand car prices in May meant inflation is unlikely to have eased for a second consecutive month.
“A stronger-than-expected inflation figure would revive the Federal Reserve hawks, and eventually push the S&P 500 below the 4,000 mark before the weekly closing bell. A softer inflation read on the other hand, would resuscitate hope that inflation has peaked two months ago, and the worst is behind,” she added.
Ozkardeskaya said energy prices will need to soften in order for inflation to continue stabilizing even as US crude topped $123 per barrel this week.
“Oil markets probably have more downside risk in the short-term, with another wave of China slowdown fears capping the upside,” said Jeffrey Halley, senior market analyst at Asia Pacific OANDA but he added that losses will be limited given the physical tightness of both crude and refined products globally.
In energy markets, WTI crude oil futures gained 0.52% to US$122.14 a barrel and Brent crude futures added 0.62% to US$123.83.
In London, the FTSE 100 was down 91 points (1.2%) at 7,385.
11.55pm: HSBC and other banks warned of 'shortcomings'
UK and European markets are all in the red but a mixed start is expected for US markets, with Wall Street investors eyeing key inflation numbers later.
Consumer price inflation is expected to remain at around 8.3%, keeping pressure on the Federal Reserve ahead of the interest rate decision next week.
Futures for the Dow Jones are down 0.2% in pre-market trading, while S&P 500 index is down 0.1%, and the Nasdaq-100 up 0.2%.
This follows a tough old session for US stocks yesterday, with the S&P 500 tumbling 2.4%, as the US 10-year yield consolidated above the 3.05 mark.
The inflation report could provide a negative surprise as the positive pressure on food and energy prices, said analyst Ipek Ozkardeskaya at Swissquote.
“A stronger-than-expected inflation figure would revive the Federal Reserve hawks, and eventually push the S&P 500 below the 4,000 mark before the weekly closing bell. A softer inflation read on the other hand, would resuscitate hope that inflation has peaked two months ago, and the worst is behind,” she added.
Ozkardeskaya said energy prices will need to soften in order for inflation to continue stabilizing even as US crude topped $123 per barrel this week.
“Oil markets probably have more downside risk in the short-term, with another wave of China slowdown fears capping the upside,” said Jeffrey Halley, senior market analyst at Asia Pacific OANDA.
But he added that losses will be limited given the physical tightness of both crude and refined products globally.
In energy markets, WTI crude oil futures gained 0.52% to $122.14 a barrel and Brent crude futures added 0.62% to $123.83.
11.02am: UK inflation expectations rise
The FTSE is continuing to fall further, now down almost 98 points or 1.3% to 7,378.
UK households' inflation expectations have risen, according to another release from the Bank of England this morning.
Expectations for the rate of inflation over the coming 12 months rose to 4.6% in May, from 4.3% in February.
Long-term expectations, ie what people predict for five years’ time, rose to 3.5%, from 3.3%.
"The relatively modest increase in households’ inflation expectations since February strengthens the case for the MPC to stick to raising Bank Rate by 25bp, rather than switching to 50bp, next week," said economist Sam Tombs at Pantheon Macroeconomics.
This rise in households’ expectations for inflation over the next year since February was not unsurprising, he said, bringing the BoE measure into line with YouGov’s equivalent poll that has been steady since March.
More importantly, Tombs said households expect inflation to fall back quite sharply, averaging 3.4% in 12-to-24 months' time, and 3.5% in five years’ time.
He also noted that households' long-term inflation expectations "are not well-anchored because they anticipate the BoE squeezing the life out of the economy", while other measures of inflation expectations have not risen since the MPC’s last meeting.
"Accordingly, the MPC likely will not panic and opt for a 50bp rate hike next week; it does not have a credibility problem that needs to be fixed."
Elsewhere, there has been some support for Rishi Sunak and the Treasury after they received criticism (see below) for squandering £11bn of the public purse by not protecting interest payments from the rise in interest rates.
I'm afraid I struggle to see validity in criticism being thrown at ChX/HMT today - based on NIESR alternative to QE unwind https://t.co/MGRSRG0fo9 . Rather than protecting BoE independence, extending HMT's role beyond indemnifying QE losses wld undermine UK's macro framework????
