FTSE pops as UK economy grows faster than expected

European bourses are rebounding after weakness yesterday. Strong UK economic growth is boosting risk sentiment, although inflation concerns remain.

• US inflation hits 7.9% almost setting in stone a rate hike by the Fed next week
• ECB turns more hawkish, EUR initially falls
• UK GDP rises 0.8% MoM in January, rebounding from a -0.2% contraction in December

After Wednesday’s impressive rally, yesterday saw stocks pull back, as the third round of Russian, Ukraine peace talks ended in stalemate, dashing hopes of a diplomatic solution to the ongoing war.

Rising US inflation added to the downbeat mood. Consumer prices rose 7.9% YoY in February, up from 7.5% in January, and are expected to continue climbing as inflationary pressures build. If we needed any confirmation that the Fed would hike rates next week, inflation at a fresh 40-year high was it.

ECB

Yesterday the ECB, as expected, kept interest rates unchanged at -0.5%. However, the ECB brought a hawkish shift to the table, announcing that it plans to wind up its asset purchase programme (APP) faster than initially expected, ending in Q3. This technically paves the way for a rate hike before the end of the year. The move by the ECB highlights rising concerns over inflation, which is no longer looking transitory but could well become entrenched if energy prices remain elevated. 

Usually, a more hawkish stance from the central bank would push the currency higher; the fact that the EUR sold off yesterday tells us that the market is worried about stagflation. Concerns that the ECB is taking steps towards tightening as growth is expected to slow weighed on demand for the common currency. As the dust settles on the decision today, the euro is managing to find some support, with EUR/USD tentatively rising to 1.10.

UK GDP

The FTSE 100 is powering higher, outperforming its European peers, thanks to encouraging UK GDP data. The data revealed that the British economy rebounded strongly in January, growing 0.8% MoM, ahead of the 0.2% forecast and a solid uptick from -0.2% contraction in December, when Omicron was spreading rapidly. The expansion in the economy was seen across all sectors, and GDP is now 0.8% higher than where it was pre-pandemic. The good news is driving demand for the FTSE, although FX markets are slightly more cautious, with GBP/USD trading basically flat and under 1.31. While January saw strong growth, the reality is that growth is expected to slow amid the fallout from the Ukraine crisis and surging energy prices.

Oil

Oil prices are edging higher after booking over 14% losses across Wednesday and Thursday, bringing the WTI crude oil price down from a 14 year high of $130 at the start of the week to a low of $104 struck overnight. Oil was on track to lose around 7% this week after 26% gains last week. The wild swings in the oil price reflect the level of uncertainty of what the Ukraine crisis and Western sanctions mean for the market. While the US banned Russian oil imports, additional supply could be found from Venezuela, Iran, or the UAE, in an attempt to fill at least part of the supply gap left by Russian oil. OPEC+ is unlikely to offset the difference given that Russia is a member.