UK inflation hits target, conflicts send oil higher and Nvidia’s record valuation
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “UK inflation finally hitting target may come as relief for companies and consumers, but given this descent was widely expected it’s not moved the dial much for London-listed stocks. The FTSE 100 has opened lower as investors digest the inflation reading which shows prices in the services sector remain hot, indicating a rate cut may not come until the Autumn. Fed policymakers are also staying cautious about the prospects for interest rate cuts. Concerns about an increase in geopolitical tensions in the Middle East and between Russian and Ukraine also seem to have added to a more downbeat sentiment.
The last time UK inflation stood at 2% was in the run up to the Euros in July 2021, just before pent-up demand was unleashed while pandemic restrictions eased. As fans prepare to toast the tournament once more, seeing inflation finally return to target might be seen as a reason to put out more bunting, given how painful the cost-of-living crisis has been. But it doesn’t look like the Bank of England will join the celebratory party immediately and cut interest rates tomorrow. Policymakers still have their eye on hot wage inflation, with earnings including bonuses still running at 6%, at the last count.
There will be concerns that services inflation has only retreated slightly so although August remains a possibility for a rate cut, September is looking more likely – and the markets are only fully pricing in a rate cut in the Autumn.
In the US Fed policymakers appear to be creeping closer to bringing in a rate cut this year but are warning that patience will still be required. It comes after the weaker than expected retail sales reading for May, indicating that consumers are becoming a lot more cautious. Economist and Fed Governor Adriana Kugler indicated that if conditions to continue to ease as expected, an easing of policy later this year would be appropriate. Other policymakers have been making similar comments about inflation is moving in the right direction but have made it clear that a lot more data needs to cross their desks before they will be confident that price pressures are easing off in a sustainable way.
With shares rising another 3.5%, Nvidia has shot into the fast lane and emerged in pole position in terms of tech valuations, overtaking Microsoft and Apple. Its value now stands at $3.34 trillion, an eye-watering sum reflecting its technological prowess which is driving a revolution in computing. It’s the dominant provider of the core kit necessary to run AI applications and has kept accelerating past revenue expectations. Compared to 2020, this year’s sales are forecast to be up nearly 12-fold and operating profits are expected to have grown by a factor of over 20. With companies ring-fencing budgets to spend big on AI products and services, it leaves Nvidia well placed to enjoy further success, especially given its proven ability to adapt to new tech trends and raise the bar on processing power. Smaller rivals and even some of its major tech customers want a bigger slice of its market but given that it’s got such a big first mover advantage, Nvidia is set to stay top dog for a significant time. However, the exact path ahead for the demand for AI is hard to map and some volatility should be expected especially given its huge valuation.
Warnings from Israel that an all-out war against Hezbollah is possible has led to increased concerns over possible oil supply disruption in the region, which has helped Brent Crude maintain its level above $85 a barrel. Traders also have a keen eye on what’s happening in Eastern Europe. A Ukrainian drone strike sparked a fire at an oil terminal in the Russian port of Azov, part of a series of attacks aimed at targeting Russia’s energy infrastructure to disrupt supplies and cut off funding for its military campaign. However, a lid is being kept on prices to some extent, by industry data showing a lower-than-expected drawdown on US crude stocks last week.”
