FTSE 100 analysis: Stocks fall as UK inflation remains hot

FTSE 100 falls in wake of strong inflation

The FTSE 100 is down 0.5% in early trade today in wake of the latest inflation data out of the UK.

UK inflation remains elevated in May

Stocks are under pressure after inflation rose faster than hoped in May.

UK (CPI) inflation rose 8.7% year-on-year in May, flat from what we saw in April and above the 8.4% forecast. The 0.7% month-on-month rise eased from 1.2% in the previous month but also came in higher than the 0.5% forecast. Core inflation that strips out more volatile food and energy prices was also stickier than hoped, rising 7.1% year-on-year and accelerating from the 6.8% rise seen in the prior month.

That could further entrench the idea the UK is having a harder time bringing inflation down than across the Channel or the Atlantic, especially as that is the fourth consecutive month that inflation has come in hotter than expected by economists.

The inflation data is influencing a number of sectors today. Retailers such as Marks & Spencer, Currys, Next and ASOS are down 0.2% to 2.7% because they are sensitive to the UK’s economic performance. Housebuilders such as Persimmon and Barratt are both down 1.7% as higher-than-expected inflation will keep driving interest rates, and therefore mortgage rates, higher.

Attention now turns to the Bank of England interest rate decision tomorrow, when a 25bps hike is widely expected – with today’s inflation data only cementing the view that more tightening is necessary. That will also raise questions about whether the BoE could be pressured to accelerate future rate hikes given the data today, making tomorrow’s event all the more important.

As for the economic calendar for the rest of the day, Federal Reserve chair Jerome Powell provides his testimony to Congress this afternoon (and will continue tomorrow), which will give markets a chance to gauge the future path of interest rates after they were left unchanged in the last meeting but were accompanied by hawkish commentary. There is also the new housing price index and retail sales data out of Canada.

FTSE 100 analysis: Where next for the UK 100?

The UK 100, which tracks the FTSE 100, is on course to lose ground for a fourth consecutive session today after sinking to its lowest level in two-and-a-half weeks this morning.

We can see the index has slipped under the 7,537 level of support that had held firm for two weeks, as well as the 200-day moving average. The index is now at risk of tumbling toward the June-low of 7,451 if it remains on this trajectory.

A move back above 7,537 is the immediate upside goal before it can look to break above 7,650.

Top UK stock news

Berkeley Group is down 2.1% this morning. The London housebuilder said pretax profits climbed 9.5% to £604 million in the year to the end of April and met guidance, with the housebuilder saying it remains on course to deliver its outlook and maintain shareholder returns over the next two years despite challenging conditions, exacerbated by rising mortgage rates. Berkeley said it expects to deliver pretax profits of ‘at least’ £1.05 billion across the next two financial years combined, weighted to 2024. It also said it plans to return £2.63 per share, per year up to the end of September 2025. It said three executive directors – Justin Tibaldi, Paul Vallone and Karl Whiteman will step down after its AGM but said they will retain their operational roles. Three non-executive directors are leaving after nine years but they are not being replaced and, instead, it is reducing the size of its board.

Halfords is up 5.6% after revealing revenue rose to £1.59 billion in the year to the end of March from the £1.38 billion delivered the year before, coming in ahead of estimate. Underlying pretax profit plunged to £51.5 million from £89.8 million, but Halfords said it is confident it can grow its bottom-line to around £53.3 million in the new financial year. It continues to counter inflationary pressures with cost-cutting but warned profits and cashflow generation will be weighted to the second half.

GSK is down 1% after it said the latest trial data for Arexvy, its RSV vaccine for older adults, indicates a single dose can provide protection over two RSV seasons in adults over the age of 60. ‘We look forward to discussing these results with regulators and vaccine recommending bodies and to collecting more data from the ongoing clinical development programme,’ said GSK chief scientific officer Tony Wood.

Airplane engine maker Rolls Royce was the second best performer in the FTSE 100 yesterday after CEO Tufan Erginbiligic said demand for long-haul aircraft is ‘coming back strongly’ during the Paris Air Show, partly thanks to a stronger than expected recovery in China. Rolls Royce is down 0.3% this morning.

Anglo American is down 0.7% after it said its De Beers diamond unit sold $450 million worth of diamonds in the fifth sales cycle of 2023. That is down from $479 million sold in the previous sales cycle and from the $657 million sold in the fifth sales cycle of 2022. De Beers CEO Al Cook said sentiment is being hit by global macroeconomic challenges and that the industry heads into summer in a cautious mood.

THG is up 4.9% after it said profitability improved in the first half of 2023 as hoped, with adjusted Ebitda set to come in the range of £44 million to £47 million compared to £32.3 million the year before. It reiterated its full year outlook and said free cashflow has also been better than anticipated.

Mondi is down 0.5% despite being upgraded to Neutral from Underperform by Credit Suisse, which said the packaging firm’s earnings should bottom-out in the second half of 2023.

NatWest is down 3.1% at 237.7p after being downgraded to Underperform by BNP Exane, which has a price target of 280p on the bank. Lloyds is down 2.9% at 43.51p after also being cut to Neutral and given a target price of 52p. Metro Bank was also downgraded to Underperform, sending the challenger bank down 3.4% this morning.

Entain is up 0.3% at 1,239p after it was upgraded to Outperform by BNP Exane, which has a price target of 1,500p on the gambling stock.

Grainger is up 0.4% at 234.60p after being upgraded to Overweight at Barclays, which has a target price of 270p on the stock.

Oxford Biomedica is down 0.3% at 460.50p after JPMorgan initiated coverage on the company with a Neutral recommendation and a price target of 495p.

Lookers has been downgraded to Hold from Buy by Liberum, which set a price target of 120p. The firm is currently subject to a takeover by Canadian outfit Alpha Auto Group. The stock is down 0.2% today at 118.61p.