September 29, 2023

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Stocks rose, and the pound fell as UK inflation slowed

Stocks rose, and the pound fell as UK inflation slowed
  • Sterling is falling after a sudden drop in UK inflation, and the Euro is strong
  • Britain’s FTSE 250 is heading for its best trading day since early February
  • Government bonds are rising on the hope that the central bank’s interest rate will stop
  • The MSCI World Stock Index closes on eight consecutive winning days

LONDON/SYDNEY, July 19 (Reuters) – Global stocks and government bonds rebounded on Wednesday as good news about UK inflation added to a picture of slowing price pressures, although sterling’s recent string of gains was hampered by data.

UK headline consumer price inflation fell to 7.9% year-on-year in June, against expectations of 8.2%, in the latest negative surprise for a major economy after more than 18 months of central banks raising interest rates.

Later in the day, final eurozone inflation data for June confirmed that the annual rate of price increases in the region fell to 5.5%.

The trend suggests that “those late effects of higher rates and tighter monetary policy are coming home,” said Erin Osman, managing director of wealth management at Arbuthnot Latham.

Sterling lost 0.8% to trade at $1.2961 as market bets faded that the Bank of England would raise interest rates to 6% from the current 5%. Against the euro, the pound fell 0.8% to 86.1 pence.

Samuel Tombs, chief British economist at Pantheon, said the Bank of England now has the “green light” to raise interest rates by 25 basis points next month, after markets had previously pinpointed another 50 basis point increase.

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Sterling is still showing gains of 4% for the past three months, after booming on speculation that the US Federal Reserve will finish raising interest rates before the Bank of England does.

“The profit-taking on sterling should come as no surprise,” added Kenneth Brooks, head of foreign exchange and corporate research at Societe Generale in London.

Signs of declining inflation in the UK have also generated optimism that global price increases may slow more quickly than economists had anticipated, driving the MSCI World Equity Index (.

UK indexes outperformed. The London superstar FTSE 100 (.FTSE) rose 1.5% and the domestically focused FTSE 250 (.FTMC) rose 2.7%, on track for its best daily performance since February 2nd.

In bond markets, the yield on two-year British bonds, which measures interest rate expectations and moves inverse to the price of government debt, fell 27 basis points to 4.811%, notching its biggest drop since mid-March.

The 2-year German Bund yield fell 6 basis points, to 3.189%. The 10-year yield, a benchmark for eurozone debt costs, fell 4 basis points to 2.35%.

Eurozone bonds also benefited from comments made by ECB Governing Council member Claes Nott on Tuesday that a rate hike after next week’s meeting was “by no means certain”.

“This is probably the first time that a well-known hawk within the ECB has supported the market view that we are near the end of the cycle of trolling in Europe,” said Chris Weston, head of research at Pepperstone in Melbourne.

Wall Street seemed set for a quieter session, after US consumer data on Tuesday indicated that the economy was slowing but might have avoided a recession in the second quarter of this year.

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The 10-year US Treasury yield fell 3 basis points, at 3.789%.

Futures trading, he indicated that the S&P 500 and Nasdaq 100 stock indices will stabilize when the market opens.

The yen fell to a one-week low of 139.43 per dollar, and Japanese government bonds rose after the BoJ governor stuck to his text that policy shifts are still some time away.

Stock markets in Asia were mixed on Wednesday as economic growth concerns weighed on Chinese stocks while stocks in Japan and Australia rose.

Editing by Sam Holmes, Bernadette Baum and Kim Coghill

Our standards: Thomson Reuters Trust Principles.