Must read: UK inflation, British pound, Federal Reserve, Pearson, Disney

GLOBAL MARKETS

The FTSE 100 and the FTSE 250, which is more closely correlated to the UK economy, are staging gains while the pound is under pressure after UK inflation fell in August, despite forecasts for a slight uptick.

UK housebuilders like Taylor Wimpey (LSE:TW.), Barratt Developments (LSE:BDEV), Land Securities Group (LSE:LAND) and Berkeley Group Holdings (The) (LSE:BKG) are trading near the top of the FTSE 100 thanks to the better-than-expected inflation print. 

• Learn more: SIPP Portfolio Ideas | How SIPPs Work | Transfer a SIPP

Broader European indices are trading mostly higher ahead of the Federal Reserve’s rate decision later when the central bank is expected to keep rates on hold. However, the message is likely to be that rates will remain elevated for some time, with clues into future interest rates set to be revealed through the Fed’s dot plot.

Ahead of the Fed, US five-year and 10-year yields hit 2007 highs, while the major averages on Wall Street came under pressure. US futures are currently pointing to a slightly higher open later today.

UK INFLATION 

UK inflation fell to 6.7% in August versus 6.8% in July, defying expectations of a rise to 7%. Core inflation, which strips out the more volatile components like food, energy, alcohol, and tobacco, fell to 6.2% from 6.9%. While motor fuel inflation rose as expected, this was more than offset by volatile food, accommodation services and air fares where prices rose by less in August than a year ago. While inflation unexpectedly came down, it remains the highest among the G7 countries and is still sharply above the Bank of England’s 2% target. 

The post-pandemic revival in inflation was largely driven by global factors such as the war in Ukraine and global supply chain bottlenecks. But the UK has its own inflationary pressures to deal with such as a tight labour market which has pushed wage growth to record highs. The UK also depends heavily on imports for things like food and energy. That international dependence can leave the UK exposed to inflationary pressures from overseas such as poor food harvests and other supply constraints. 

Inflation is showing encouraging signs of coming down. The post-Covid supply chain bottlenecks have eased, last year’s energy crisis after Russia’s invasion of Ukraine has calmed down and rising interest rates from the Bank of England as well as fiscal prudence from the government have helped to ease price pressures. However rising oil prices is a key risk to watch in terms of the UK’s disinflationary trajectory, with further gains for Brent and WTI potentially adding further upward pressure for motor fuel prices and in turn UK CPI. 

The surprise drop in inflation has pushed the pound lower against the euro and the dollar. It has also solidified expectations that we’re inching towards the end of the tightening cycle. Markets are now pricing in a 45% chance of no change to interest rates on Thursday, a steep increase from 20% on Tuesday. However, it looks like interest rates will remain high for some time, with little chance of a rate cut before the second half of next year.

PEARSON 

Pearson (LSE:PSON) has appointed Omar Abbosh as CEO, taking over from Andy Bird who has decided to retire. The appointment will be effective in early 2024. Shares in the education publisher have sunk to the bottom of the FTSE 100, sliding by more than 5% reflecting investor disappointment about Bird’s departure after three years. 

Under his leadership, shares in Pearson have staged impressive gains of around 60%, reflecting his forward-looking vision for the company in terms of trying to position Pearson as a digital education provider for the future, switching away from old fashion textbooks. He’s been trying to build the ‘Netflix of education’ through its Pearson Plus platform, a monthly pay-as-you-go online service for students. 

Abbosh is currently the president of Microsoft’s industry solutions business and will therefore offer key experience in harnessing technology to Pearson’s advantage. But for now, the markets are more focussed on the loss of Bird and his impressive track record at the helm. 

DISNEY 

Shares in The Walt Disney Co (NYSE:DIS) slumped by over 3.5% after the entertainment business announced plans to almost double its investment in theme parks to around $60 billion.

While its theme parks were hit hard during the pandemic due to travel restrictions and lockdown, they have been performing well since with a 13% jump in revenues to $8.3 billion in the third quarter. That’s helped to offset its profitability woes in its Disney+ streaming service as well as the struggles in studios and linear TV. The investment is part of plans outlined by returning CEO Bob Iger, who came back to the helm in November having previously run the business for 15 years until 2020. 

Shares in Disney have underperformed the wider market this year. Having enjoyed a strong January performance, the stock has largely been under pressure since, reflecting concerns about its business model.