London midday: Stocks down but off lows after inflation data

(Sharecast News) - London stocks were off earlier lows but still a little weaker by midday on Wednesday as investors digested a higher-than-expected UK inflation print, ahead of this week's Bank of England rate announcement. The FTSE 100 was down 0.1% at 7,559.80.

Figures out earlier from the Office for National Statistics showed that consumer price inflation came in higher than expected in May, while core inflation hit a 31-year high.

CPI remained at 8.7%, coming in above expectations for a decline to 8.4% and putting pressure on the Bank of England to keep hiking rates.

Meanwhile, core inflation - which strips out elements such as food and energy - rose to 7.1% from 6.8% in April, hitting its highest level since 1992. Analysts were expecting it to be unchanged.

ONS chief economist Grant Fitzner said air fares and second-hand cars were keeping inflation high, along with live music events and computer games.

Capital Economics said the rise in inflation "increases the chances that the Bank raises interest rates by 50 basis points tomorrow rather than the 25bps rise from 4.50% to 4.75% we are forecasting".

"Either way, the acceleration in core inflation leaves the UK looking increasingly like the global outlier and the 'stagflation nation'," said chief UK economist Paul Dales.

Matt Britzman, equity analyst at Hargreaves Lansdown, said: "In equity markets, the FTSE 100 opened lower as markets weigh up the impact of sticky inflation and the potential for higher rates.

"The real question from here is at what stage does this start to feed through to materially impact corporate earnings. Businesses have been able to hike prices and demand remains pretty good across a range of sectors. But as more homeowners roll on to higher-rate mortgages that'll eat into their disposable income, it's hard to see a world where that doesn't materially impact spending."

Investors were also mulling the latest data from the Confederation of British Industry, which showed manufacturers continued to see output volumes fall in June.

According to the latest industrial trends survey from the CBI, output volumes had a weighted balance of -6% in June, although that was a marginal improvement on May's -10%.

Output declined in 12 of the 17 sub-sectors, with mechanical engineering and food, drink and tobacco seeing some of the biggest falls.

Total order books were also reported to be below normal, little changed at -15% from May's -17%.

Output was, however, expected to rise slightly in the three months to September, with a balance of 4%.

And expectations for average selling price inflation in the coming quarter also fell slightly in June, to a balance of 19% from 21% in May. Although still well above the long-run average of 7%, it is the sixth consecutive fall and leaves expectations at their softest since February 2021.

Anna Leach, deputy chief economist at the CBI, said: "May marked another weak month for UK manufacturing, with activity declining for the fifth time in a row. Manufacturing activity is likely to have shrunk a little during the second quarter, as weak demand has overwhelmed some stabilisation in supply chains and costs."

In equity markets, Berkeley Group was under the cosh as it posted a 9.5% jump in full-year pre-tax profit but struck a cautious note over the outlook.

Housebuilders more generally were in the red as the latest inflation data added to expectations of a rate hike on Thursday, which will see the cost of borrowing surge.

Commenting on the CPI data, Britzman said: "This read won't do policymakers any favours who are under increasing pressure to keep inflation coming down in the UK, but it's looking stickier as the months roll by.

"For anyone looking to take out a new mortgage, or those needing to re-mortgage, this will be disappointing news and all but guarantees a rate hike from the Bank of England on Thursday and likely baked in further down the line. With rates already sky-high compared to recent years, it's especially painful for those who took out a mortgage at ultra-low rates and now face a spike in costs just to keep a roof over their heads."

In broker note action, Rathbones was cut to 'underweight' from 'equalweight' by Barclays, while St James's Place was raised to 'overweight' from 'equalweight' and AJ Bell was lifted to 'equalweight' from 'underweight'.

Grainger was upgraded to 'overweight' from 'equalweight', also by Barclays.

Market Movers

FTSE 100 (UKX) 7,559.80 -0.13% FTSE 250 (MCX) 18,686.61 -0.32% techMARK (TASX) 4,537.32 -0.20%

FTSE 100 - Risers

Ocado Group (OCDO) 431.10p 1.67% CRH (CDI) (CRH) 4,165.00p 1.36% BP (BP.) 459.85p 1.30% Prudential (PRU) 1,113.00p 1.14% Entain (ENT) 1,249.00p 1.13% Abrdn (ABDN) 216.20p 1.12% Convatec Group (CTEC) 207.80p 0.97% Haleon (HLN) 323.75p 0.83% Hiscox Limited (DI) (HSX) 1,104.00p 0.82% Rolls-Royce Holdings (RR.) 158.25p 0.80%

FTSE 100 - Fallers

Burberry Group (BRBY) 2,155.00p -3.62% Smith (DS) (SMDS) 297.70p -3.53% Smurfit Kappa Group (CDI) (SKG) 2,722.00p -3.41% Barratt Developments (BDEV) 429.60p -3.16% NATWEST GROUP (NWG) 238.50p -2.77% Fresnillo (FRES) 628.80p -2.54% Persimmon (PSN) 1,153.50p -2.49% Taylor Wimpey (TW.) 105.65p -2.45% Endeavour Mining (EDV) 1,921.00p -2.24% Berkeley Group Holdings (The) (BKG) 3,826.00p -2.20%

FTSE 250 - Risers

Baltic Classifieds Group (BCG) 180.20p 7.13% Aston Martin Lagonda Global Holdings (AML) 322.80p 4.13% Bakkavor Group (BAKK) 98.00p 3.59% BH Macro Ltd. GBP Shares (BHMG) 388.00p 3.05% Bank of Georgia Group (BGEO) 3,130.00p 2.62% TI Fluid Systems (TIFS) 129.60p 2.53% Premier Foods (PFD) 135.00p 2.43% CLS Holdings (CLI) 132.80p 2.31% RHI Magnesita N.V. (DI) (RHIM) 2,668.00p 2.07% SSP Group (SSPG) 262.60p 1.94%

FTSE 250 - Fallers

Digital 9 Infrastructure NPV (DGI9) 67.20p -4.68% Rathbones Group (RAT) 1,882.00p -4.37% Safestore Holdings (SAFE) 850.50p -4.28% Octopus Renewables Infrastructure Trust (ORIT) 90.80p -3.30% Howden Joinery Group (HWDN) 641.00p -2.41% Workspace Group (WKP) 483.80p -2.38% Balanced Commercial Property Trust Limited (BCPT) 72.00p -2.31% Big Yellow Group (BYG) 1,081.00p -2.26% Urban Logistics Reit (SHED) 122.20p -2.24% British Land Company (BLND) 328.70p -2.14%