FTSE 100 forecast: Inflation cooldown hits sterling and lifts stocks

FTSE 100 rises

The FTSE 100 is up 0.6% in early trade this morning after the latest UK inflation data came in much cooler than expected.

UK markets cheer inflation data

We discovered this morning that inflation was up 0.3% month-on-month in August. That follows the 0.4% drop we saw the month before and was milder than the 0.7% rise pencilled-in by economists.

That meant inflation was up 6.7% from the year before, which will be welcome news considering economists had anticipated this to come in at 7% and accelerate from the last reading of 6.8%. Inflation has now dropped to its lowest level in 18 months!

Core inflation was up 6.2% from last year, down from the previous figure of 6.9% and also much milder than the 6.8% forecast.

The data is providing a real boost for economically-sensitive stocks, such as housebuilders, real estate stocks, banks and retailers.

Bank of England: Bets of another hike fall

That is a huge bit of data for the UK ahead of the Bank of England meeting tomorrow and should raise bets that it is approaching peak rates.

The reading was so much cooler than anticipated that traders now see a 70% chance of a 25bps point increase tomorrow, down from 90% before that cool inflation reading. Plus, bets for more increases beyond this week have also subsided, suggesting any hike tomorrow could be the BoE’s last!

GBP/USD sinks to 4-month low

The pound came under pressure following the inflation data, with GBP/USD sliding 0.3% and hitting its lowest level since May at $1.23.

Economic calendar

We have a flurry of speeches from the European Central Bank’s Fabio Panetta, Andrea Enria, Kerstin af Jochnick and Isabel Schnabel, with Elizabeth McCaul and Frank Elderson to follow this afternoon.

The headline event in the economic calendar today is the Federal Reserve interest rate decision, with the central bank expected to leave rates alone. We also have EIA crude oil and gasoline stocks change, which is getting more attention than usual following the recent rise in oil prices.

FTSE 100 analysis: Where next?

Last week, we saw the FTSE 100 break above the falling trendline that had held the index back for most of this year and we saw it climb to as high as 7,711 before finding some fresh resistance, in-line with the ceiling we saw in late June. This is likely to be tested again today and a move above here opens the door to 7,790, which is the resistance that held throughout most of May.

The RSI remains in bullish territory, although we did see test overbought upon hitting that 7,711 resistance earlier this week.

On the downside, the 200-day moving average may provide some new support should it come under renewed pressure but there is still a risk it falls back under that falling trendline.

Top UK stock news

Pearson shares are down 4.2% this morning after announcing Omar Abbosh will become its new chief executive in early 2024, succeeding Andy Bird as he retires. Abbosh was previously the president of Microsoft’s industry solutions and before that he spent three decades at Accenture.

Dunelm is up 3.4% after it delivered record sales in the year to the start of July as it raised its dividend, although profits remained under pressure. The homeware retailer said sales were up 5.5% from last year at £1.64 billion but this did not translate to the bottom-line as tighter margins and higher costs bite, with pretax profit falling 7.8% to £192.7 million. That was just ahead of the £192.1 million in profit forecast by analysts. Free cashflow improved to £160 million as cash conversion improved. That gave it the confidence to raise its full year dividend by 5% to 42p, which is in addition to the one-off special dividend worth 40p that was paid earlier this year. Dunelm said it is pleased with trading since the start of the new financial year and that its value proposition is resonating with customers, although warned that customer behaviour remains “unpredictable”. Freight costs and other inflationary pressures are easing. Dunelm said it has “never been more confident in our plans to seize opportunities in the short, medium and long term”.

AstraZeneca is up 1.8% this morning after it said its rare disease unit named Alexion has agreed to purchase and licence a portfolio of preclinical rare disease gene therapy programmes from US pharmaceutical giant Pfizer for up to $1 billion, plus tiered royalties on sales.

M&G posted a rise in adjusted pretax profit in the first half of 2023 to £390 million from the £298 million reported the year before, smashing the £303.3 million expected by analysts. That sent the stock up 3.2% in early trade this morning. "Against the backdrop of ongoing market volatility and uncertainty we have made progress against all three pillars of the strategy that we launched in March - maintaining our financial strength through capital discipline; mobilising the Transformation programme to simplify our business and improve client outcomes; and delivering growth with positive net client inflows,” said CEO Andrea Rossi. M&G reported £700 million of positive net client inflows despite headwinds from UK institutional clients. The company raised its interim dividend to 6.5p from 6.2p. M&G remains on track to deliver £50 million of cost-savings this year, as part of its broader plan to simplify the business and make £200 million of savings by 2025.

Close Bros is up 2.6% after it agreed to acquire Bluestone Motor Finance, which provides finance for motors across Ireland, for an undisclosed cash amount. The deal should be completed in the fourth quarter of 2023. Bluestone has originated over EUR450 million in loans since inception and had EUR132 million loans under management at the end of 2022.

Galliford Try is trading marginally higher in early trade after it upped its dividend and reported strong double-digit growth in revenue and profits in the year to the end of June. The construction firm said revenue rose 12.6% to £1.39 billion and that adjusted pretax profit was up 22.5% at £23.4 million. Reported profits were up 87% at £10.1 million. Its full year dividend of 10.5p was over 31% higher than the year before, plus shareholders have the 12.0p special dividend that has already been communicated and set to be paid in October. Its share buyback programme is also over 90% complete. Galliford Try said its outlook has also improved as its order book grew to £3.7 billion from £3.4 billion a year ago. “We are encouraged that the momentum in the business has carried into the first quarter of the new financial year and our expectations for the full year to June 2024 have now increased,” said CEO Bill Hocking.

BAE Systems has been downgraded to Hold by SocGen, which has a price target of 1,121p on the defence giant. The stock is down 0.8% this morning at 1,050.77p.

Computacenter has been given a New Buy rating by HSBC, which has a price target of 3,015p on the tech stock. Computacenter is up 1.1% at 2,502p.

Softcat has been given a New Hold rating by HSBC, which has a price target of 625p on the software play. The company is up 1.3% today at 1,455p.

Bytes Technology has been given a New Buy rating at HSBC, which has a 625p price target on the stock. Bytes is up 3.3% at 488.6p this morning.

WPP has been downgraded to Neutral at BNPP Exane, which has a price target of 840p on the advertising stock. WPP is down 0.4% in early trade at 762p.

Ithaca Energy has been given a New Buy rating at Peel Hunt, which has a 210p price target on the oil company. Ithaca is down 3.5% in early trade today at 167p.