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FTSE dives as Bank splits over inflation threat

Mid-cap stocks plunge, gilts slide as retail sales drop and three Bank of England policymakers vote for interest rate rise.

 
FTSE dives as Bank splits over inflation threat
 
  • Drop in retail sales cystallises concerns over economy;
  • Bank of England stuns City with 5-3 split on vote to hold rates;
  • Bond markets tumble as they price in earlier interest rate rise;
  • Shares fall, particularly in ‘mid cap’ FTSE 250, which plunges 2.5%;
  • DFS Furniture sums up consumer spending squeeze with profits warning; its shares crash 21%.

The UK stock market tumbled today as a sharp drop in retail sales alarmed investors over the state of the British economy as it prepares for Brexit. Meanwhile, the pound rose after the Bank of England shocked the City by revealing its monetary policy committee was getting closer to raising interest rates in response to the threat of rising inflation.

A bigger-than-expected 1.2% fall in retail sales last month stoked the fears over stocks exposed to the domestic economy and sent the FTSE 250 plunging 2.5%, its biggest decline this year.

Consumer-facing ‘mid cap’ stocks such as Restaurant Group (RTN), Howden Joinery (HWDN), Wizz Air (WIZZ) and Dunelm Group (DNLM) dived over 6%, pulling the index down 491 points to 19,483 and unravelling its post-election gains.

DFS Furniture (DFSD) summed up the problems as its shares plunged 21% after warning profits would be lower this year as consumers bought fewer sofas due to the mounting economic and political uncertainty. 

The news dragged down other small consumer stocks and pushed the FTSE Small Cap index 1% or 60 points lower at 5,566.  

A handful of big multi-nationals like HSBC (HSBA), Unilever (ULVR) and Prudential (PRU) eked out gains, shielding the FTSE 100 from the worst of the falls though the blue chip index closed slid 65 points to close 0.9% down at 7,409.

The pound reversed an early fall caused by the retail sales figures to trade 0.13% up at $1.2765 against the dollar. The Bank of England held interest rates at their all-time low of 0.25% but surprised markets with news of a 5-3 split on its monetery policy committee (MPC). This could mean an earlier-than-expected rise in the cost of borrowing that would boost sterling.

MPC minutes showed external members Ian McCafferty and Michael Saunders joined Kirstin Forbes, the previous lone ‘hawk, in calling for a reversal in last August’s cut in the base rate to curb the growing threat of inflation.

News of the split – which follows a rise in US interest rates last night – knocked government bond markets which had not expected a rate rise until February 2020. Government bonds, or gilts, are very sensitive to interest rate movements and the thought that rates could rise earlier than expected saw 10-year gilt prices drop with their yields jumping 0.104% to 1.034%.

Carney under pressure

Stuart Edwards, bond fund manager at Invesco Perpetual, said politics were bearing down on bond markets as investors reassessed the risk of lending to the UK government with higher inflation and a looser budget looking likely.  

‘If there is less fiscal austerity in the UK then in terms of what that means for supply and demand and dynamics for gilts, on the one hand you perhaps require a higher risk premium to own gilts and on the other there could be more gilt supply as well. That again could be a negative,’ Edwards said.

Luke Hickmore of Aberdeen Asset Management said Bank governor Mark Carney (pictured) might regret not having raised rates earlier when it became clear the initial impact of the EU referendum had not been bad as feared. Now the economy was slowing, the central bank had little room for manoeuvre with rates so low, he said.

‘A passive Bank of England is not good for anyone. Now we’ve got a hung parliament on the dawn of Brexit negotiations and data suggesting that the economy is slowing. The hard yards for Mr Carney could be ahead,’ he said.

Inflation gloom

The poor retail sales figures are the latest in a string of economic data this week to reveal the pressure on consumers as inflation rises after last year’s slump in the pound following the EU referendum. It comes after the consumer prices index (CPI) spiked to a four-year high of 2.9% which was followed by news that wage growth was failing to keep up with the cost of living.

Almost inevitably today’s figures confirm the squeeze on consumers has resulted in a big fall in spending on big ticket items. Spending in household goods stores plunged 5.7% month on month - hence the slide in Dunelm shares - and were down 6.4% over the year, according to figures from the Office for National Statistics.

Sales of furniture and lighting have fallen 7% over the year and electrical appliances are 4.8% down, as households cut back on spending, the ONS said.

Nicla Di Palma, equity analyst at wealth manager Brewin Dolphin, said the rest of the year would be tough for retailers. ‘Consumers’ disposable incomes are declining as wage growth is not keeping pace with inflation, and the price of both food as well as non-food items is bound to increase due to sterling depreciation.

'This will lead to a subdued outlook for retailers, as the UK consumer will be reluctant to spend on discretionary purchases. Hence, providing good value items that the consumer wants is key for UK retailers,’ she said.

 

6 comments so far. Why not have your say?

Andrew Stevenson

Jun 15, 2017 at 16:28

Carney is a politician, not a banker. At least we can improve our exports, by packing him off back to Canada on the first plane.

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Jonathan

Jun 15, 2017 at 17:32

If they do raise it, it would probably be by 0.25%. Also, the pound has risen due to this split in voting making up a little bit of the massive fall after the Brexit vote.

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David Campbell

Jun 15, 2017 at 17:53

Stock markets worldwide are down today; Gavin Lumsden's comments ignore that on the reasons are just about issues within Britain. Rather myopic reporting or maybe just a case of little Englander!!

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an elder one

Jun 15, 2017 at 17:56

So many have been fretting the market was due a correction; all they needed was a cause, which is where we are.

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David Campbell

Jun 15, 2017 at 18:28

Stock markets worldwide are down today; Gavin Lumsden's comments ignore that and the reasons given are just about issues within Britain. Rather myopic reporting or maybe just a case of little Englander!!

report this

Alan Tonks

Jun 15, 2017 at 22:26

Andrew

They wouldn’t want him back unfortunately!!

David Campbell

You wouldn’t be a very wee Scot in a very wee dress, who likes to repeat himself perchance!!

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