Member Article

UK inflation falls below 3%

Despite a raft of pretty unsettling headlines throughout the day, news flow was punctuated by the odd upbeat report. Markets edged higher purportedly in anticipation of Central Bank easing, ahead of a two day US Federal Reserve meeting that begins later today.

On the downside, whilst there was strong demand at a Spanish bond auction this morning, the interest rate on 12 month paper jumped to 5%, up from just under 3% last month. Despite the increased borrowing costs, the 10 year sovereign yield was steady if not slightly lower at just over 7%.

A German ZEW economic sentiment index came in well below expectations at -16.9, bucking a trend of improvement and representing the greatest fall in this barometer since 1998. Analysts commented that the poll used to determine the index was carried out prior the outcome of the Greek election, hence offering at least a partial explanation. The data however served as a reminder that the German economy is, quite understandably, not immune from the turmoil in the currency bloc.

More optimistically, the Office for National Statistics released data indicating that the rate of inflation in the UK (as measured by the Consumer Price Index) fell to 2.8% in May, from 3.0% in April. Having touched 5.2% in September, inflation has fallen steadily as the effects of a VAT increase at the start of 2011 have worked their way through, and commodity prices (including food and fuel) have eased. The data is good news for the UK consumer, and could also give the Bank of England scope for further easing.

Housing data from the US was also mixed, with housing starts falling 4.8% in May to a seasonally adjusted rate of 708,000, below analysts’ forecasts. Despite this, upward revisions to previous data provided some support, as did new housing permits that increased 7.9% over the same month to 780,000 units (again at an annual rate), representing the highest level since 2008.

Shares in Home Retail Group, the owners of Argos and Homebase, rose following its first quarter results. Despite the weather being blamed for an 8.3% fall in sales (year on year), the fall was lower in expected. This caught many short sellers by surprise and caused what is known as a short squeeze; a jump in share price that occurs when short sellers close their positions effectively buying back the stock they had previously sold. Shares in the company finished the day 23.5% higher at 91.9p.

Risk appetite picked up through the afternoon, with the dollar weakening and commodity prices rising, mining and energy stocks led indices higher, along with financials. It appeared that the prospect of further stimulus by the Federal Reserve boosted the demand for risk assets. The FTSE 100 finished the day 1.7% higher at 5586, with similar gains seen in major European indices, although the US S&P500 and Dow Jones Industrial Average were trading closer to 1% higher at the time of writing.

This was posted in Bdaily's Members' News section by James .