Stocks waver as inflation could nip market rally in the bud, and EasyJet is set to return to the FTSE 100

There’s been a mixture of corporate and macro news that have moved markets on Thursday. US producer price data surprised on the upside, which is adding to fears that inflation pressures are building, and central banks may not be able to cut interest rates as fast as predicted. This has knocked the Nasdaq in the US, which is down more than 0.5%, while the S&P 500 is flat. Europe is a mixed bag, the FTSE 100 is lower, while other European indices are managing to eke out a gain.

Will recent inflation reports shift the dial for the Fed?

After reaching a record high on Monday, the S&P 500 index is moving sideways, as investors try to assuage what the latest hotter than expected inflation print means ahead of the Federal Reserve meeting next month. The headline rate of PPI rose by 0.6% last month, double the 0.3% rate expected, this pushed the annual rate of headline PPI to 1.6%, up from 1% in January. The core rate of PPI was also stronger than expected, rising by 0.3% on the month. The annual rate also rose to 2%, which is the second month that the annual rate has not declined and this is the first time that this has happened since September 2022.

Fed rate cuts may be pushed back

The chances are that the Fed will stick to its recent message that rate cuts are coming, but the Fed needs to take its time. However, the PPI data suggests that inflation is moving in the wrong direction to justify rate cuts, and this could lead to inflation upgrades to the Fed’s forecasts next week, and also a reduction in rate cuts expected this year in the Fed’s dot plot. The December dot plot expected 3 rate cuts this year, which is roughly what the market now expects, however could this be revised down to 2 cuts? Right now, the market is expecting the first rate cut to come in July, with no rate cuts currently expected for the first half of this year. If the Fed err on the cautious side next week, then rate cuts could be pushed back further than this summer.

Savills beats estimates as housing market picks up

Corporate news from the UK is dominating the European session today. On a high note, Savills, the UK estate agent, is one of the top performers in the FTSE 250 today after it reported a slight beat in profit for 2023 and said that a broad housing market recovery is likely in 2024 and 2025. It also increased its dividend by more than expected and said that lower interest rates will be key to driving transaction volumes this year and next. They also said that the UK housing market is past the ‘moment of peak uncertainty’, with more people happy to buy and sell houses. Since housing is an important part of consumer confidence, this also bears well for the overall UK economy this year.

Easyjet rejoins the big hitters

Elsewhere, EasyJet will rejoin the FTSE 100 on Monday, after it was ditched by the FTSE 100 4 years ago at the peak of the pandemic. The share price is not reflecting this move, and is down by more than 2% on Thursday, however, the share price has rallied by more than 50% since its October low. It’s a sign of the times that an airline is replacing Endeavour Mining, as miners continue to act as a drag on the FTSE 100. EasyJet is expecting demand to remain robust as the travel sector surges in the post Covid economy. Although the stock price has performed well in the last 6-months, on a longer-term horizon, the stock price is close to its highest level since 2007, it will be interesting to see if robust consumer demand this summer along with its return to the FTSE 100 can push it to multi year highs later this year.

Shell rolls back on Carbon emissions targets

Elsewhere, Shell has further weakened its targets for carbon emissions cuts in the next decade, The company now plans to cut its carbon intensity by 15-20% by 2030, and not by 20% as per their previous target. Carbon emissions cuts from UK based oil majors have not been a hit with big investors, and some think this is why some UK oil giants lag behind their US counterparts. Also, energy security is a key theme in geopolitics right now, so it is not popular for oil majors to cut oil production or move to renewables when the geopolitical situation is so fragile. Shell’s share price barely moved on Thursday, as this move was mostly expected. Demand for oil and gas is expected to remain strong, so we could see further reductions in its renewables and carbon emissions targets down the line. Shell is higher by 1.8% in the last 5 days and the oil and gas sector of the FTSE 100 is one of the top performers on Thursday.

FX view

USD/JPY is bouncing back, even though there are further signs that the BOJ will hike interest rates next week and end their zero-interest rate policy. The weakness in the yen could be some selling of the rumour, before buying the fact. Also, it highlights some nervousness around what the BOJ may do next – will they continue to hike rates, or will this be a slow process? If it’s the latter, then upside in yen could be limited in the short term.