Europe
Shares in Europe continued to flesh out gains today; the geopolitical issues appear contained so markets are refocusing on easy monetary policy which was supported today in the UK by a deceleration in consumer prices.
UK CPI dropped back down to 1.6% from 1.9% previously. While some of the drop relates to falling energy prices, core CPI also dropped to 1.8% from 2.0% last month implicating the price change was more widespread.
Lower levels of inflation take the heat of the Bank of England to hike rates. This latest report won’t have been factored into the decision-making at the latest BOE meeting but with core inflation below 2% anyway it seems entirely possible no members of the MPC dissented the decision to keep interest rates unchanged.
If inflation is falling and tomorrow the minutes of the Monetary Policy Committee indicate nobody has dissented, whether Governor Carney and Chancellor Osborne had a secret agreement or not, a rate hike this side of the general election is looking increasingly unlikely.
It’s not to say geopolitical risk is gone, the Vedomosti newspaper has cited sources inside the Russian government that further retaliatory sanctions could include the automotive, aircraft and shipping industries potentially wounding the Eurozone economy even further.
The FTSE 100 was seeing broad-based strength today led higher by strong gains in the house builders including Barratt Developments (LONDON:BDEV) which benefited from a 57% jump in half year profits for Persimmon (LONDON:PSN) following similar results from Bovis (LONDON:BVS) yesterday.
Basic Resources were by far the weakest sector as investors didn’t react well to Bhp Billiton (LONDON:BLT) failing to announce an anticipated share-buyback plan due its divestment of non-core assets into a newly created PLC.
It’s been a V-shaped reversal for the FTSE 100; the sharp declines in late July have been matched with an equally sharp reversal higher. If the index continues at the same pace it will have surpassed the July 29 peak by the end of this week.
US
Stocks in the US continued the rebound that started over a week ago following inflation data that met expectations and earnings from Home Depot (NYSE:HD) that impressed the street.
Given the extent of the decline in stock markets following the last Fed meeting and with the Fed minutes and Jackson Hole meeting this week; extra attention is being paid to the future direction of US interest rates.
Core prices rose slightly less than expected at 0.1% in July so remained flat at 1.9% year-over year. The inflation data had little impact; it was the surprising beat in housing starts at 1.093m against the 970k expected that gave stocks a boost.
Higher inflation is a pre-cursor to higher interest rates so the fact that core CPI prices stayed below 2% as expected takes the pressure of the FOMC to hike rates sooner especially given the flat average hourly earnings growth reported at the start of the month.
Home Depot (NYSE:HD) earned $1.52 per share against estimates of $1.45 on $23.6bn in revenue up from $22.52bn a year earlier. The stock has now broken the top of a one year-old horizontal range capped by around $83 implying further price gains to come.
Prior to the release the stock was up 2.3% this year, lagging the S&P 500 but beating other retailers. Home Depot has benefited from a slight pickup in construction as the US housing market and looks set to continue this momentum based on this quarter's numbers and today’s housing starts.
FX
The US Dollar had another day of broad strength; a more dovish set of data for the UK, Australia and New Zealand stood in contrast to data suggesting an improving housing market in the US with inflation in line with expectations.
The British pound was the biggest major FX loser today after the miss on the CPI data; cable fell below its 200 day moving average for the first time in over a year; suggesting further possible weakness ahead.
Commodities
Crude Oil continued its weakness today as those long the commodity start to capitulate; the 200 week moving average has supported the price of WTI crude four times in the last year but looks to be giving way today.
Gold undid its early advance, falling back below $1,300 per oz as the US dollar strengthened after the US economic data
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