FTSE 100 makes new high ahead of key US inflation data

Stock markets around Europe rose after an upbeat session on Wall Street driven by a recovery in tech stocks as the rise in bond yields eased. Fed chair Jay Powell offered reassurance in his reappointment hearing, though he talked about the possibility of raising rates faster than expected if inflation remains persistent. All eyes on today’s US CPI print – expected at another 40-year high.

The FTSE 100 had been tracing out a neat new range this year but this morning it’s managed to break free and make a new post-pandemic high at 7,545. The positive march means 7,700 remains the target – the old pre-pandemic peak in Jan ‘20. Up 8% since the November low the move might just be running out of gas – RSI starting to look overbought, MACD a tad stretched though the bullish crossover is still in play. 7,400 is the floor for now – any pullbacks likely to be bid here.

Megacap tech bounced back to flatter the major US indices. What drags the most on the way down will also do the heaviest lifting on the way up. The Nasdaq rallied 1.4%, while the S&P 500 rose 0.9%. The rip in bond yields eased – the US 10yr back under 1.75%. Some of the trashier, spec-tech, loss-making corners also got pulled up – ARKK rallied almost 3%, though it remains more than 10% YTD.

Speaking at his Senate banking committee confirmation hearing, Powell said the Fed would not shy away from raising rates more than forecast. He also suggested balance sheet run-off decision would be worked through in the next 2-4 meetings – implying QT could start in June. Regional Fed presidents Mester and Bostic were also on the wires backing a hike in March. None of this is new – we know the Fed is in tightening mode now. The question lingers none on what the Fed’s position is right now, but what it might end up doing should inflation persist.

On that…US CPI inflation is due today at 13:30 GMT. Expect a print above 7%, with the month-on-month increase expected at +0.5% (core +0.4%). Markets will be especially focused on signs of peaking – don’t bet on that happening soon. As repeated several times here, inflation pressures are broadening and becoming more entrenched. The Fed is still chasing and not on top.

The dollar was softer yesterday on the Powell comments and yields eased back. GBPUSD made the move above 1.36 stick and can look up the channel to 1.38 next.

US bank earnings kick off Friday – looking for the Wall Street beasts to post a record-breaking year for profits. 2021 was defined really by two things – the release of loan loss provisions flattering the bottom line, and surging investment banking revenues. No one is really going to pay too much attention to the figures for the last quarter – we know they’ll be good; the focus is now on how banks do as the Fed starts to tighten policy. Rate hikes this year should foster higher net interest income and margins from banks’ core lending activity. So, we could see 2022 mark a period of lower bottom line profits but growing core revenues from lending. Fed figures indicate lending is picking up – as long as the Fed doesn’t go too big too fast (inflation this week could see another bumpy ride for bonds). GS were out Monday with a prediction for 4 hikes this year, up from 3…consensus for more hikes is mainly +ve for bank stocks. Piper Sandler yesterday said that Bank of America (BAC) is the large cap bank to own in 2022 – which fits if the year is about a rise in core lending revenues as it has the biggest national footprint.

In London this morning, Sainsbury’s shares rose 2% after the supermarket group raised its full-year profit guidance after a very good Christmas. For the year to March, SBRY expects to deliver underlying pre-tax profits of £720m, up from £660m in prior guidance. General merchandise – Argos – and the bank performed well. Cost savings and higher volumes are offsetting higher operating inflation and competitive pressures, aka matching discounters on price (see Aldi this week).

Meanwhile, Whitbread shares were steady after it reported a solid Q3 marked by ‘resilience’ to Omicron. Total UK sales rose 3.1% vs last year, but lockdowns are wrecking German occupancy rates, which have declined to 36% in the last 6 weeks from 60% in the third quarter. Tough gig until more corporate travel returns and weddings, stags/hens really pick up properly.

Dunelm Group jumped 5% after yet another strong showing: Total sales of £407m in the second quarter were up £46m compared to FY21 and £84m compared to FY20. Gross margin in the second quarter increased by 160bps compared to the same period last year, ahead of expectations, driven by higher full price sell through of seasonal ranges.

Outlook also good: Management expects profit before tax (PBT) for the first half to be approximately £140m, up from £112m last year and £84m in 2020. And they say that absent any significant Covid-related disruption, they expect that full year FY22 PBT will now be materially ahead of market expectations, which was about £180m.