London stocks fell on Friday as investors assessed hawkish remarks from Federal Reserve officials and disappointing Chinese inflation data.
Boston Fed President Eric Rosengren said on Friday “a reasonable case can be made” for raising interest rates gradually as the risks facing the economy are more in balance. The dollar strengthened against most currencies following his remarks, including 0.25% against the pound.
Chris Beauchamp, chief market analyst at IG, said: “A dismal end to the week became even more dismal thanks to Eric Rosengren, who said that the Fed risks creating more problems in waiting to raise rates.
The theme of this week, at least where US dollar traders (and many more investors) are concerned, is that a September move from the FOCM is all but impossible, while a December move is becoming more unlikely too.
Following the ECB’s policy announcement on Thursday, when the central bank said it hadn’t discussed further quantitative easing, Beauchamp believes it is becoming “worryingly clear” that central banks might be stepping away from loose monetary policy.
Rosengren’s comments were echoed by Dallas Fed President Robert Kaplan who said on Friday the case for a rate hike has improved in the last few months.
In contrast, the usually dovish Fed Governor Daniel Tarullo on Friday told CNBC he wants to see more evidence of sustained inflation before raising rates, although he said he wouldn’t rule out a hike this year.
The market is now looking ahead to a speech on Monday by the Fed’s Lael Brainard, a leading dove.
Fed officials are lining up to speak before the September policy meeting blackout on Tuesday, which means policymakers are unable to comment until the interest rate decision. The Fed meets on 20-21 September.
Elsewhere, Chinese inflation figures were also in focus, as consumer price inflation rose 1.3% in August from a year earlier, down from July’s 1.8% and marking the lowest level since October 2015. It was also weaker than the 1.7% jump expected by economists.
The UK’s deficit in trade in goods narrowed to £4.5bn in July from £5.5bn in June as exports rose, the Office for National Statistics revealed in its first trade data since the Brexit vote. Economists had expected a deficit of £4.2bn.
The exports of goods and services rose 1.9% in July from a month ago, supported by a weaker pound after the UK voted to leave the European Union. Imports dropped 0.5%.
While the pound has recently firmed from its post Brexit vote lows, it is still at an extremely competitive level and is likely to remain so for an extended period. Indeed, we believe that the pound could well soften further if current UK economic resilience falters over the coming months as analysts suspect it will.
Separately, the ONS revealed UK construction output rose 1.5% year-on-year in July, surprising analysts who had expected a 3.4% fall and following a 0.7% drop in June.
Meanwhile, a Bank of England survey showed the proportion of Britons who believe the central bank will raise interest rates over the next year has plunged to a record low. It follows the BoE’s decision in August to cut interest rates to a record low of 0.25% after the Brexit vote in June.
In the Eurozone, data showed Germany’s trade surplus declined to €19.4bn in July from a revised €21.4bn in June. Economists had been expecting a surplus of €22bn.
Exports fell 2.6% on the month, which was the worst decline in almost a year and missed expectations of a 0.3% increase. Imports declined 0.7% on the month, missing forecasts of a 0.8% jump.
Oil prices retreated on Friday after surging in the previous session when data from the US Energy Information Administration showed crude inventories fell by 14.5m barrels in the week ended 2 September. Analysts had been expecting a gain of 225,000 barrels.