LONDON MARKET MIDDAY: BoE sees inflation rising to 4% in near term

(Alliance News) - The mood was subdued in London on Thursday after a strong week-to-date, with the Bank of England keeping interest rates and the pace of asset purchases unchanged, though the second decision came with one dissenting vote.

The central bank said it sees UK inflation rising to 4% in the near term, double its 2% target. Its projections see this falling back to 2% in late 2023.

Sterling was quoted at USD1.3941 following the BoE decision, up from USD1.3905 at the London equities close on Wednesday.

The FTSE 100 index was down 12.70 points, or 0.2%, at 7,111.16 midday Thursday. The mid-cap FTSE 250 index was up 72.26 points, or 0.3%, at 23,419.99. The AIM All-Share index was down 0.1% at 1,257.32.

The Cboe UK 100 index was up 0.2% at 708.05. The Cboe 250 was up 0.5% at 21,152.17 and the Cboe Small Companies down 0.1% at 15,283.04.

"It was a calmer day for markets as investors waited for the Bank of England," said Russ Mould, investment director at AJ Bell.

He noted that the FTSE 100 was subdued, with weakness from miners dragging on the large-cap index. Rio Tinto shares were down 3.4% at midday, while peer Anglo American was off 2.6% and BHP Group down 2.6%.

The biggest blue-chip faller was Lloyds Banking, down 3.6% after Goldman Sachs cut the bank to Sell from Hold.

UK homebuilders dipped, with large-caps Persimmon down 1.0% and Barratt Developments down 0.9%, while Crest Nicholson fell 1.7% in the FTSE 250, after data showed the UK construction industry last month notched its slowest rise in output since February.

The IHS Markit/CIPS construction purchasing managers' index registered 58.7 points in July - still a strong reading, remaining well above the no-change mark of 50.0, but falling from June's 24-year high of 66.3.

House building was the best performing category, followed by commercial building. Both saw the slowest rate of expansion since February, however. Civil engineering, while still in expansion territory in July, also saw momentum slow.

It was a similar story in the eurozone, where the construction sector slipped into reverse in July to mark the first fall in activity since February. The PMI fell to 49.8 points in July from 50.3 in June, and the input prices index pointed to a "sharp and accelerated" rise in costs faced by construction firms.

The euro traded at USD1.1842 midday Thursday London time, firm on USD1.1835 late Wednesday.

In mainland Europe, the CAC 40 in Paris was up 0.4%, while the DAX 30 in Frankfurt was flat on Thursday.

Topping the FTSE 100 index was jet engine maker Rolls-Royce, rising 5.1% as it swung back to profit.

Rolls-Royce said its revenue in the six months to June 30 slipped 9.1% year-on-year to GBP5.16 billion from GBP5.67 billion. It posted a pretax profit of GBP114 million, swinging from last year's hefty GBP5.21 billion loss.

Rolls-Royce highlighted progress in its restructuring plans, with around 8,000 roles cut. The company's aim to cut 9,000 roles and make GBP1.3 billion in run rate savings by the end of 2022 is on track, it added.

CMC Markets chief market analyst Michael Hewson called the interim profit a "surprise".

"All-in-all an encouraging update; however there still remains some way to go as the company reorientates its business model," he said.

Mondi shares rose 3.3%. The packaging firm posted virtually flat first-half profit as rising sales volumes and price increases helped cushion the company from persistent economic uncertainty.

The Addlestone, Surrey-based paper and packaging firm said pretax profit for the six months ended June 30 slipped 1.1% to EUR461 million from EUR466 million, with revenue rising by 5.1% to EUR3.63 billion from EUR3.45 billion. Mondi Chief Executive Andrew King said the company was pleased with its first-half performance, with sales volume growth and pricing momentum in its packaging markets strong.

Mid-cap stock Savills rose 3.8% after the estate agent reported a "record" performance in the first half of 2021 and expects full-year performance to be "meaningfully ahead" of expectations.

Pretax profit for the six months that ended June 30 was GBP63.8 million, widened year-on-year from GBP7.7 million. Assuming no new material disruption, Savills expects the performance for the year as a whole to be "meaningfully" ahead of its previous expectations.

Wall Street is poised for a stronger open on Thursday, with the Dow Jones Industrial Average pointed up 0.2%, the S&P 500 index up 0.3% and the Nasdaq Composite up 0.2%.

With the BoE decision out, full market focus now turns to Friday's US non-farm payrolls figure. Ahead of this comes weekly initial jobless claims on Thursday at 1330 BST.

The always key non-farms payrolls report took on extra significance after ADP figures on Wednesday showed employment in the US increased by 330,000 jobs in July, well below both the 680,000 jobs added in June and consensus forecasts, according to FXStreet, of 695,000.

"The US Federal Reserve is just waiting for employment to improve further before starting to reduce the pace of its asset purchases, with inflation already well above the central bank’s target and rising," said Fawad Razaqzada, market analyst at ThinkMarkets.

He added: "If we get one or two really good jobs reports over the next couple of months then the conditions for starting the normalisation process will have been met for many of the Fed’s policy makers. This makes the upcoming jobs reports very important."

The labour market has been brought into even more focus after US Federal Reserve Vice Chair Richard Clarida said Wednesday that barring surprises, the economy should reach the threshold of maximum employment by the end of next year, which would allow the start of "policy normalization" in 2023.

Gold was quoted at USD1,811.76 an ounce on Thursday, firm on USD1,808.00 on Wednesday. Brent oil was trading at USD70.50 a barrel, lower than USD71.22.

Against the yen, the dollar was lower at JPY109.56 from JPY109.65 late Wednesday.

By Lucy Heming; lucyheming@alliancenews.com

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