Market snapshot: UK markets err on the side of caution

US markets edged higher on a much-awaited but ultimately benign inflation report, which provided little in the way of fresh insight.

Both inflation numbers were largely in line with expectations, with the core number falling to 4.7%. While this represents a marginal decline on the previous reading and a continuation in the direction of travel which the Federal Reserve would want to see, evidence remains in some areas that inflation remains persistent. Alongside the inflation news was a print which revealed a larger than expected rise in jobless claims, although taken in tandem the consensus firmly remains that the Fed will leave rates unchanged at its next meeting in September.

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Indeed, before that meeting there will be any number of further data for the Fed to interpret, which lessened some of the impact of yesterday’s announcement. While markets finished marginally higher, they gave up larger early session gains as investors pondered the data to come and the stickiness of inflation so far. Even so, the general mood remains positive that the Fed increasingly looks like it may achieve the ideal outcome of an economic soft landing.

Set against this backdrop, the main indices continue to make steady gains, boosted also by a corporate reporting season, which has provided few shocks and generally better-than-estimated results, albeit against a low bar of expectations. In the year to date, the benchmark S&P 500 has added 16.4%, the Nasdaq 31.3% and the more traditional Dow Jones 6.1%.

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The optimism being generally seen in US markets is proving elusive in Asian markets at present, largely due to a faltering Chinese economy. Following on from the surprising and unwelcome news of a fall into deflationary territory earlier in the week, Chinese property companies came under further pressure after a downbeat statement from Country Garden Holdings Co Ltd (SEHK:2007), a major player in that space. In addition, the ongoing spat between the US and China on the subject of sensitive technology bans also weighed on sentiment, with calls becoming louder for intervention by the authorities to revive the economy’s fortunes.

Some months ago, the Federal Reserve was caught between a rock and a hard place in juggling its fight against inflation by aggressively raising interest rates without unduly harming the wider economy, a feat which it increasingly seems likely to have achieved. However, the Bank of England now has a similar dilemma, and the outcome is far less clear.

The latest release of GDP data shows a UK economy which continues to confound with its resilience, yet where growth is marginal and therefore likely to be thrown off course by a succession of rate rises and potentially more to come. June growth of 0.5% outpaced expectations of a 0.2% increase, boosted by a bout of warm weather, which was of particular benefit to the hospitality trade. Of itself, the reading is economically positive but by the same token it complicates the decision which the Bank of England now faces in terms of its next interest rate decision, particularly if it chooses to tighten further and potentially incite a recession.

UK markets erred on the side of caution once more, taking their lead from the wavering Asian markets as opposed to the more upbeat prospects coming from across the pond. Stocks on the rise were few and far between in a broad markdown, which blew through the likes of the mining stocks and Prudential (LSE:PRU) given their Chinese exposure. The latest decline leaves the FTSE 100 ahead by a meagre 1.7% in the year to date, and the more domestically driven FTSE 250 up by just 0.6%.