FTSE closes high as UK wage data pushes gilt yields above mini-budget level

FTSE 100 and European stocks

European stock markets closed in positive territory on Tuesday as short-term gilt yields surpassed the mini-budget level on the back of strong UK wage growth.

The FTSE (^FTSE) was almost 0.4% by the end of the session, thanks also to a boost from mining stocks. Meanwhile, the CAC (^FCHI) was also 0.7% up in Paris, and the Frankfurt DAX (^GDAXI) was 0.8% higher.

Two-year gilt yields rose 0.18 percentage point to 4.81%, compared to their peak of 4.64% in the aftermath of the announcement of unfunded tax cuts in the mini-budget in September last year.

The coupon on 10-year gilts surged by more than 100 points in the last three months as concerns grow about the persistence of rising inflation. The Office for National Statistics (ONS) said average earnings, excluding bonuses, grew at 7.2% over the 12 months – up from the 6.7% recorded in March.

It comes as wages have grown at their fastest pace on record outside of the pandemic but are still lagging behind inflation.

Traders are betting that the Bank of England (BoE) will raise interest rates to 5.75% by the end of the year to control spiralling inflation. Markets have fully priced in rises of 0.25 percentage points at the next three meetings of the Monetary Policy Committee.

Elsewhere, online trading platform CMC Markets (CMCX.L) dropped as much as 5% after flagging a hit to first-quarter net operating income.

Meanwhile, UK housebuilder Bellway (BWY.L) warned of a further slowdown as a climb in mortgage rates and cost-of-living pressures suppressed demand in the property sector. It was 4% down during the session.

Richard Hunter, head of markets at Interactive Investor, said: “The latest quarter has seen a sustained improvement in sales demand, particularly compared to the previous quarter and largely to be expected as an increase in the traditional seasonal interest kicks in.

“However, while the quarter on quarter picture is rosy, the year on year comparison shows the scale of the sector challenges, with overall reservation rates dropping by 25%.”

Read more: Trust in supermarkets falls to nine-year low as shoppers feel 'ripped off'

US and Asia markets

Across the pond, Wall Street rose after opening as new data showed that consumer prices in the United States fell last month.

The Dow Jones industrial average(^DJI) gained 0.4% by the time of the European close, while the broader S&P 500 (^GSPC) also climbed 0.6%, and the tech-focused Nasdaq (^IXIC) was 0.7% higher.

The US Labour Department said on Tuesday that the Consumer Price Index (CPI) report for May showed headline inflation rose 4% over the prior year in May, the slowest since April 2021 and below expectations for a 4.1% increase.

“The Fed will be pleased to see inflation come in lower than expected for May, giving it a bit of breathing room to pause rates in the foreseeable future. Core inflation remains a little stickier than it would like, but given its recent rises it too will be happy with the move downwards," Richard Carter, head of fixed interest research at Quilter Cheviot.

“The US economy has been incredibly resilient in the face of high inflation, and this fall back to more normal levels will be especially welcome and may just help consumer spending hold up at a time where we are seeing a few wobbles. Talk of recession is becoming increasingly unlikely, but growth will still be challenging to come about.

Asian stocks tracked Wall Street’s higher close on Tuesday as the People’s Bank of China (PBOC) lowered a short-term lending rate for the first time in 10 months.

In Japan, the Nikkei (^N225) surged 1.8% on the day, while the Hang Seng (^HSI) gained 0.7% in Hong Kong, and the Shanghai Composite (000001.SS) climbed 0.15%.

Watch: How does inflation affect interest rates?

Pound

The pound (GBPUSD=X) was up against the US dollar by 0.74% to 1.2602 as investors expect a pause in the Federal Reserve’s cycle of rising interest rates on Wednesday. Against the euro, sterling (GBPEUR=X) was 0.5% higher at 1.1684.

"The pound is pushing higher after UK job data comes in much hotter than expected," Fiona Cincotta, senior financial markets analyst at City Index, said. "The data will have unnerved the BoE ahead of next week’s interest rare decision, where the central bank is expected to raise interest rates by a further 25 basis points."

Oil markets

In commodities, oil prices continued their upwards movement. US crude oil, or West Texas Intermediate (CL=F), surged 3.5% to trade at $69.49 a barrel, while Brent crude (BZ=F) rose 3.4% to $74.30.

Read more: Interest rates and oil prices: How one impacts the other

Economic data

UK wages have grown at their fastest pace on record outside the COVID pandemic period, according to the Office for National Statistics ONS) on Tuesday.

Regular pay excluding bonuses increased by 7.2% in the three months to April, up from the 6.7% recorded in March.

The figure was ahead of economists’ predictions of 6.9% and higher than of an upwardly revised 6.8% in the previous three months.

Real pay fell by 2% when including bonuses, down from 3% in January to March.

Wages were boosted by the 9.7% rise in the minimum wage in April. Total pay, including bonuses, grew by 6.5% per year in the three months to April.

“In cash terms, basic pay is now growing at its fastest since current records began, apart from the period when the figures were distorted by the pandemic. However, even so, wage rises continue to lag behind inflation,” ONS director of economic statistics Darren Morgan said.

Watch: What are SPACs?

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