Bank of England sees dissent in ranks over rate hikes
U.K. stocks dropped by the most in a month 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 dropped 0.7% to close at 7,419.36, its biggest one-day drop since May 18, according to FactSet data.
Dissent: The stock benchmark hit its intraday low of 7,377.86 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 BOE policy 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.
It was also the first policy meeting since last week's U.K. general election resulted in a hung parliament, where no party holds a majority.
"Just as [BOE Governor Mark] Carney was dusting off his feather quill pen to explain the recent hike in inflation to [Treasury chief] Philip Hammond, news broke that two further MPC members have dissented...catching much of the square mile by surprise,"
"Carney now has a considerable split for his party members, possibly alluding to interest rates being hiked sooner than previously thought," wrote Alex Lydall, head of dealing at Foenix Partners.
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," Lydall added.
Carney and Treasury Chief Philip Hammond were due to speak at a high-profile, annual dinner at Mansion House in London on Thursday night, but the event was canceled after the deadly fire (http://www.marketwatch.com/story/speeches-by-uk-financial-officials-canceled-after-fire-2017-06-15) in an apartment block in the city on Wednesday.
The pound hit an intraday high of $1.2796, recovering after falling below $1.27 following the disappointing retail sales report. Sterling bought $1.2754 late Wednesday.
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.
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 6.1%, DIY retailer Kingfisher (KGF.LN) lost 2.8% and home builder Barratt Developments PLC (BDEV.LN) moved 3.1% lower.
In other movers, shares of International Consolidated Airlines Group SA (IAG.LN) (IAG.LN) fell 3.4%. The parent company of British Airways expects a recent computer outage that lead to hundreds of flight cancellation will cost the company GBP80 million, according to reports (http://news.sky.com/story/british-airways-it-failure-to-land-it-with-16380m-bill-10916439) that said IAG's CEO Willie Walsh gave that figure to shareholders at the company's annual meeting Thursday.
Fed stance: 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 12:38 ET (16:38 GMT)