Proactive Investors -
- FTSE 100 above session low of 7,568.55 hit earlier
- US stocks fall on return after Juneteenth holiday
- British Aerospace (LON:BAES) up as Paris Airshow starts
New York dips
The FTSE 100 index gave up its modest gains and slipped back below the 7,600 level as US stocks started the shortened trading week following yesterday's Juneteenth holiday lower as investors weighed up new economic data from the residential construction sector ahead of Fed chair Jerome Powell’s Congressional testimony on Wednesday.
Around 20 minutes after the New York opening bell, the Dow Jones Industrials Average had lost 170 points or 0.5% at 34,128, while the S&P 500 shed 0.3%, but the Nasdaq Composite edged down just 0.01%.
New housing starts in May surged 21.7% to 1.63 million above the consensus expectation of 1.4 million. Building permits also increased more than expected, up 5.2% at 1.49 million above the expected 1.42 million.
Pantheon Macroeconomics senior US economist Kieran Clancy commented that the rebound in residential construction would soon run out of road.
“The ongoing bounce in housing starts and new home sales, and the surge in homebuilders’ stock prices, is fuelling the emerging narrative in parts of the commentariat that housing is now recovering, but the new home market is not the whole housing market,” Clancy pointed out.
“Total mortgage applications are bouncing along the floor, at best, and affordability remains extremely stretched, fundamentally limiting the scope for further increases in housing starts and new home sales.
“A sustained recovery in housing requires a meaningful improvement in affordability, via lower mortgage rates, falling home prices, or both. Neither will happen overnight," he concluded.
Inflation crucial
All eyes will be on the May UK consumer prices index reading for inflation tomorrow morning, which in turn could have a crucial bearing on the Bank of England’s key interest rate decision on Thursday.
David Goebel, associate director of Investment Strategy at leading UK wealth manager Evelyn Partners noted: “The expectation among economists is that the annual CPI rate will come down to 8.4% from the unexpectedly high April reading of 8,7% that kicked off the recent rise in bond yields. The closely watched core inflation figure, however, is expected to remain at 6.8%, and it’s fair to expect that any overshoot of either reading will further stoke bond yields. The two-year gilt yield continued its persistent surge this week, reaching 5.08% on Tuesday morning – higher than at any time since the midst of the financial crisis in 2008.”
He said: “The Bank of England’s policymakers are between a rock and a hard place, although some would argue they have had a hand in wedging themselves there. On the one hand the monetary policy committee must retain the credibility of its inflation-controlling mandate and its willingness to do whatever is necessary to bring inflation back down to target. On the other, with 12 successive rate rises the MPC is being criticised for risking an overshoot in its attempt to cool economic activity, while pouring fuel on the mortgage crisis fire.
“There is little doubt that the MPC will hike rates by 0.25% at the end of its meeting on Thursday, but if the ONS reports a higher-than-expected rate of inflation for May on Wednesday morning then the odds will shorten on a controversial 0.5% increase.”
Goebel added: “BoE Governor Andrew Bailey sounded a warning shot on the need to get inflation down, the Chancellor weighed in by backing the Bank to ‘do what it takes’, and markets are now pricing in the UK Bank Rate to rise to an eye-watering 5.8% - a 1.3% advance on the current 4.5%. It was only a few weeks ago that rate watchers were calling an imminent peak for the Bank rate.
“That has caused serious ructions in the mortgage market, with lenders withdrawing products and falling over each other to reprice.”
He concluded: “If BoE estimates that only a third of the rate increases since the end of 2021 have fed through to consumers and businesses are near the mark, then many more households and businesses are in for a rates shock as reality feeds through this year and next.”
Electric Rolls
Rolls-Royce (LON:RR) is set to test a new line of hybrid-electric turbogenerators at its European sites rather than in the UK, the company said on Monday.
Showcasing the new system at the Paris Air Show, Rolls-Royce confirmed the engine would be tested using sustainable aviation fuels in the coming months in Dahlewitz, near Berlin.
The German economic affairs ministry is also partially funding the project, Rolls-Royce said, which will see the engine eventually run on hydrogen as the fuel becomes more widely available.
Rolls-Royce also laid out plans to become “the leading provider of all-electric and hybrid-electric power and propulsion systems” for aviation, with Monday’s move indicating the wider plans could also take place in Europe rather than in the UK.
Rolls-Royce shares were 2.3% higher at 157.30p on Tuesday afternoon.