— Simon French (@shjfrench) June 10, 2022
Secondly, the Treasury (through DMO) takes a "balance of risks" approach to its liabilities. It is not a hedge fund & whilst with hindsight it may have been "profitable" to reduce linkers/extend duration last year I'm uncomfortable with fiscal authority acting like a hedge fund.
— Simon French (@shjfrench) June 10, 2022
Third. A £11bn "cost" should really be set against the £120bn "benefit" that the QE process has so far yielded for the Exchequer. To be fair to NIESR in their paper https://t.co/ibZvbQORsF of last year they do acknowledge this - but this seems to have been drowned out today.
— Simon French (@shjfrench) June 10, 2022
10.16am: Cost of living worries
The war in Ukraine and the rising cost of living are the main concerns for UK adults, a survey from the Office for National Statistics has found.
Around three quarters (78%) of adults were very or somewhat worried about the conflict in Ukraine, with 74% worried about the rising cost of living.
Almost nine out of 10 adults continued to report their cost of living had risen over the past month, the same as in the May report but up from six in 10 when this survey started in November 2021
The most common reasons given by adults who reported their cost of living had increased continued to be rising food shopping prices (94%), rising gas or electricity bills (85%), and increases in the price of fuel (77%), ONS said.
Some 46% of adults reported buying less food when shopping in the past two weeks, up from 44% in the previous period and 18% at the beginning of 2022.
9.41am: Bank shortcomings
The UK’s big listed banks are all in the red, as they all passed a Bank of England test that show they could fail without hurting taxpayers or customers, although investors were not likely to have been impressed that shareholders would be first in line to bear the costs.
HSBC Holdings PLC (LSE:HSBA) is the biggest faller, down 1.3%, followed by Standard Chartered, Barclays, Lloyds and Natwest, all down less than 1%.
The BoE said it had identified “shortcomings” in the plans of HSBC, Lloyds and StanChart, with "areas for further enhancement" for six lenders.
HSBC was told to take steps to improve the resolvability of its international infrastructure across 64 countries and territories.
“The changes that would be required to this infrastructure to support certain restructuring actions, which may be needed in resolution, would be complex,” the bank said, adding that the work would be done over a “multiyear period”.
Russ Mould, investment director at AJ Bell, said: “With a gloomy near-term economic outlook, the resolvability test will provide some relief that the UK’s key financial players wouldn’t cause a disaster if something went very badly wrong.
“It’s important to recognise this test wasn’t carried about because of ‘live’ fears. It is more a case of good practice and guarding against a repeat of the global financial crisis in which some banks got into trouble and had to be bailed out using taxpayers’ money.
“This isn’t to say the UK banks all have a clean bill of health. There are still places where they could do better, so it’s back to the gym for many of them, including HSBC which has identified areas for further improvement."
9.23am: Chancellor criticised
Chancellor of the exchequer Rishi Sunak has been accused of missing out on the opportunity of saving taxpayers £11bn of interest payments.
The National Institute of Economic and Social Research said by not buying interest rate insurance last July the government spent much more on servicing government debt after the rate rises by the Bank of England since December.
"Such a lost opportunity is an unnecessary cost to the public finances at a very difficult time," the thinktank said.
The loss to taxpayers, some in the media pointed out, is greater than the amount Conservatives have accused Labour of costing the UK between 2003 and 2010, when he sold some of the nation’s gold reserves at rock bottom prices.
NIESR director Jagjit Chadha said the "heavy continuing exposure to interest rate risk" was the Treasury’s fault.
“It would have been much better to have reduced the scale of short-term liabilities earlier, as we argued for some time, and to exploit the benefits of longer-term debt issuance,” Chadha said.
9.01am: Sharp drop
The FTSE 100 has dropped 1% in the first hour of trading, taking it back to just over 7400, where it last was two weeks ago.
Leading the fallers are consumer facing stocks, including drinks and retailers, with Coca-Cola HBC, Royal Mail PLC, JD Sports Fashion PLC, Diageo PLC (LSE:DGE) and Primark owner AB Foods.
Amid news that Chinese authorities have locked down Shanghai again, tech investor Scottish Mortgage Investment Trust PLC (LSE:SMT) is among the blue chip losers, down almost 2%.
This also put pressure on miners and oil companies, with Brent crude down 0.5% to US$122.4, although the supply-side challenges still leave the price up 58% so far this year.
