LONDON MARKETS: FTSE 100 Slides As Consumer Spending, Central Bank Concerns Take Hold

By Carla Mozee, MarketWatch Features Dow Jones Newswires

Bank of England sees dissent in ranks over rate hikes

Continue Reading Below

U.K. stocks dropped by the most in two months Thursday, falling further as the pound charged higher on divided views about interest rates at the Bank of England.

Stocks in the region struggled during the session as downbeat signs from consumers here and abroad raised questions about policy outlooks held by officials at both the Bank of England and the Federal Reserve.

The FTSE 100 fell 1.2% to 7,383.24, on course of its biggest percentage fall since April 18, according to FactSet data. Only two shares traded higher on the index: Banking heavyweight HSBC PLC (HSBA.LN) and London Stock Exchange PLC (LSE.LN) were each up 0.4%.

Dissent: The stock benchmark hit session lows as the pound was pushed toward $1.28. Those moves came after the Bank of England voted 5-3 to hold its key interest rate at 0.25%. Analysts had widely expected one Monetary Policy Committee member -- at the most -- to seek a rate hike.

A stronger pound can hurt multinational companies on the FTSE 100 as most make the bulk of their revenue overseas. The rate decision came as U.K. economic data this week has shown inflation rising to nearly 3%, average wages falling and retail sales declining.

Continue Reading Below

It was also the first policy meeting since last week's U.K. general election resulted in a hung parliament.

This all puts more of a spotlight on Bank of England Governor Mark Carney, who is set to offer his views on the U.K. economy at Thursday night's speech at Mansion House in London.

"Just as Carney was dusting off his feather quill pen to explain the recent hike in inflation to [Treasury chief] Phillip Hammond, news broke that two further MPC members have dissented ... catching much of the square mile by surprise," wrote Alex Lydall, head of dealing at Foenix Partners.

"Carney now has a considerable split for his party members, possibly alluding to interest rates being hiked sooner than previously thought," Lydall said. Carney "must now be praying the U.K. ties up its political mess imminently and he can get back to his sole focus of recent data-softening and the U.K.'s monetary policy stance."

The pound hit an intraday high of $1.2798, recovering after falling below $1.27 following the disappointing retail sales report. Sterling bought $1.2754 late Wednesday.

Hammond said Thursday he won't appear at Mansion House in the wake of the west London apartment fire that has killed at least 17 people and left dozens injured (http://www.marketwatch.com/story/london-fires-death-toll-rises-to-17-in-london-fire-2017-06-15).

Retailers shaken: Ahead of the BOE decision, the Office for National Statistics said retail sales in May fell 1.2% month-over-month, below expectations for a 0.8% fall.

Ahead of that, DFS Furniture PLC (DFS.LN) shares tumbled 21% on the FTSE All-Share index. The sofa seller said uncertainty caused by the U.K.'s general election and other economic factors has resulted in a sharp drop in customer demand.

"DFS Furniture looked pretty damn tatty this Thursday, the stock plunging ... to trade below GBP2 for the first time since the aftermath of last year's Brexit referendum," wrote Spreadex financial analyst Connor Campbell.

"It is going to be interesting in the coming weeks to see how much of an effect the current political landscape and, of course, rapidly shrinking wages, has had on the U.K. retail sector's second quarter."

The data and warnings rattled retail shares on the FTSE 100, as well as those of home builders. Apparel retailer Next PLC (NXT.LN) gave up 5.7%, DIY retailer Kingfisher (KGF.LN) lost 3.8% and home builder Barratt Developments PLC (BDEV.LN) moved 3.2% lower.

Fed stance: Data on Wednesday showed sluggishness in the U.S. retail sector, a decline in consumer-price inflation and an increase in weekly gasoline supplies just as the summer driving season gets underway.

The Fed on Wednesday met market expectations in raising interest rates by 25 basis points.

However, "markets were surprised by the hawkishness in the policy statement and Chair Janet Yellen's press conference. Even though projections for inflation were lowered to 1.6% from 1.9% in 2017, the dot plot didn't change," said Hussein Sayed, chief market strategist at FXTM, in a note.

"It seems the Fed is no longer as data dependent as before and wants to carry on with the [policy] normalization process despite weakness seen in some economic releases. Yesterday's CPI and retail sales were both disappointing but didn't seem to worry Yellen," he said.

Read:Here's what the market thinks the Fed has got wrong (http://www.marketwatch.com/story/heres-what-the-market-thinks-the-fed-has-got-wrong-2017-06-13)

Election update: U.K. Prime Minister Theresa May and her Conservative Party have been in discussions with Northern Ireland's Democratic Unionist Party about working together in the House of Commons after the Conservatives lost their majority in parliament in last week's general election.

May said this week she's still planning to begin talks about Britain's exit from the European Union, or Brexit.

(END) Dow Jones Newswires

June 15, 2017 08:27 ET (12:27 GMT)