The FTSE can’t seem to stop hitting new highs, climbing strongly since the start of May to within striking distance of 8,500. Among the factors propelling the index upwards are inflation continuing to fade; signals from the Bank of England (BoE) that it could cut rates in June; the GDP quarter-on-quarter growth beat, which also heralded the end of the UK’s recession (boosting sectors such as banking); strong performances from big beasts such as Experian, and bids such as those for Anglo American, which has now set out its own plan to break itself up.
But how sturdy is FTSE’s current bullish phase? As enthralling as this record-breaking episode has been, the market’s structural problems have not been erased and will continue to undermine confidence. Nevertheless, the upwards trajectory has been an encouraging indication that a bit of normality is creeping back in after a long period of outflows, and some pieces are falling into place to support brighter times ahead.
The Federal Reserve might have spent most of 2024 to date in hawkish mode, given the first dip (of just 0.1 per cent in April) in US inflation this year only emerged this week, but the BoE has been moving in the opposite direction. The message from May’s Monetary Policy Committee (MPC) review is that inflation is heading back to target, with a slight renewed upturn in Q3 and in Q4 to around 2.5 per cent, and thereafter falling below the target rate. Governor Andrew Bailey has suggested that markets are underestimating the number of cuts that may be required. Monetary easing is on its way soon, with inflation readings for April and May crucial to whether the BoE will act in June or August.
Pantheon Macroeconomics, which expects April consumer price index (CPI) inflation to fall to 2.1 per cent in line with the MPC’s own forecast, says the first cut is likely to come in June (66 per cent probability), while acknowledging that it wouldn’t take much (pay growth refusing to budge perhaps?) for the MPC to delay until August (33 per cent probability), with three cuts in total this year. Oxford Economics would not be surprised “if some of the BoE insiders opt to err on the side of caution, making us wait until August before there’s a majority to cut”. After all, pay growth is still uncomfortably high.
Could pay data and a resurgent economy jeopardise rate cuts and thus throw the FTSE off course again? It seems highly unlikely that the BoE has any fear of a US-style resurgence, given the mild levels of GDP growth being recorded. After all, the 0.6 per cent increase in GDP in the first quarter of this year (and 0.4 per cent in the month of March) was a mere 0.2 per cent better than had been forecast. Indeed the OECD – which sees inflation remaining fairly persistent at 2.7 per cent this year – continues to predict sluggish growth in the UK. Its forecast puts 2024 growth at 0.4 per cent, rising to 1 per cent next year, similar to the BoE’s conclusions. Capital Economics thinks UK GDP could grow by 0.8 per cent this year and 1.5 per cent next year.
Meanwhile, cuts to National Insurance, wage increases and lower expected borrowing costs will be offset by the higher tax burden. Tax cuts appear to be moving out of reach again and the National Institute of Economic and Social Research says a new government will have no choice but to raise taxes.
Encouragingly, Capital Economics expects that the combination of lower rates and further AI enthusiasm will drive the FTSE 100 from its current high to about 9,300 in 2025. The stellar performance should continue, it argues, thanks to a GDP rebound, more cuts than expected to interest rates and an inflating of the AI-fuelled bubble.
The UK index, however, will fail to catch up with its US equivalent as the euphoria will inflate the UK market far less than the US. But this also means that later, when the AI bubble deflates, says the researcher, it expects the FTSE 100 to fall by a lesser amount in 2026.
Hopefully, by then, the market will be on a more even keel with a thriving IPO market. Tech firm Raspberry PI has confirmed its intention to float and, although it’s no giant, it may mark the end of an arid period for the LSE, and will be a pleasant reminder of what a normal market feels like.
