FTSE 100 surges above 7,800 to within reach of record high

US inflation data underpinned earlier gains for the UK index which now sits less than 100 points from a new peak, despite a likely recession in 2023. Our City expert explains.

The resurgent FTSE 100 index today breached 7,800 for the first time since 2018 and is within sight of a new record high after encouraging US inflation figures helped sustain the upbeat mood of investors in 2023.

London’s top flight index stood at just above 6,800 in mid-October, but China’s reopening from Covid and hopes that the worst is nearly over for interest rate rises has given a new year lift.

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The progress has come despite recession looming over many major global economies and with the US inflation rate still three times higher than the Federal Reserve 2% target.

Today’s latest consumer price index (CPI) figure from the US is moving in the right direction, however, after the reading for December cooled for a sixth time in a row to 6.5% from 7.1% a month ago.

It had peaked at 9.1% in June, prompting the Federal Reserve to speed up its monetary policy tightening through an unprecedented run of four consecutive 0.75% rate increases.

Today’s CPI reading was bang in line with Wall Street expectations, with a decrease in gas prices resulting in the lowest print since October 2021. Core inflation, which is likely to have more influence over future Federal Reserve decision-making, fell to an annual rate of 5.7% from 6% the month before.

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The latest figures have boosted hopes that the US economy can still achieve a soft landing following the pandemic, particularly given recent signs of resilience in the jobs market.

The big question for investors is how much further US rates will need to rise and whether policymakers can get inflation back on track without choking the economy.

Capital Economics said today: “This report adds more weight to our view that CPI inflation will fall more rapidly than the Fed expects this year.

“But it will be another couple of months before there is enough accompanying evidence showing a more marked easing in labour market conditions and wage growth to persuade the Fed to stop hiking rates.”

Wall Street expects another quarter point rise in February and is betting on a terminal rate of 5% by June. Despite today’s improvement in inflation, US markets remain volatile this afternoon after an unexpected three month low in weekly unemployment claims fuelled fears of a tight labour market.

This meant the S&P 500 stood in negative territory at one point, although the FTSE 100 index traded as high as 7,809, having earlier broken 7,800 for the first time since May 2018 — the same month that the top flight set its record high close of 7,877 and intraday high of 7,903.

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The FTSE 100 index outperformed during 2022 and has enjoyed a robust start to 2023 after commodity stocks were boosted by optimism that China’s economy will rebound faster now that mandatory quarantine requirements have been dropped. Copper prices, for example, are at their highest level since June.

A recent fall in wholesale gas prices during a mild January and encouraging inflation figures from across the eurozone have also lifted confidence.

Progress in US markets has been more muted, but tech stocks have shown signs of life in recent days as bond yields cool on softening interest rate expectations.

The Nasdaq has just posted a four-day winning streak for the first time since September and beleaguered Tesla Inc (NASDAQ:TSLA) shares have rebounded by 15% in the week prior to last night’s close.