The FTSE 100 rally driven by falling oil prices gave London markets a boost on Wednesday, even as fresh data showed UK inflation accelerating and the US Federal Reserve announced an expected interest rate rise. The FTSE 100 index closed up 30.34 points, or 0.3%, at 10,688.47, while the FTSE 250 advanced 251.46 points, or 1.1%, to 24,070.20. The AIM all-share climbed 5.21 points, or 0.7%, to 788.36.
Brent crude was quoted at $104.54 a barrel in London on Wednesday, down from $108.48 late on Tuesday. Russ Mould, investment director at AJ Bell, said the drop provided some ‘much-needed relief’ to the market following an intense period that had fired up inflation worries. ‘The dip in the commodity price might not be enough to steer the Federal Reserve on a different path, though. It is widely expected to raise interest rates today, with the first of potentially two or three hikes over the next six months,’ he added.
Federal Reserve raises rates for the first time since July 2023
The US Federal Reserve duly announced a quarter-point rate increase at 7pm, a move that had been widely forecast. According to The New York Times, the hike was the first from the Fed since July 2023, marking a renewed tightening cycle after a prolonged pause. Investors are now pricing in a further three increases through 2027, with the next expected to come in December.
Analysts at UBS said: ‘The decision represents a major policy test for Federal Reserve chairman Kevin Warsh, including his ability to build consensus and manage market expectations around the degree of guidance provided on the interest rate path ahead.’ Warsh himself pointed to the strength of the economy in justifying the move. Reuters reported him stating that ‘Domestic spending has been resilient, productivity growth strong, and capital investment is robust.’
Ahead of the Fed’s announcement, bond yields eased back from recent highs. The yield on the US 10-year Treasury was quoted at 4.97%, down from 5.01%, while the 30-year Treasury yield trimmed to 5.34% from 5.37%.
FTSE 100 rally and oil prices: housebuilders lead the risers
Lower bond yields provided additional support to the housebuilding sector, which saw some of the day’s biggest gains. Barratt Redrow led the FTSE 100 risers, up 12%, after reporting mixed full-year results. The company posted better-than-expected profit but trimmed its outlook for financial year 2027. Citigroup analyst Ephrem Ravi said that while lower financial 2027 volume guidance ‘implies some downside risk to consensus earnings estimates’, ‘strong sales momentum, synergy benefits and the sizeable buyback programme should help offset the earnings downside risk’. Persimmon rose 5.8% on the FTSE 100, with Bellway, Taylor Wimpey and Vistry all gaining between 5.7% and 7.1% on the FTSE 250.
Mining stocks also advanced as metal prices climbed. Fresnillo, Antofagasta and Endeavour Mining rose 2.2%, 2.7% and 1.6% respectively. Gold was quoted at $4,345.07 an ounce, up from $4,285.70 the previous day. The weaker oil price weighed on BP and Shell, which closed down 2.3% and 2.1% respectively.
In the US, the S&P 500 rose 0.5% and the Nasdaq Composite advanced 0.9%. In Europe, the CAC 40 in Paris gained 0.6% and the DAX 40 in Frankfurt added 0.5%.
US retail sales figures added a positive note. The US Census Bureau said retail and food services sales totalled $773.9 billion in August, rising 1.2% from July and 6.0% from a year earlier, beating the FXStreet-cited consensus of 0.8%. Ksenia Bushmeneva, economist at TD Economics, said retail sales had ‘roared back to life’ in August following a disappointing July, though she warned that headwinds are ‘mounting’, pointing to higher mortgage rates and rising energy prices. ‘This is likely to lead to some moderation in spending growth as we move into next year,’ she said.
Back in London, the Office for National Statistics said UK consumer price index (CPI) inflation accelerated to 3.1% year-on-year in August, up from 2.9% in July, driven largely by higher transport costs as rising oil prices fed through to consumers. Core CPI, which strips out energy, food, alcohol and tobacco, held steady at 2.6% annually. Sanjay Raja, Deutsche Bank’s chief UK economist, said: ‘Inflation is on the ascent with an unknown destination. Events in the Middle East continue to add to inflationary pressures.’ He added that his projections point to CPI getting close to 4% around the turn of the year, and questioned whether current rates are ‘restrictive enough’ to bring it back to the Bank of England‘s 2% target.
The Bank of England announces its own interest rate decision at noon on Thursday, with a hold considered the most likely outcome, though analysts expect a split vote. UK Prime Minister Andy Burnham said he was ready to take ‘difficult decisions’ ahead of the coming budget, acknowledging the Middle East conflict’s impact on inflation as ‘a challenge’ while saying the government ‘won’t take risks with people’s living standards’.
Thursday’s economic calendar also includes eurozone CPI data and US initial jobless claims figures, alongside half-year results from retailer Next and a trading update from Unite.
