Interactive Investor

Inflation fears hinder FTSE 100 landmark quest

14th February 2023 15:26

by Graeme Evans from interactive investor

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Vodafone and BT shares took centre stage today, but have they done enough to push the FTSE 100 over the 8,000 threshold? 

Vodafone and BT shares 600

London’s rejuvenated FTSE 100 index hit the brakes just shy of the 8,000 landmark today after US figures showed the fight to bring down inflation is far from over.

The 6.4% annual reading for the consumer price index represented the lowest level since October 2021, but came in higher than the 6.2% forecast on Wall Street after a 0.5% month-on-month increase in January.

At more than three times the Federal Reserve’s 2% target, the print will reinforce expectations  that policymakers are set to keep raising interest rates to a point well over 5%. The current Fed funds rate is in a range of 4.5%-4.75%, having tightened aggressively in the last year.

Given the resilience of economic growth at the start of 2023, Capital Economics said the update pointed to the Fed raising interest rates a little further over the coming months than the solitary 0.25% hike it had pencilled in for March. 

The consultancy remains hopeful, however, that the disinflationary process will re-accelerate soon as easing shortages push core goods prices lower, housing inflation slows and labour market conditions cool.

Economists also expect a further interest rate rise by the Bank of England next month after average earnings surged today by a bigger-than-expected 6.7% at the end of 2022 to add more evidence of a tight UK labour market.

The threat of stickier inflation comes as investors become much less pessimistic, with Bank of America’s latest European fund manager survey today reporting a big drop in those expecting a global recession.

Whereas 61% of investors still think European growth will slow in response to tightening credit conditions, the bank added that an increased share of 33% expects growth to be resilient thanks to savings and order backlogs.

This improved mood has driven London’s FTSE 100 index to a record high in recent sessions, fuelled in particular by big gains for oil companies and rate-sensitive financial stocks.

The top flight moved within four points of the 8,000 threshold at the start of today’s session but retreated back to 7,959 in the wake of the US inflation report. It later rallied back to around 7,900.

The S&P 500 index opened 0.7% lower and the rate-sensitive Nasdaq Composite surrendered a chunk of last night’s gains after falling by around 1% in initial dealings.  

London-listed Vodafone Group (LSE:VOD) was one of the best blue-chip stocks after it emerged last night that US media investor Liberty Global had taken a 4.9% stake in a move worth £1.2 billion.

Liberty’s boss Mike Fries called it an “opportunistic and financial investment” and said his company had no plans for a takeover or to seek a seat on the board.

Vodafone shares rose 4p to 98p, which compares with last summer’s 130p and December’s low of 83p when the company said it had parted company with chief executive Nick Read. 

Analysts at Bank of America recently said shares looked too cheap, pointing out the upside risk to consensus forecasts from easing energy costs, price rises and cost cutting. 

They added that a new management team can accelerate Vodafone’s restructuring strategy and reallocate capital into core markets and away from those with poor returns. A 30% dividend cut is a risk but the bank suspects this is priced into the current yield of 9%.

The stake building by Liberty, which owns 50% of Virgin Media O2, fuelled buying across the sector as BT Group (LSE:BT.A) shares also rose 4.75p to 138.85p and Airtel Africa (LSE:AAF) by 3.2p to 127p.

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