“There is little respite at present from inflationary concerns, giving investors little room for manoeuvre in navigating the darkening economic clouds," says Richard Hunter, head of markets at Interactive Investor.
Following the European Central Bank signalling its intention for an interest rate rise next month, coupled with a downgrade to growth forecasts, and the US Federal Reserve likely to hike rates again next week, he said "it remains to be seen whether the rises so far have had the desired impact on reining in the economy without tipping the country into recession".
At the same time, Hunter said corporate earnings are also likely to reflect the additional pressure and with some of the major banks now suggesting that there has been a pick-up in credit card borrowing, pressure on the consumer is mounting.
"This in turn could lead to defaults in due course, which could also signal the return of bad loan provisions from the banks following the clearance of the previous swathe of impairments resulting from the pandemic."
7.50am: Shanghaid
Weighing on equity markets this morning will be renewed concerns about the effect of Covid in China as authorities banged up the most populous city in another lockdown only a week after it was released from the last one.
Earlier this week President Xi said the country must stick "unswervingly" to its zero-Covid strategy.
Half of Shanghai districts will go into lockdown after 11 new infections were detected overnight, six outside the city’s mass quarantine centres.
Here's market analyst Jeffrey Halley at Oanda: "Markets have naively assumed that China was 'one and done' with Beijing and Shanghai, ignoring the experience of Covid-zero nations elsewhere.
"That reality might finally be permeating the most ardent dip-buyers now, and the prospect of a wave of renewed covid lockdowns in Shanghai would have subdued Asian sentiment today, even without the bonfire on Wall Street last night."
6.45am: Reverse gear
The FTSE 100 is expected to start Friday in reverse gear as investors continue to fret about inflation and the medicine required to combat it.
Spread betting quotes suggest the FTSE 100 will open 55 points weaker at 7,421.
Yesterday in the US the Dow Jones tumbled 638 points to 32,273 and the S&P 500 slumped 98 points to 4,018 ahead of the release of US inflation and core inflation data today.
“Markets have been tying themselves up in knots over this all week, thanks to a thin data calendar. Like last Friday’s Non-Farm Payrolls, I am expecting a very binary outcome this evening with median forecasts for the headline at 8.30%, and core inflation at 5.90% YoY [year-on-year]. A number at 8.40% or higher probably sparks a risk aversion sell-off across asset markets with the US Dollar winning. Conversely, a print at 8.20% or lower probably sees a buy everything, sell US Dollars rally, as Fed hiking expectations are pared ahead of next week’s FOMC,” said Jeffrey Halley, the senior market analyst at OANDA’s operations in Asia Pacific.
“China inflation this morning has passed without incident,” he added.
“Inflation YoY for May was just under expectations at 2.10%. Inflation MoM fell to -0.20%, slightly higher than forecasts of -0.30%. The Covid-led consumer and industrial led slowdown continues acting as a brake on inflation. Markets in China today have their eyes focused elsewhere. President Xi Jinping sent out mixed messages overnight, exhorting officials to maintain Covid-zero, while also supporting economic growth. Good luck with that,” Halley said.
Currently, the Hang Seng index is trading 123 points lower at 21,746 but the Shanghai Composite is 18 points better at 3,256.
Elsewhere in Asia, the Nikkei 225 is 420 points lower in Tokyo at 27,826.
In London this morning, inflation data will be to the fore as well with the release of the Bank of England’s TNS inflation attitudes survey, which should show another jump in inflation expectations.
In the statement following its May meeting, the Bank’s monetary policy committee said; "With monetary policy acting to ensure that longer-term inflation expectations are anchored at the 2% target, upward pressure on CPI [consumer price] inflation is expected to dissipate over time."
If this indicator continues to show that near-term inflation expectations are not anchored at all-around 2%, the Bank’s Monetary Policy Committee may feel more pressure to accelerate their tightening, said BDSwiss's Marshall Gittler.
The two most important readings to track are the 12-month ahead index and the “more important” medium-term inflation expectations measure, said Deutsche Bank, predicting 5.5% and 4% respectively.
Around the markets
- Sterling: US$1.2504, down 0.09 cents
- Gilt: 2.326%, up 7.48 basis points
- Gold: US$1,846.70, down US$6.10
- Oil: US$122.39, down 68 cents
- Bitcoin: US$30,116, down US$23
- Ethereum: US$1,794, up US$1.34