Shock inflation reading puts pressure on BoE

(Alliance News) - Stock prices in London were mixed at midday Wednesday, as investors digest a hotter-than-expected UK inflation reading and what that means for the Bank of England.

The FTSE 100 index was up 3.13 points at 7,572.44. The FTSE 250 was down 57.55 points, 0.3%, at 18,688.61, and the AIM All-Share was up 0.43 of a point, 0.1%, at 785.61.

The Cboe UK 100 was up 0.1% at 755.14, the Cboe UK 250 was down 0.3% at 16,380.59, and the Cboe Small Companies was down 0.2% at 13,844.14.

According to the Office for National Statistics, the UK annual inflation rate was unchanged at 8.7% in May, where it had landed in April. Inflation had been expected to cool to 8.4%, according to market consensus cited by FXStreet, so the latest figure was hotter than forecast.

Wednesday's readings have put the spotlight on the Bank of England, on the eve of its interest rate decision. The BoE targets an inflation rate of 2%. The BoE on Thursday is expected to lift bank rate to 4.75%, from 4.5%.

However, the inflation reading may have put a 50 basis point lift on the table. The BoE last hiked by 50 basis points in February, enacting successive 25 basis point lifts since in March and May.

"Inflation is proving as sticky as superglue, prompting talk that central banks will keep raising interest rates. The prospect of the Bank of England potentially taking UK rates to 6% by early next year is alarming, particularly if you think that the current 4.5% level is already causing stress among consumers and businesses," AJ Bell analyst Danni Hewson commented.

The pound was quoted at USD1.2703 at midday on Wednesday in London, down compared to USD1.2743 at the equities close on Tuesday.

On the back of the prospect of even higher borrowing costs, housebuilders lost out on Wednesday. The rate on a two-year mortgage had already climbed above 6% over the weekend.

Shares in Persimmon were down 2.4%, while Barratt Developments fell 2.8%. Berkeley Group lost 2.2%, despite a fairly solid set of annual results and reaffirmed guidance.

In the year to April 30, the Surrey-based housebuilder reported pretax profit of GBP604.0 million, up 9.5% year-on-year to GBP551.5 million. Profit was slightly ahead of guidance of GBP600 million. Revenue rose 8.6% to GBP2.55 billion from GBP2.35 billion.

Chief Executive Officer Rob Perrins said: "Looking forward, we are well-placed to meet our guidance for the next two financial years and continue investing in our existing regeneration sites, but will remain cautious in committing to new investment until the conditions for growth are in place."

Berkeley said it expects to deliver pretax profit of at least GBP1.05 billion across its next two financial years combined, which is likely to be slightly weighted to financial 2024.

Among the FTSE 250, Rathbones lost 5.4%. Barclays cut the company's rating to 'underweight' from 'equal weight'.

"We downgrade Rathbones to 'under weight' as a result of its lower growth outlook, risks around integrating M&A and its relative re-rating versus faster-growth peers," Barclays analysts explained.

On London's AIM, Live Co lost 27%, over its delayed audit and the appointment of its new auditors.

The Surrey, England-based live events, entertainment and sports events company said it has appointed MHA MacIntyre Hudson, part of Baker Tilly International, as its new auditors.

Live Co added that while the preparation of its 2022 financial statements have been ongoing, the accounts are unlikely to be published by June 30, as required by the AIM listing rules.

It said that it has now engaged additional resource to ensure the publication of its results by July 31. Accordingly, the company shares will be suspended from July 3.

Meanwhile, Tekmar was up 14%.

The Darlington, England-based provider of technology and services for global offshore energy markets posted revenue of GBP17.7 million for six months ended on March 31, up 36% from GBP13.0 million the year before. Its pretax loss narrowed to GBP1.8 million from GBP3.2 million.

In New York, the Dow Jones Industrial Average, the S&P 500 index and the Nasdaq Composite are all called to open flat.

Investors are awaiting Federal Reserve Chair Jerome Powell to present his semi-annual testimony to a US House of Representatives Committee on Wednesday and to the US Senate on Thursday.

"[Powell] is bound to be quizzed closely on last week's indications from the Fed that, although US interest rates were left unchanged this month, they could be raised again in July," Lloyds Bank said.

In European equities on Wednesday, the CAC 40 in Paris was flat, while the DAX 40 in Frankfurt was up 0.2%.

Germany's economic output will contract by 0.4% this year, according to the ifo Institute's latest forecast.

Earlier this year, the institute had expected a contraction of only 0.1%. The researchers predict an increase of 1.5% in 2024, nudged down from their previous estimate of 1.7%.

Inflation will slowly fade to 5.8% this year, from 6.9% in 2022. It is then expected to fall to 2.1% in 2024.

"The German economy is only very slowly working its way out of the recession," said Timo Wollmershauser, head of forecasts at ifo.

The euro stood at USD1.0924, up against USD1.0909. Against the yen, the dollar was trading at JPY141.80, higher compared to JPY141.26.

Brent oil was quoted at USD76.02 a barrel at midday in London on Wednesday, up from USD74.86 late Tuesday. Gold was quoted at USD1,935.33 an ounce, largely flat against USD1,935.21.

By Sophie Rose, Alliance News reporter

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