Must read: UK inflation data fuels FTSE Santa rally, oil, FedEx

GLOBAL MARKETS

European markets have opened higher with the FTSE 100 leading the charge, up by over 1.3% after UK inflation fell by more than expected in November. Housebuilders are in the green, on track for the best quarter in more than 10 years, rallying almost 20%. Banks are also up sharply with Barclays (LSE:BARC) leading the gains as the second-best performer on the UK blue-chip index today.

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Oil prices are in the green with WTI rallying nearly 1%, lifting oil stocks such as BP (LSE:BP.) and Shell (LSE:SHEL). Focus continues to be on the situation in the Red Sea and the knock-on impact for the shipping industry.

On Wall Street, a Santa rally is taking hold – the Dow logged its ninth consecutive day of gains with all three major indices closing in the green. However, FedEx Corp (NYSE:FDX) shares fell sharply after second-quarter earnings missed expectations and it cut its full-year revenue guidance.

UK INFLATION

UK CPI inflation fell to 3.9% in November, down from 4.6% in October and sharply below expectations for 4.4%. This is the third time that inflation has come in better than expected over the past four months.

Core inflation, which strips out the more volatile components, namely food, alcohol, tobacco, and energy, fell to 5.1%, also below expectations for 5.6%. Food prices rose by 9.2%, the lowest rate since May 2022 with bread, cake, meat, milk, cheese and eggs falling in price. Thanks to lower energy prices, motor fuel prices have come down by 10.6% in the year to November. Transport, recreation and culture, second-hand cars and air fares also contributed to the better-than-expected inflation reading.

A combination of weaker energy prices, soft consumer demand and higher interest rates have helped to bring inflation closer to the Bank of England’s 2% target. However, there is still some way to go before inflation returns to more normal levels, particularly when you look at core CPI, which remains above 5%. It looks like interest rates will stick to the “table mountain” theory, remaining around their current levels for some time before the Bank of England begins cutting rates around mid-2024.

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The markets are much more dovish than the Bank of England, which is erring on the cautious, hawkish side. Financial markets are pencilling in 140 basis points of cuts next year which feels too optimistic, whereas Governor Andrew Bailey says it’s too early to talk rate cuts, which feels too pessimistic, particularly considering today’s figures.

UK equities are enjoying a tailwind today with almost all FTSE 100 stocks in the green thanks to the fall in inflation and the read across for potentially looser monetary policy. The interest rate-sensitive housebuilder sector is catching a bid, extending its recent rally, while the pound is under pressure against the US dollar.