Poor US Data Cast Doubt On Fed Lifting Rates

Stocks in London ended lower on Friday, with the FTSE 100 index hurt by a strong pound after soft US consumer inflation and retail sales data hit the dollar, casting doubt over the US Federal Reserve's expected steps in monetary policy.

The FTSE 100 index ended down 0.5%, or 35.05 points, at 7,378.39. Still, the blue-chip index ended up 0.4% for the whole week.

The FTSE 250 index closed down 0.1%, or 9.98 points, at 19,408.36 points, ending up 0.1% for the week, and the AIM All-Share index down 0.3%, or 2.60 points at 954.21, ending 0.5% lower for the week.

The BATS UK 100 index closed down 0.7% at 12,496.44 and the BATS 250 ended down 0.1% at 17,611.46. The BATS Small Companies closed flat at 11,924.80.

In mainland Europe, the CAC 40 index in Paris ended flat, while the DAX 30 in Frankfurt ended 0.1% lower.

Wall Street was higher at the London equities close amid the weak dollar, with the Dow Jones Industrial Average up 0.1%, the S&P 500 index up 0.2% and the Nasdaq Composite trading 0.3% higher.

The US Labor Department said its consumer price index rose by 1.6% year-on-year in June, below the 1.9% rise seen in May and missing economist expectations of a 1.7% increase. Month-on-month, consumer inflation was flat in June, having edged down by 0.1% in May. The reading was also below economists expectations for a 0.1% increase.

The report showed another notable decrease in energy prices, which slumped by 1.6% in June after tumbling by 2.7% in May.

Core consumer inflation, which excludes food and energy prices, crept up by 0.1% month-on-month in June for a third consecutive month, while economists had expected core prices to rise by 0.2%. On a yearly basis, core inflation stood unchanged at 1.7% in June.

Meanwhile, the US Commerce Department said retail sales fell by 0.2% in June after edging down by a revised 0.1% in May. The continued drop in sales surprised economists, who had expected sales to inch up by 0.1% compared to the 0.3% decrease originally reported for May.

Excluding auto sales, retail sales still dipped by 0.2% in June following the 0.3% decline seen in May. Ex-auto sales were expected to rise by 0.2%.

"The downside surprise in inflation and in retail sales data was not good news for the dollar index and investors have pushed their bearish bets further," said Think Markets analyst Naeem Aslam.

The greenback fell against its major counterparts. The pound climbed above the USD1.30 line for the first time since the start of July, quoted at USD1.3089 at the London equities close, compared to USD1.2943 at London equities close on Thursday.

The UK currency had a good second half of the week, having touched a low on Wednesday of around USD1.28, after receiving support from strong UK employment figures while average earnings came in slightly above consensus expectations. The weakness in the dollar during the period also assisted stronger sterling.

Against the euro, the dollar also suffered, with the single currency standing at USD1.1420 at the European equities close compared to USD1.1403 late Thursday.

Think Market's Aslam said the poor set of US macro data increases the "anxiety" and creates "a lot of questions" about the current strategy which the Fed is using.

"Remember that a number of the Fed committee members have already shown their concerns about inflation and Fed Chair Janet Yellen has also said that she is watching inflation very closely," said Aslam.

The dollar was already heading down before the US inflation and retail sales data were published, as the market had taken Yellen's prepared statements before the US Congress on Wednesday and Thursday as dovish.

Yellen spoke of gradually reducing the Fed's balance sheet and voiced concerns with regard to weak inflationary pressures. The Fed chief said it would be "quite challenging" for the US to reach the 3% growth target set by President Donald Trump.

While Yellen did say that the Fed would "be monitoring inflation developments closely in the months ahead", Capital Economics analyst Paul Ashworth believes that, "on the basis of June's data, it is getting harder for the Fed to continue claiming that this is a temporary drop-off".

"With its dual mandate, the Fed needs to take into account the decline in the unemployment rate this year as well as the drop back in core inflation. For that reason, we still expect the Fed to continue raising interest rates in the second half of this year. Nevertheless, the odds of a September rate hike are fading," Ashworth said.

The market is currently expecting the Federal Open Market Committee meeting to vote in favour of lifting US interest rates either in September or December, in what would be the third hike this year following the increases in March and June. No FOMC meeting is scheduled in August.

The weaker dollar helped prices of base metals and gold, with the precious metal quoted at USD1,228.17 an ounce at the London equities close against USD1218.27 an ounce late at the same time on Thursday.

The FTSE 350 Mining sector index ended up 1.0%, with Anglo American leading the FTSE 100 gainers, up 2.1%, while gold miners Fresnillo and Randgold Resources rose 1.6% and 1.9%, respectively.

The oil price also received a boost, with Brent oil having touched an intraday high of USD49.03 per barrel. However, the North Sea benchmark gave back some gains at the London equities close, quoted at USD48.64 a barrel, only just above USD48.34 a barrel late Thursday.

Beside US macroeconomic data, investors also focused on Friday afternoon on second-quarter results from several US major banks. JPMorgan Chase, Wells Fargo & Co and Citigroup reported positive updates, with Citi and JPMorgan topping analyst expectations.

On the UK corporate front, Royal Mail set out proposals for its pension scheme, following talks with unions on a plan for after the end of March 2018, when the scheme in its current form will close to future accrual.

It is now offering members a choice between a defined benefit scheme and a defined contribution scheme, which would be set up as new sections of the plan, replacing the current sections that will close to future accrual next March. The defined benefit cash balance scheme would provide members with a guaranteed lump sum at retirement.

Royal Mail said it expects the overall cost of this proposal to be funded from its current GBP400 million annual pension contribution. The postal operator ended among the worst performers, down 2.4%.

In the FTSE 250, Carillion ended up 1.3%, in its first day of gains after a four-day decline. The construction and support services company rose after it appointed HSBC Bank as its joint financial adviser and joint corporate broker with immediate effect.

The appointment of new investment bankers follows Monday's dramatic announcement that Carillion's chief executive had departed as it launched an "all options" strategic review after booking a huge provision on contracts.

The announcement caused Carillion shares to halve in value this week. The stock remains down 71% since the close last Friday. Carillion's total market value is currently GBP241.6 million, having stood at around GBP826.0 million last Friday.

In the UK corporate calendar on Monday, City of London Investment Group issues a trading statement, while alcohol, tobacco and impulse product distributor Conviviality publishes full-year results. Miner Rio Tinto releases a second-quarter operations review at 2330 BST.

In the economic calendar on Monday, Rightmove UK house prices are released at midnight, with China's retail sales, industrial production and gross domestic product second-quarter data all at 0300 BST. Eurozone consumer inflation data are at 1000 BST, while the US NY Empire State manufacturing index is at 1330 BST.

Equity markets in Japan will close for the Marine Day.