Housebuilders fall amid hot UK CPI, rate fears

(Alliance News) - Stock prices in London opened in the red on Wednesday, as a hot UK inflation reading intensified fears about the trajectory of interest rates.

The FTSE 100 index opened down 28.92 points, 0.4%, at 7,540.39. The FTSE 250 was down 161.59 points, 0.9%, at 18,584.57, and the AIM All-Share was down 1.52 points, 0.2%, at 783.66.

The Cboe UK 100 was down 0.4% at 751.92, the Cboe UK 250 was down 0.9% at 16,282.31, and the Cboe Small Companies was down 0.1% at 13,868.61.

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.

"The news that there’s been no change in the headline CPI rate will send something of shiver through even the hardiest spectator," said AJ Bell analyst Danni Hewson.

The ONS said rising travel prices, second-hand cars, as well as recreational and cultural goods and services kept the yearly inflation rate in red-hot territory last month.

Wednesday's reading puts 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%.

"There was unanimity across the market and forecasters that rates will increase by 0.25% on Thursday. Faced with the persistence of core inflation categories, the pressure to do more is growing," Guy Foster, chief strategist at RBC Brewin Dolphin.

Of particular concern will be the second consecutive upside surprise to core inflation, suggesting inflation is becoming more deeply entrenched in the British economy.

Core consumer prices, which exclude volatile categories such as food, energy, alcohol and tobacco, rose 7.1% on-year in May. Market consensus had expected the reading to be unchanged from 6.8% in April.

"We're in the uniquely unfortunate position of having the same kind of wage hikes as the US, and the same kind of energy price rises as Europe – so we're enduring the worst of both worlds, and facing higher and stickier inflation than elsewhere," said Hargreaves Lansdown analyst Sarah Coles.

Sterling was quoted at USD1.2778 early Wednesday, higher than USD1.2743 at the London equities close on Tuesday.

Meanwhile, the UK's debt pile reached more than 100% of economic output for the first time since 1961 as government borrowing more than doubled in May.

ONS said net debt reached GBP2.6 trillion as of the end of May, estimated at 100.1% of gross domestic product.

It is the first time the debt-to-GDP ratio has risen above 100% since March 1961, except for during the pandemic, but this was later revised lower due to stronger GDP figures.

"Support for struggling households during Covid and the energy crisis has come with a significant price tag as benefits have been uprated and the government is also being hit with higher wage costs," noted AJ Bell's Hewson.

With the market reassessing the potential interest rate peak in the UK, shares in housebuilders fell, amid fears for the ramifications on the mortgage market. The rate on a two-year mortgage deal had already climbed above 6% over the weekend.

Answering questions in the House of Commons on Tuesday, Chancellor Jeremy Hunt seemed to rule out mortgage bill support, due to fears it could worsen inflation. Hunt will meet with major mortgage lenders later in the week.

Shares in Persimmon were down 2.2%, while Barratt Developments fell 2.1%. Berkeley Group lost 1.9%, despite a fairly solid set of annual results and reaffirmed guidance.

The housebuilder reported increases in both revenue and profit for its year ended April 30.

Revenue rose 8.6% year-on-year to GBP2.55 billion from GBP2.35 billion and pretax profit climbed 9.5% year-on-year to GBP604.0 million from GBP551.5 million. It said forward sales were sustained at a "healthy" GBP2.1 billion, but the value of reservations for the financial year were around 15% behind the previous year. It said sales pricing remains firm and above business plan levels, and build cost inflation was moderating.

interactive investor's Richard Hunter said the results showed "dogged resilience", amid the wider challenges facing the industry as a whole.

Elsewhere in the FTSE 100, BP and Shell were among the handful of constituents in the green, up 0.8% and 0.6%, as oil prices rose.

Brent oil was trading at USD76.31 a barrel early Wednesday, higher than USD74.86 on Tuesday.

Elsewhere, THG surged 4.8%. The e-commerce retail firm said its founder & Chief Executive Matthew Moulding has given up his special share, which paves the way for the firm to get a premium listing.

THG also updated on its trading ahead of its annual general meeting, boasting a "strong" quarter. It expects a significant increase in profit over the first half, with adjusted earnings before interest, tax, depreciation and amortisation to be between GBP44 million and GBP47 million, compared to GBP32.3 million a year before. Free cash flow is ahead of expectations, it said.

In European equities on Wednesday, the CAC 40 in Paris was down 0.2%, while the DAX 40 in Frankfurt was marginally lower.

The euro traded at USD1.0911, slightly higher than USD1.0909. Against the yen, the dollar was quoted at JPY141.94, up versus JPY141.26.

In the US on Tuesday, Wall Street ended in the red, with the Dow Jones Industrial Average down 0.7%, the S&P 500 losing 0.5% and the Nasdaq Composite giving back 0.2%.

US Federal Reserve Chair Jerome Powell will testify in front of Congress later in the day, which may provide further insight into the bank's decision to pause its rate hiking cycle earlier this month.

"We could also get further insights into last week's discussions with a raft of Fed speakers from the likes of Christopher Waller, Michelle Bowman, James Bullard and Loretta Mester this week," CMC Markets analyst Michael Hewson.

In Asia on Wednesday, the Nikkei 225 index in Tokyo closed up 0.6%. In China, the Shanghai Composite closed down 1.3%, while the Hang Seng index in Hong Kong was down 2.0%. The S&P/ASX 200 in Sydney closed down 0.6%.

Gold was quoted at USD1,935.53 an ounce early Wednesday, flat from USD1,935.21 on Tuesday.

Still to come on Wednesday's economic calendar, there's UK house price data at 0930 BST.

By Elizabeth Winter, Alliance News senior markets reporter

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