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Pound falls: weak data undermine case for rate rise

Good US jobs data lift FTSE 100 but blue chip index struggles to make headway as sharp drop in oil price offsets the boost from weak pound.

 
Pound falls: weak data undermine case for rate rise
 

(Update) The debate over when UK interest rates should rise swung back to the ‘doves’ today as further weak economic data and news of softening house prices darkened the clouds over British consumers.

The pound dropped 0.6% to $1.2889 against the dollar after an unexpected 0.1% contraction in UK industrial output in May, confounding economists’ forecasts of a 0.4% rise. Construction, the UK’s third biggest sector, fell for a second month, dropping 1.2% in May.

Meanwhile, the Halifax house price index showed residential property prices flattened in the last three months. A 0.1% dip in the second quarter compared to the first three months of the year leaves the average house worth £218,390, the Lloyds bank-owned mortgage lender said.

Although this is 2.6% more than a year ago, Martin Ellis, Halifax housing economist, said it was the lowest rate of annual growth in four years.

‘Although employment levels continue to rise, household finances face increasing pressure as consumer prices grow faster than wages. This, combined with the new stamp duty on buy-to-let and second homes in 2016, appears to have weakened housing demand in recent months,’ Ellis said.

On the industrial output figures, Victoria Clarke of Investec Economics said the data was another sign of a loss of economic momentum in June. This week had already brought softer-than-expected PMI (purchasing managers’ index) surveys in manufacturing, industry and services.

Clarke said the household cash squeeze from higher inflation caused by the fall in the pound since the EU referendum a year ago would continue to drag on the economy.

‘And with the UK’s more export focused manufacturing sector seemingly losing momentum, we see continued signs of a UK economy that is struggling to gain any serious pace.

‘Hence, we remain of the view that the data releases of the past week will help to dissuade the UK’s monetary policy committee from a near-term rate hike,’ she said.

Government bond yields, which respond to changes in inflation and interest rate expectations, dipped with two-year gilt yields 0.025% lower at 0.331%.

Oil prices added to the deflationary sentiment dropping more than 1% after reports of rising US production coupled with increased output from the Opec cartel of oil producing nations. Brent crude futures tumbled $1.42 to $46.68 a barrel with West Texas futures falling a similar amount to $44.11.

Although the slump in the pound in the past year has benefited the FTSE 100 and its many multi-national stocks, the downward pressure from oil hit energy and oil stocks, negating the sterling boost to leave the blue-chip index just a point higher at 7,337 in morning trading.

The release of better-than-expected US jobs figures this afternoon bolstered sentiment with the FTSE adding 11 points to 7,348. Non-farm jobs jumped by 220,000 last month, beating expectations of a 179,000 gain. Although this points to the growing strength of the US economy and could justify the Federal Reserve lifting interest rates for a third time this year, US inflation remains below the 2% target, suggesting some underlying weakness.

In London Easyjet (EZJ) was the biggest riser, up 4.2% or 57p to £14.03, after Credit Suisse analysts upgraded the budget airline to ‘outperform’ due to improved summer trading.

Centrica (CNA) gained 4% to 209.5p on speculation the utility could receive a bid from a consortium of foreign investors.

WPP (WPP) was the biggest faller, down 3.3% or 53p to £15.57 after Exane BNP Paribas downgraded the advertising group to ‘underperform’ on concerns that it might not be nimble enough to respond to the challenges of online advertising and social media marketing.

The FTSE 250 index shed 47 points or 0.2% to 19,321 but was brightened by a 5.3% rise in Dunelm (DNLM). Shares in the homewares retailer jumped 32p to 629p after a fourth quarter trading update apparently showed it defying the consumer squeeze with like-for-like sales up 3.8%.

While Dundelm tills were ringing, Hargreaves Lansdown analyst George Salmon pointed out sales of electric fans and garden equipment had been at a lower margin and that pre-tax profits were likely to be lower than expected.

‘We’ve already had a damaging profit warning from DFS (DFSD), and the fact that wage growth is now lagging inflation will surely add to concerns around the sector,’ he said.

The FTSE Small Cap index edged two points higher to 5,584, helped by a bid for Cape (CIU), which sent shares in the oil services group surging 46% to 265p.

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Centrica shares crash after loss of 823,000 customers

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