FTSE 100 and reaction to latest US inflation shock

London's leading index had looked impressive up until release of the newest stats on US inflation. Here's what happened next.

US inflation figures gave another jolt to global markets today as the FTSE 100 index briefly wobbled on heightened expectations for more steep interest rate rises.

The annual CPI rate of 8.3% for April was better than the previous month’s 41-year high of 8.5%, but the improvement was smaller than the 8.1% that Wall Street had been forecasting. Energy prices jumped by 30.3% and food by 9.4%, which is the highest rate since 1981.

But any glimmer of hope from US inflation appearing to be at its peak was more than offset by a closer look at the figures, particularly the CPI index excluding food and energy.

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The 0.6% month-on-month rise, which compared with 0.3% in March and market expectations of 0.4%, will add to concerns that inflation is becoming entrenched and will take a lot longer to get back towards the Federal Reserve’s 2% target.

Having raised interest rates by half a percentage point for the first time in two decades last week, today’s figures for April will fuel expectations for a series of similar moves by the Fed at its remaining policy meetings during this year.

Some traders believe a 0.75% hike is still on the cards for June, even though Fed chairman Jerome Powell sought to downplay these expectations last week.

Wall Street is currently looking for around 270 basis points of tightening overall, a pace that investors fear will slam the brakes on growth and make it harder for the US economy to avoid a hard landing.

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Growth and tech stocks have borne the brunt of these fears amid a 38% slide for New York’s index of 10 mega-cap tech stocks, which includes Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT).

US futures reversed initial gains after today’s release, while the FTSE 100 index briefly touched negative territory from being 1% higher a few moments earlier. The top flight, which was earlier boosted by hopes of an easing in China’s Covid lockdown restrictions, later rebounded 82 points to 7324.

Base effects should soon start to bring inflation lower, given that the data no longer compares a normal economy to one suppressed by the pandemic. But the Ukraine war and supply chain pressures created by China lockdowns are creating additional price pressures, while a tight labour market has added to the wage momentum in the US economy.

Unemployment currently remains at a low rate of 3.6%, while recent figures showed a 5.5% increase in average hourly earnings.