Must read: housebuilders surge after UK inflation surprise 

Our head of investment rounds up the morning's big news.

GLOBAL MARKETS

European equities have opened in the green and the FTSE 100 back above 7,500, with latest UK inflation figures in focus. Housebuilders are at the top of the UK index, hitting a one-month high, thanks to a softer-than-expected CPI reading.

Aston Martin Lagonda Global Holdings Ordinary Shares (LSE:AML) shares are also trading sharply higher after Goldman Sachs upgraded the stock to a buy from neutral, almost doubling its price target to 413p from 212p.

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UK INFLATION 

UK CPI inflation hit 7.9% in the 12 months to June, below analysts’ expectations for 8.2% and down from 8.7% in May. Core CPI, which strips out energy, food, alcohol, and tobacco, fell to 6.9%, also better than the expected 7.1%. The monthly CPI figure rose by 0.1% versus Reuters’ consensus estimates for 0.4%, with monthly core CPI up 0.2%, beating forecasts for 0.4%. 

Transport, particularly motor fuel prices, led to the largest downward contribution to the monthly change as well as downward effects from food and drinks, furniture and household goods, and restaurants and hotels. Transport prices fell by 1.7% in the year to June compared to a rise of 1.3% in May, with motor fuel prices dropping 22.7% versus a drop of 13.1% in May.

Food and non-alcohol beverage prices rose by an annual figure of 17.4% in June, falling from 18.4% in May and a 45-year high of 19.2% in March. The largest downward contribution came from milk, cheese, and eggs, where the annual rate eased to 22.8% from 27.4% in May. 

Annual inflation eased in June by more than expected, touching its lowest level since March 2022, while core inflation retreated from a 30-year high in May. June’s data was the first time in five months that inflation did not come in hotter-than-expected.

In reaction, the pound is snapping its recent winning streak, heading for its biggest one-day drop this month, depreciating by over half a percent against the US dollar and touching its lowest level against the euro since May. The cooler inflation reading has provided a tailwind to housebuilder stocks including Persimmon (LSE:PSN), Barratt Developments (LSE:BDEV) and Taylor Wimpey (LSE:TW.) which have surged to the top of the FTSE 100.

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Although this is a step in the right direction, Prime Minister Rishi Sunak’s goal to halve inflation this year still looks like it will be difficult to achieve, and the Bank of England is still expected to continue hiking rates to ease price pressures back down towards its 2% target.

Inflation in the UK is still very high by international and recent historic standards, with food prices growing sharply ahead of CPI, adding to the squeeze for many households and businesses.

However, investors now expect a 60% chance of a 25-basis point hike at its next meeting in early August, with more hawkish bets being wound back from earlier in the week when markets were pricing in a 58% chance of a more aggressive 50 basis point hike. Longer term, the Bank rate is now expected to peak somewhere between 5.75% and 6% in late 2023 / early 2024, down from prior expectations for it to peak at 6%.