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(Alliance News) - Stocks in London were set for a slump on Wednesday after a higher-than-expected US inflation reading spooked markets and sparked a sell-off in New York.
Data on Tuesday showed the annual US inflation rate for August was 8.3%, topping expectations, according to FXStreet, of 8.1%, but still easing off July's rate of 8.5%.
Likely to worry the Federal Reserve was August's core inflation rate, which excludes energy and food. It ticked up to 6.3% on an annual basis from 5.9% in July. The rate had been expected to pick up more modestly to 6.1%.
"Yesterday's number runs counter to the downward narrative, and helps to explain the outsized reaction in stocks, yields and the US dollar, however it doesn't mean the Fed will do 100bps next week as some have been suggesting," said Michael Hewson, chief market analyst at CMC Markets.
Markets now have the odds of a 75 basis point US rate hike next week 66% priced in, while the remainder think the Fed will go all-out with a full percentage point hike.
But likely to encourage traders was an unexpected softening in price pressures in the UK. The annual UK inflation rate has eased to 9.9% in August, having been expected to climb further above 10%.
"Looking ahead, we think that the headline rate of [UK] CPI inflation will rise to almost 11% in October, driven by a 1.0pp increase in the contribution from electricity and natural gas prices. The latter will rise by only 27% month-to-month in October, far less than the 80% increase announced by Ofgem last month, following the new PM's intervention last week. But we're increasingly confident that October's rate of CPI inflation will prove to be the peak and that it will ease rapidly in 2023," said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
Here is what you need to know ahead of the London market open:
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MARKETS
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FTSE 100: called down 49.76 points, or 0.7%, at 7,336.10
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Hang Seng: down 2.2% at 18,905.82
Nikkei 225: closed down 2.8% at 27,818.62
S&P/ASX 200: closed down 2.6% at 6,828.60
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DJIA: closed down 1,276.37 points, or 3.9%, at 31,104.97
S&P 500: closed down 177.72 points, or 4.3%, at 3,932.69
Nasdaq Composite: closed down 632.84 points, or 5.2%, at 11,633.57
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EUR: down at USD0.9980 (USD0.9992)
GBP: down at USD1.1501 (USD1.1524)
USD: down at JPY143.56 (JPY144.23)
Gold: down at USD1,701.87 per ounce (USD1,704.90)
Oil (Brent): down at USD92.86 a barrel (USD93.12)
(changes since previous London equities close)
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ECONOMICS
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Wednesday's key economic events still to come:
11:00 CEST EU industrial production
09:30 BST UK house price index
08:30 EDT US producer price index
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The annual UK inflation rate, in a surprise, eased back into single-digits in August, the Office for National Statistics said. The consumer price index rose 9.9% year-on-year in August, unexpectedly slowing from 10.1% in July. Consensus, according to FXStreet, was for the rate reading to tick up to 10.2%. July's figure had been the highest since current records began in 1997 and at a level, according to models, not seen since 1982. Inflation remains far higher than the Bank of England's 2% target. A fall in the price of motor fuels made the largest downward contribution, while rising food prices were the largest upward contributor. Month-on-month, inflation eased to 0.5% from 0.6%. Core CPI - which excludes energy, food, alcohol and tobacco - edged up as forecast, to 6.3% from 6.2%.
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Separately, the ONS said input producer prices rose 21% in the year to August, easing from 23% in July. Output prices rose by 16%, again easing from 17% in July. "Crude oil and petroleum products provided the largest downward contributions to the change in the annual rates of input and output inflation, respectively," the ONS said.
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Industrial production growth in Japan was unable to match market expectations for July, data from the Ministry of Economy, Trade & Industry showed. Industrial production increased 0.8% in July from June, which is slower than the 1.0% growth expected from the market - according to consensus from FXStreet - and sharply lower than the 8.9% growth seen in June. Annually, industrial production dropped 2.0%, a steeper decline than the 1.8% forecast. In June, industrial production fell 3.1%. Production capacity slipped 0.1% from the previous month in July, while it fell 1.3% annually.
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BROKER RATING CHANGES
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Stifel cuts IAG to 'sell' (hold) - price target 1 (1.50) EUR
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Stifel cuts easyJet to 'sell' (buy) - price target 300 (600) pence
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Stifel cuts Ryanair to 'sell' (hold) - price target 10 (13) EUR
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COMPANIES - FTSE 100
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Miner Rio Tinto said it has agreed to form a joint venture to develop the Western Range iron ore project in the Pilbara, Western Australia. Rio will own 54% of the venture and China Baowu Steel Group 46%, and the two will invest USD2 billion to develop the mine. Construction is expected to begin in early 2023 with first production anticipated in 2025. Rio and Baowu have also agreed to enter into an iron ore sales agreement at market prices covering a total of up to 126.5 million tonnes of iron ore over 13 years. "This volume represents Baowu's 46% interest in the anticipated 275 million tonnes of production from Western Range through the joint venture," Rio said.
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COMPANIES - FTSE 250
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Home furnishings retailer Dunelm said total sales in the financial year to July 2 were up at GBP1.58 billion from GBP1.34 billion the year before, and pretax profit increased to GBP212.8 million from GBP157.8 million. Dunelm raised its ordinary dividend by 14% to 40 pence from 35p, but reduced its special payout to 37p from 65p. The gross margin for the year slipped to 51.2% from 51.6% the year before, and Dunelm expects to achieve a margin of around 50% in its recently commenced financial year. Sales have been "robust" in the first ten weeks of its 2023 financial year, it added, and it is on track to deliver full-year results in line with analyst expectations.
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Housebuilder Redrow said revenue in the financial year to July 3 rose 10% to GBP2.14 billion from GBP1.94 billion the year prior. However, pretax profit fell 22% to GBP246 million from GBP314 million after booking exceptional fire safety costs of GBP164 million. Excluding these costs, underlying pretax profit rose 31% to GBP410 million. Redrow's final dividend was lifted to 22.0p, up 19% from 18.5p the year before. This took its total payout for the year to 32.0p, up 31%. The homebuilder said its order book has placed it in an "excellent" starting position for the 2023 financial year, but added: "Given rising inflation and higher interest rates it is not surprising the buoyant housing market has moderated recently and demand has returned to historically average levels." In the first ten weeks of the new financial year, demand has moderated to historic levels.
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OTHER COMPANIES
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ITM Power said Graham Cooley has decided to step down as chief executive after 13 years in the role. The company has started the hunt for his replacement, and Cooley will remain in position until a successor is appointed. After this, he will assume a "senior strategic role". The update came as the energy storage and clean fuel reported annual results. Revenue for the year to April 30 rose to GBP5.6 million from GBP4.3 million, and pretax loss widened to GBP46.7 million from GBP27.6 million. "Continued investment in capability and capacity will see losses increase in the near term, with an improved position in the medium term. The cash on our balance sheet will enable us to grow capacity," the company said.
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By Lucy Heming; lucyheming@alliancenews.com
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