London and New York equity markets closed firmly in positive territory on Friday, even as a US inflation report strengthened the case for a Federal Reserve rate hike next week.
The FTSE 100 index ended the session up 41.52 points, or 0.4%, at 10,650.44, though the large-cap benchmark still fell 1.7% across the week, its worst weekly performance since July.
The FTSE 250 gained 89.79 points, or 0.4%, to close at 23,975.73, while the AIM all-share climbed 2.92 points, also up 0.4%, to 790.87.
European markets also finished in the green, with the CAC 40 in Paris and the DAX 40 in Frankfurt each rising 0.8% on the day.
In New York, the Dow Jones Industrial Average was up 1.0%, while the S&P 500 added 1.1% and the Nasdaq Composite surged 1.3% at the time of London’s closing bell.
The Bureau of Labour Statistics reported that the consumer price index rose 3.4% year-on-year in August, matching the pace seen in July and in line with market consensus cited by FXStreet.
Core consumer price inflation, which excludes food and energy, cooled to 2.4% annually in August from 2.5% in July, but monthly core prices rose 0.3%, topping expectations of a 0.2% increase.
According to the CME FedWatch Tool, markets now price an 87% probability that the Fed will lift its funds rate by 25 basis points on Wednesday, up sharply from 72% the day before.
Analysts at Barclays commented: “Although some of the August strength seems one-off, we think the data are supportive of a rate hike next week. We maintain our call for the Federal Open Market Committee to deliver a 25bp hike at next week’s September meeting.”
Oxford Economics analyst Bernard Yaros offered a note of caution, saying a hike “isn’t a slam dunk”, adding: “The upcoming interest-rate decision by the Federal Reserve is on a knife’s edge, and the firmer core CPI reading in August pushes the central bank toward a hike next week.”
Yaros added that “a rate increase this month is still no guarantee, as the Fed’s preferred inflation measure will prove more benign.”
Dutch bank ING characterised any potential Wednesday move as a “recalibration” rather than the start of a hiking cycle, noting: “We changed our view to a 25bp Federal Reserve rate hike in September in the wake of Chair Kevin Warsh’s address at the Jackson Hole symposium.”
ING analysts added: “Our projections for jobs and inflation suggest no need for a series of hikes,” suggesting the Fed is unlikely to embark on an extended tightening path.
The Bank of England is due to announce its own rate decision on Thursday, and unlike the Fed, it is not expected to hike, with bank rate currently at 3.75%.
Deutsche Bank analysts Sanjay Raja and Maui Brennan warned, however, that “the tides are turning on the inflation backdrop,” pointing to higher energy prices and a more resilient economy than the Bank of England had anticipated.
The pair added: “The case for staying on hold is weakening slowly,” suggesting the Monetary Policy Committee may face growing pressure to act in coming months.
UK GDP data released Friday showed the economy grew 0.4% in July from June, accelerating from 0.3% growth in June and flat output in May.
Among individual movers, Rightmove shares rose 2.9% after a regulatory filing revealed activist investor Sachem Head had acquired a roughly 6.0% stake in the property portal.
Trainline rose 1.8% after reporting resilient first-half trading, announcing a new £100 million share buyback programme, and reiterating full-year guidance including net ticket sales of £6.2 billion to £6.45 billion for financial 2027.
C&C surged 13% after agreeing to acquire Asahi UK’s wholesale interests for a nominal consideration, with the Dublin-based drinks maker saying the deal will “provide a significant number of new customers with MCB market leading service and range proposition.”
Brent crude fell to 104.73 dollars a barrel late in London, down from 105.51 dollars on Thursday, while gold rose to 4,375.02 dollars an ounce from 4,363.96 dollars the previous session.