Hopes of US rate cut build

Equity markets rose over the week, with some relatively positive UK economic data helping the pound move higher. The UK's inflation rate rose for the first time this year, but the figure was below market expectations. Retail sales also bounced back in July, but not by as much as some had hoped. The Chinese economy continued to struggle

Over the week, the blue-chip FTSE 100 index was up 1.7% by mid-session on Friday, with the more UK-focused FTSE 250 trading 2.1% ahead.

• Asia sector investment review
• Families need to be open about their finances
• Could now be the time for UK smaller companies?
• How to teach your children (and grandchildren) about money

Podcast

Rachel Reeves’ spending review and UK interest rates. Charles Stanley Direct’s Chief Analyst Rob Morgan speaks to Erica Whyte about the market reaction, what we know so far, and what might lie ahead. Listen here.

Economics

The UK's economy grew 0.6% in the second quarter of 2024, in line with expectations. Growth was led by the services sector, with strength in the IT industry, legal services and scientific research. Services are the biggest contributor to the UK's economy, far outstripping manufacturing and construction, both of which saw output fall between April and June.

The UK's inflation rate has risen for the first time this year, with the consumer price index (CPI) rising to an annual rate of 2.2% in July, slightly above the Bank of England’s (BoE’s) 2% target. The figure was below the 2.3% expected by markets. The data has reinforced the market view that the BoE will hold interest rates in September after it reduced borrowing costs at its August meeting. Positions in futures markets indicate the market expects two further interest rate cuts of 25 basis points apiece before the end of 2024.

UK retail sales ticked up in July, partly reversing a plunge the month before, as summer discounts and major sporting events offered a boost to department stores and sportswear shops. Retail sales volumes rose 0.5% in July, according to data from the Office for National Statistics (ONS). However, the figure came in marginally below economists’ expectations of 0.6% growth.

Inflation in the US rose at its slowest rate in more than three years last month, bolstering the case for the central bank to start cutting interest rates. Prices rose 2.9% in the 12 months to July, the smallest annual increase since March 2021 and down from 3% in June. The figure is likely to be welcomed by the Federal Reserve and markets have interpreted the data as making a September interest rate cut more likely.

• Is inflation now under control in the UK and US?

A raft of Chinese economic data indicated the country’s economy remained moribund. Although retail sales rose more than expected in July, industrial production was below forecasts and fixed asset investment fell 10.2% in the year to date. Unemployment also rose for the first time since February, with the jobless rate rising to 5.2% in July from 5% in June.

Geopolitics

Worries about Iranian retaliation for the assassination of Ismail Haniyeh, the political leader of Hamas, in July in an apparent Israeli attack in Tehran boosted oil prices earlier in the week. However, on Wednesday a report of an unexpected build in US crude stockpiles and the view than an aggressive Iranian response had been temporarily shelved caused prices to ease. Ukraine and Gaza worry world leaders.

UK economic growth has been relatively anaemic for some time, but the new Labour government has big plans to boost Britain’s output. Will its strategy work?

Companies

AstraZeneca became the first company listed in London to attain a market value of more than £200bn. The shares hit a record high after US regulator the Food and Drug Administration (FDA) granted its blockbuster cancer drug Imfinzi a priority review for patients with limited-stage small cell lung cancer.

Shares in Admiral surged after the insurance group posted a better-than-expected 32% rise in interim pre-tax profits, driven by an improved underwriting performance and claims releases. It also declared an interim dividend of 71p a share including a special payment of 19.7p, a rise of 39%. This was also ahead of analysts’ expectations.

Crest Nicholson shares fell after rival Bellway walked away from a potential takeover of the house builder. Crest Nicholson said last month that it was "minded to accept" a revised £720m takeover offer from Bellway, having rejected an initial approach of £650m a month earlier.

Package holiday group Tui beat expectations in its third-quarter results, boosted by strong summer demand and the collapse of German rival FTI which saw it cancel 215,000 holidays. Management also reiterated guidance for a 25% rise in operating profit this year and a 10% increase in revenues.

Shares in gaming group Flutter Entertainment surged after management lifted full-year guidance after a better-than-expected second-quarter performance.

US coffee chain Starbucks replaced chief executive Laxman Narasimhan after less than two years in the role, as the coffee chain contends with falling sales in its major markets. He will be replaced by Brian Niccol, the head of Mexican grill chain Chipotle. Shares in Starbucks jumped more than 20% following the announcement.

Private US confectionery group Mars agreed to buy Pringles and Pop-Tart-maker Kellanova for almost $36bn. Mars will pay $83.50 per share, which represents a near-33% premium to its closing price before the deal was announced.

A strong underwriting performance in the first half means Aviva has been converting more of its insurance premium into profit. Operating profit was up by 14% to £875m. UK & Ireland insurance growth was helped by a strong discipline in underwriting as well as improved income generated from investment positions taken by the division.

Balfour Beatty’s management expects the strong performance seen in the first half to continue into the second half of the year. The group's £16.6bn order book, which grew slightly in its interim results, will act as a prop to investor confidence. There are concerns that more key pieces of infrastructure spending may be scrapped after the government abandoned plans for a tunnel at Stonehenge this week.