Stocks rally as rates’ peak moves into view

Bad news on the UK economy had an upside for some investors today after it appeared to limit the scope for further interest rate rises by the Bank of England.

Stocks in the property, building and utility sectors benefited as the City downgraded its rate rise expectations in response to a closely watched PMI survey of UK activity.

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The headline figure unexpectedly dipped below the 50 breakeven threshold, fuelling expectations that 14 consecutive rate rises by the Bank of England are finally weighing on demand and dampening price pressures in the process.

The Bank is still expected to raise rates by another 0.25% to 5.5% on 21 September, but with City traders now pricing in an eventual peak of 5.83%.

ING economist James Smith said: “That doesn’t seem totally unrealistic, though our own base case is that we get just one final rate hike in September.

“That’s premised on the services inflation numbers staging a modest improvement before November’s meeting, enabling the Bank to pause.”

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The revised rate rise outlook helped the domestic-focused FTSE 250 index to peak in today’s session at 18,228, although the rise weakened to 0.6% by lunchtime as investors also considered the increased prospect of a mild recession for the UK economy.

The hit to activity has been greatest in manufacturing, where the bigger-than-expected fall in the PMI reading from 45.3 to 42.5 is the lowest level since the first Covid lockdown.

The previously resilient services sector is also starting to feel the heat from higher interest rates after its PMI score came in below 50 for the first time since January.

On a more encouraging note, Capital Economics said that Bank policymakers will be pleased to see the output price balance at its lowest level since February 2021 at 55.

The consultancy said this was consistent with core CPI inflation falling from 6.9% back towards 2%: “Overall, the dual signs of weaker activity and easing price pressures give us a bit more confidence in our view that interest rates are near their peak.”

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In the FTSE 100 index, the risers board was topped by Severn Trent (LSE:SVT) followed by United Utilities Group Class A (LSE:UU.). The defensive duo are down by 20% and 17% respectively in the past year as rate rises have increased debt costs and encouraged investors to look elsewhere for returns.

It’s been a similar story in property, with Land Securities (LSE:LAND) and Segro (LSE:SGRO) among today’s biggest top-flight risers, while Taylor Wimpey (LSE:TW.) led the housebuilding sector on hopes that mortgage costs will not rise as far as feared earlier in the week.

The appeal of stocks in these income-bearing sectors has been boosted by a 12 basis point fall in the 10-year gilt yield to 4.52%, having been a 15-year high of 4.75% last week.

Despite today’s improved performance, the FTSE 100 index is still 5% lower across August amid worries about China’s debt-laden property sector. The period of selling included seven straight sessions of losses up to Monday, the top flight’s worst run since 2019.