Must read: UK inflation, rate cuts, US data, Aviva results

GLOBAL MARKETS 

After UK stocks ended higher on Tuesday, European stocks are extending gains, trading in the green this morning.

The FTSE 100 is in positive territory, with Entain (LSE:ENT) at the top of the index thanks to a surge in shares of Flutter Entertainment (LSE:FLTR) after it raised its full-year guidance and released strong second quarter results. Housebuilder stocks are also leading the charge thanks to lower-than-expected UK CPI which could pave the way for another rate cut in September.  

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After UK inflation data this morning, all eyes turn to US CPI due out later today, which could provide some clues into whether the Federal Reserve will begin cutting rates in September.

Analysts anticipate US annual inflation will come in at around 3%, in line with June’s reading, potentially prompting the central bank to loosen monetary policy next month. This would likely provide some relief to the markets after last week’s fears of a US recession sparked a major bout of volatility.

UK INFLATION 

UK annual inflation hit 2.2% in July, rising from 2% in May and June and marking the first increase since December. But this was slightly better than expected – analysts had pencilled in a rise to 2.3%. The monthly figure also beat expectations, falling 0.2% versus forecasts for a 0.1% drop. Annual core CPI rose by 3.3% and services sector inflation hit 5.2% - both lower than anticipated. As a result, the pound moved lower against the US dollar after the data.

Housebuilders like Persimmon (LSE:PSN), Barratt Developments (LSE:BDEV), Taylor Wimpey (LSE:TW.) and Land Securities Group (LSE:LAND) have jumped towards the top of the FTSE 100. 

Last year saw a significant decrease in gas and electricity prices, normalising after the energy crisis the previous year caused by Russia’s invasion of Ukraine in February 2022. This year, gas and electricity prices are falling by less than a year ago, putting upward pressure on raw materials and in turn inflation. Offsetting an even steeper increase in inflation though was a fall in hotel costs following a strong month in June. 

The headline rate of inflation is moving slightly away from the Bank of England’s target and it is expected to continue to rise by the end of the year before returning back to 2% by 2026.

Despite this, the central bank is likely to continue to proceed with further rate cuts potentially this year and next, having reduced the bank rate at the start of August for the first time since 2020. Markets are now pricing in around a 45% chance of another 25 basis point cut next month, up from 36% before today’s data.

AVIVA  

Keith Bowman, Investment Analyst at interactive investor says: “Aviva (LSE:AV.) has today detailed progressive and reassuring half-year results. 

General insurance premiums are up 15% to £6 billion, while Wealth and Retirement related sales climbed 12% to £19.7 billion. External net flows of £0.3 billion aided the contribution from its Investment Management division, with the combined effort helping drive operating profit up 14% to £875 million. That’s ahead of analyst expectations of around £854 million. 

A 7% increase to the interim dividend and a payment of 11.9p per share further underlines Aviva’s attraction to income investors, while the carrot of additional shareholder returns has been dangled via potential additional share buybacks going forward.  

More broadly, exposure to general insurance leaves Aviva calculating risks in relation to unknown events such as wildfires in Canada and increased flooding caused by climate change. Higher bank deposit rates now offer a more realistic alternative to saving with its Wealth business, while geographical diversity has in recent years been reduced following various business sales. 

More favourably, product diversity remains high. An increased focus on regions is also being supplemented by acquisitions such as its recent purchase of AIG’s UK protection business for £453 million. Cost savings continue to be pursued, while Aviva’s capital cushion, or Solvency II ratio of over 200% remains robust.

For now, and while no new announcements about extra share buybacks may disappoint some, an ongoing focus on operational efficiency and forecast dividend yield above 7% continue to support City consensus opinion of Aviva shares as a strong hold.