FTSE lower after US stocks hand back gains, factory gate prices due from across the Atlantic and UK GDP comes in ahead of expectations

“After another positive surprise on US inflation, stocks were all set to stage another rally before the head of the San Francisco Federal Reserve Bank intervened to dampen hopes of a shift in the trajectory of rates,” says AJ Bell Investment Director Russ Mould.

“That dragged US stocks down from their highs and set the scene for a weak open for European stocks.

“The FTSE 100 was also affected by a strong pound, after better-than expected figures on the UK economy, and weak resources stocks after a tough week for China marked by deflation, falling producer prices and soft trade figures as well as a sorry showing for Chinese equities. As the world’s most rapacious consumer of commodities, the fortunes of the Chinese economy are closely tied to these markets.

“Later today factory gate prices are out in the US, another reading which suggests inflationary pressures are easing could lift sentiment.

“This data set is something of a crystal ball for consumer price inflation; when producers charge more for goods the higher costs are usually passed on to households.”

UK GDP

“The UK economy continues to confound predictions of a recession for now. However, the words ‘for now’ are doing plenty of heavy lifting.

“Strength in the pharmaceutical and car manufacturing sectors was a key driver in helping GDP for the second quarter confound expectations for a period of stagnation.

“The economy also bounced back strongly in June from a May period affected by the extra Bank Holiday associated with the King’s coronation. Hot weather helped pubs and restaurants, though a drizzly and cooler July will likely dampen this trend when the next monthly GDP figures are announced in September.

“Before we roll out the garlands it is worth observing the UK remains one of the few major economies to reach its pre-pandemic size. This is a story of resilience rather than dynamism.

“The durability of the economy is a double-edged sword as it may lead the Bank of England to keep taking a hard line on interest rates. Given the lagged impact of rate increases, which have already seen borrowing costs increase from near zero to more than 5% in a little over 18 months, this could result in a more significant downturn at some point down the line.

“On the other hand, a lower than anticipated inflation number next week could build confidence in a Goldilocks scenario where the economy is blowing neither too hot or too cold and the Bank can start to dial back the pressure on rates and avoid inflicting much more pain without risking losing control of prices again.”

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