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FTSE falls and Wall Street rallies as Fed's Powell warns of more rates rises

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·4 min read
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Fed chair Jerome Powell. The FTSE 100 and Wall Street stocks fell as recession fears mount. Photo: Reuters/Elizabeth Frantz
Fed chair Jerome Powell. The FTSE 100 and Wall Street stocks fell as recession fears mount. Photo: Reuters/Elizabeth Frantz

European stocks tumbled on Wednesday as investors digest Britain's latest inflation data and warnings from Federal Reserve chair Jerome Powell of more rate hikes on the horizon.

The FTSE 100 (^FTSE) declined 0.9%, France’s CAC (^FCHI) fell 0.8% and the DAX (^GDAXI) slumped 1.1% in Frankfurt.

New figures from the Office for National Statistics show the consumer price inflation rose to 9.1% in May, up from 9% the previous month, to a fresh 40-year high.

Rising prices for food and non-alcoholic drinks, compared with falls a year ago, pushed up last month’s inflation rate, the ONS said.

Read more: UK inflation hits fresh 40-year high of 9.1%

Prices rose 0.7% in the month alone, a slowdown from the 2.5% pace recorded in April when the 54% energy price cap came into effect.

The retail price index, which is used to determine train ticket prices and to which some index-linked bonds are pegged, soared 11.7% – another 40-year high.

The latest gauge piles more pressure on the Bank of England to step up efforts to curb surging prices across the economy. Threadneedle Streets expects inflation to exceed 11% in October, significantly higher than other similar countries in the G7.

"There is a dawning realisation that global policy makers will have to act in a more aggressive manner in order to take the heat out of inflation," said Sophie Lund-Yates, equity analyst at Hargreaves Lansdown. "Swiftly rising interest rates act as a vacuum for economic growth, and this isn’t lost on the market today."

Sterling (GBPUSD=X) extended its decline against the dollar as Britain's inflation nightmare gets deeper. The pound crashed 0.8% to $1.218. Against the euro (GBPEUR=X) it was 0.2% lower to €1.16.

Analysts say the "weakness in the pound" isn’t helping inflation and the UK economy, largely due to the strength of the US dollar, which has pushed sterling down over 12% in the last year.

Michael Hewson, chief market analyst at CMC Markets, said: "This is largely down to the increased aggressiveness of the US central bank which appears determined to export its own inflation problem to the rest of the world by hiking rates sharply in the coming months.

"No one is suggesting that the Bank of England matches the Fed hike for hike, but they should at least give the impression in being serious about tackling the problems posed by a weaker pound, as well as trying to keep the interest rate differential as narrow as possible, if only to mitigate the inflationary impulse currently affecting the staples of energy first and foremost, as well as food, all of which are priced in US dollar."

Read more: Bank of England needs to follow Fed on rates hike to boost pound, says MPC member

Across the Atlantic, US benchmarks bounced as Fed chair Powell testifies before Congress, seeking to alleviate fears about a recession in the world's largest economy.

Wall Street’s S&P 500 (^GSPC) advanced 23.87 points, or 0.6%, to 3788.66. The tech-heavy Nasdaq (^IXIC) was 0.9% higher, while the Dow Jones (^DJI) added 0.4% at London's close.

Fed chair Powell said the US central bank will keep lifting interest rates to tackle inflation, but said policy makers must be "nimble" amid the risk of a recession. Last week, the Fed raised rates by 75 basis points, the biggest increase since 1994.

In text of his testimony to the Senate Banking Committee, he said: "The American economy is very strong and well positioned to handle tighter monetary policy.

"Inflation has obviously surprised to the upside over the past year, and further surprises could be in store. We therefore need to be nimble in responding to incoming data and the evolving outlook.

"We understand the hardship high inflation is causing. We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so."

Asian stocks were in the red overnight with the Nikkei (^N225) down 0.4% in Japan, while the Hang Seng (^HSI) dipped 2.3% in Hong Kong and the Shanghai Composite (000001.SS) lost 1.2%.

Meanwhile, oil prices fell as recession fears mount as global growth slows. International benchmark brent crude (BZ=F) fell 4% $110.15 a barrel, while US light crude (CL=F) dropped 4.5% to $104.64.

Watch: How does inflation affect interest rates?