LONDON MARKETS: FTSE 100 Sways In Both Directions After U.K. Inflation At Highest In 5 Years

By Carla Mozee, MarketWatch Features Dow Jones Newswires

Consumer price inflation now a full percentage point above target

Continue Reading Below

U.K. stocks were steady Tuesday after investors received inflation data that could harden the case for the Bank of England to raise British borrowing costs.

The FTSE 100 index was up nearly 0.1% at 7,530.78, and has been darting between small gains and losses. Industrials shares fell the most while utility shares topped advancers on a sector basis, according to FactSet data. The index on Monday ended 0.1% (http://www.marketwatch.com/story/miners-lift-ftse-100-but-pound-strength-keeps-gain-in-check-2017-10-16) lower after a choppy session.

Among big movers Tuesday, shares of Merlin Entertainments PLC (MERL.LN) tumbled 20%. The theme park operator reported that its year-to-date comparable-revenue growth was flat, (http://www.marketwatch.com/story/merlin-says-revenue-hit-by-weather-terror-attacks-2017-10-17) saying its London sites were hurt by bad weather and the effect of terrorist attacks.

Accelerating inflation: The key focus for U.K. assets Tuesday was the reading on consumer price inflation for September, which at 3% is the strongest level since March 2012 and above the Bank of England's 2% inflation target.

The report may contribute to the Bank of England deciding to raise its key interest rate, which stands at a record low 0.25%.

Continue Reading Below

Bank stocks held to gains on the prospect of a U.K. rate hike, as it could prompt banks to charge more for loans. Barclays PLC (BCS) (BCS) added 1.8% and Royal Bank Of Scotland Group PLC (RBS.LN) (RBS.LN) picked up 0.9% as did Standard Chartered (STAN.LN). Lloyds Banking Group PLC (LLOY.LN) (LLOY.LN) moved up 0.2%, and HSBC Holdings PLC (HSBA.LN) (HSBA.LN) was up by 0.2%.

"While the market now expects the first hike in November, having recently brought forward its expectations from as late as 2019, current pricing suggests the market is anticipating only one further hike in 2018," said Kallum Pickering, senior U.K. economist at Berenberg, in a note.

"We therefore expect the BoE to strengthen its guidance after the first hike, leading to a somewhat steeper gilt curve and possibly a stronger sterling on a trade-weighted basis by the turn of the year," he said.

The pound pulled lower after the September inflation report met expectations, trading at $1.3247 compared with $1.3280 ahead of the inflation report. Late Monday, sterling bought $1.3250. The yield on the 10-year bond was down less than 1 basis point at 1.33%, according to Tradeweb data.

"As long as the BoE goes early and slowly with its tightening we do not expect any major negative effects on real GDP growth or employment," said Pickering.

Read:'Might finally be time to get on with rate rises' -- analysts on BOE's next move after inflation report (http://www.marketwatch.com/story/might-finally-be-time-to-get-on-with-rate-rises-analysts-on-boes-next-move-after-inflation-report-2017-10-17)

Bank of England Governor Mark Carney was slated to appear before a Treasury committee on Thursday.

The Bank of England has previously warned that inflation will peak around 3%, driven in part by a slide in the pound's value since the last year's Brexit referendum. Sterling's decline against the U.S. dollar, the euro and other currencies has made imported items more expensive for consumers and businesses to purchase.

Stock movers: Pearson PLC shares (PSON.LN) sprang up 7.2% after the educational materials publisher raised the lower end of its full-year earnings outlook.

Brexit still stuck: British Prime Minister Theresa May failed to achieve any breakthrough over stalled Brexit talks during a dinner Monday with top European Union officials in Brussels. A fifth round of talks ended last week with the EU's Brexit negotiator, Michel Barnier, saying that progress is still insufficient for talks to move to the next phase.

Read:Brexit is far from the only worry for U.K. stocks (http://www.marketwatch.com/story/brexit-is-far-from-the-only-worry-for-uk-stocks-2017-10-14)

(END) Dow Jones Newswires

October 17, 2017 06:46 ET (10:46 GMT)