Today's markets: Shares soar on inflation news

The FTSE 100 has brushed off the weak growth figures for the UK economy and taken its lead from the US, where welcomed inflation figures sent New York shares soaring with the S&P 500 having its best day in months.

The broad US index closed 1.8 per cent higher while the tech-heavy Nasdaq rose 2.5 per cent, with banks and tech companies leading the way. This positivity fed into Asia with the Hang Seng rising 1.2 per cent and then into Europe where the FTSE 100 is up 0.9 per cent and the Dax 0.2 per cent. In Paris, shares are up a huge 2 per cent.

It stems from a US CPI report which, as discussed yesterday, had the potential to send shares either way. Luckily for investors, the print was in line with expectations, with CPI rising to 2.9 per cent from 2.7 per cent. But, there were signs that core CPI was starting to slow, which is what traders are focusing on. It shifted the mood from the US is running too hot back to inflation is under control, and maybe the Federal Reserve had a point in December when it said it needed to slow down rate cuts, but not stop them completely. The data certainly relieved the anxiety that was building up and made the past two weeks unnecessarily volatile, which rate cut expectations all over the place. As you’d expect, the bets are now back on the first cut coming in July, instead of September, the latter always being an overly pessimistic point of view that stemmed from last week’s non-farm payroll data. The Fed still plans on cutting rates twice this year, markets still think that might be a bit too much, but we only have another six months to worry about that.

And we of course have potential supply-side inflation from any tariffs from President-elect Donald Trump. His team are suggesting implementation might be slower than the ‘day one’ narrative evoked by the president, so that’s another watching brief. The problem is slowing down rate cuts or even increasing rates doesn’t combat supply-side inflation in the same way as it does when an economy is running too hot, hence why central banks were deliberately slow off the mark when inflation spiked post-Covid and due to the invasion of Ukraine. So we might have the case where inflation prints are rising, but the Fed sits tight. Traders, assuming they’re willing to tolerate tariffs anyway, will forgive the Fed too, you’d imagine. It’s rate changes they’re not expecting that really sets them off.

Back to Britain, and while inflation is slowing here too, GDP absolutely is not rising. Economic growth was flat in three months to the end of November, and only rose 0.1 per cent month-on-month. Lots to factor in here, including the Budget, worries over how the UK will be impacted by tariffs and just a general meh. Can’t see this improving in the near term, business taxes haven’t even increased yet. But this does mean we’ll likely see the Bank of England spring into action, with inflation heading downwards, and growth flat, nothing is stopping it from cutting rates in February. What inflation does next will impact what the MPC does too, but as discussed with the US, if inflation is rising and the economy isn’t, at some point you just have to tolerate it and kickstart growth.

By Taha Lokhandwala