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LONDON (Alliance News) - London's major stock indices closed higher and the pound reached a fresh multi-year high against the dollar Thursday, as UK data showed the manufacturing sector expanding quickly and the housing market continuing to boom.

The UK's main stock indices opened higher and proceeded to trade in a relatively tight range for the rest of the day. The major European markets were closed for the May Day bank holiday.

The FTSE 100 has closed up 0.4% at 6,808.87, the FTSE 250 has closed up 0.2% at 15,85034, and the AIM All-share has closed up 0.2% at 824.36.

Lloyds Banking Group led the blue chip index higher, closing up 5.5% after kicking off the banking sector's first quarter earnings season.

Lloyds, which is still 25% owned by the UK taxpayer, reported that its pretax profit dropped by a third to GBP1.37 billion after last year was buoyed by gains on the sale of government securities. However, its underlying profit increased to GBP1.80 billion, from GBP1.48 billion a year earlier, while it made better-than-expected progress on its net interest margin and its tier1 capital ratio. Analysts said that the solid improvement on most fronts makes a return to dividend payments this year more likely.

The bank also said it will float at least a quarter of TSB by the end of June.

The whole banking sector performed well Thursday, with Royal Bank of Scotland closing up 2.7% ahead of its own first quarter statement on Friday, while Barclays, which reports Tuesday, closed up 1.2%, and HSBC gained 0.6%.

The housebuilders also performed well in the wake of the latest reading to confirm the surge in the UK housing market. The FTSE 350 Household Goods sector index, which contains the housebuilders, gained 1.8% Thursday. Berkeley was the best performer, up 2.2%, while Redrow gained 1.7%, and Crest Nicholson rose by 1.6%.

The Nationwide UK house price index showed inflation at 10.9% year-on-year in March, faster than the 10.0% rise expected by economists. Over the month of March alone, prices rose by 1.2%, faster than the 0.7% expected.

The latest Markit PMI showed the UK manufacturing sector expanded at its fastest rate for five months in April. The PMI reading came in at 57.3 for the month, up from 55.8 in March and exceeding economists' expectations for expansion to slow to 55.4.

"There is absolutely no sign that UK growth is slowing down as the Bank of England had banked on in its last quarterly forecast in February. To the contrary, it is probably accelerating," said Berenberg chief UK economist Rob Wood. "The strength of manufacturing shows that the UK recovery is not simply a housing driven credit bubble that will inevitably bust," the economist says.

The latest lending data showed UK mortgage approvals slowing for the second consecutive month, to 67,135 in March from 69,592 in February. While new stricter rules on mortgage lending only came into effect a few days ago, some analysts said that lenders may have tightened up their lending in anticipation of the rule change.

The strength of the UK economic data boosted the pound against the dollar to a fresh four-and-a-half year high of USD1.6920.

"As the economy is growing strongly, the BoE is now getting behind the curve, and we expect rates to rise faster than the market expects," said Berenberg's Wood. The economist forecasts the first UK interest rate rise in the first quarter of 2015.

The dollar got a boost in afternoon London trade after US initial jobless claims rose unexpectedly to a nine-week high of 344,000 in the week ended April 25. Economists had expected claims to drop to 319,000 from the 330,000 recorded in the previous week.

However, a busy afternoon of US data also saw US personal spending grow at the fastest pace in more than two years in March. Spending rose by 0.9% over the month, increasing from 0.5% growth in February, faster than the 0.6% growth expected by economists, and the fastest rate of expansion since February 2012.

Another busy day in the US corporate calendar saw more companies exceed expectations, although expectations had been significantly lowered due to the unusually severe winter in the US during the first quarter.

Exxon Mobil reported first quarter earnings per share of USD2.10, higher than the USD1.88 that had been expected. The oil major achieved the better-than-expected earnings despite revenue coming in lower than expected at USD106.77 billion, against the USD109.76 billion forecast.

"The energy sector has been one of the best performing this year as investors have moved away from technology and other growth sectors," said CMC Markets market analyst Jasper Lawler.

Overall, the US equity markets are continuing to struggle for much direction, with the DJIA marginally lower, the S&P 500 marginally lower, and the Nasdaq Composite outperforming, up 0.4%.

Back in the UK, the supermarkets had a bad day, with the FTSE 350 Food & Drug retail sector index losing 2.0% after Wm Morrison Supermarkets announced the details of 1,200 price cuts in its stores. While the supermarket had already announced that it was planning to spend GBP300 million on the cost cutting, headlines such as a pack of Jammie Dodgers being cut to 49 pence, from 109p, brought the supermarket price war back to investor attention. Morrison closed down 1.7%, while J Sainsbury closed as the heaviest blue chip faller, down 3.2%, and Tesco lost 2.1%.

British Sky Broadcasting closed up 2.3% after saying its on track to deliver on its expectations for the full year, despite continuing to step up investments to get more of its customers onto more of its services and the higher cost of its Premier League football offering.

BG Group gained 3.3% after announcing its first quarter results. Despite posting a profit of USD1.11 billion, down from USD1.21 a year earlier as issues in Egypt continued to weigh, Liberum Capital said that the adjusted operating profit and adjusted net income were both 13% ahead of consensus forecasts.

Rolls-Royce dropped 1.0% after saying it expects 2014 profit and revenue in its marine unit to fall 10% compared with 2013 due to a one-off charge estimated at GBP30 million to rectify a "product quality issue" and due to lower services volumes. It had previously predicted lower revenue, but modest profit growth, at the unit.

Weir Group closed down 2.1% after saying that, although 2014 trading has so far been in line with expectations, it expects its full-year results to be hit by foreign exchange rate moves, joining a long list of companies warning that overseas earnings were being hit by the strength of the pound when translated back to sterling.

Europe will return to the markets Friday, and the morning economic focus will be a raft of European Markit manufacturing PMI's, and the Eurozone unemployment rate for March due at 0900 GMT. The UK construction sector Markit PMI is due for release at 0830 GMT.

The main economic event of the day will be the monthly US non-farm payroll report at 1230 GMT.

In the UK corporate calendar, first quarter statements are due from Royal Bank of Scotland, Rentokil Initial, Direct Line Insurance Group, and Intercontinental Hotel Group.

AstraZeneca may be back in the spotlight on Friday, after Bloomberg reported late Thursday that Pfizer is preparing to increase its bid for the British pharmaceutical group to over USD63 billion, from USD58.8 billion.

By Jon Darby; jondarby@alliancenews.com; @jondarby100

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