The surprise UK inflation reading was positive news for interest rate-sensitive stocks including banks and housebuilders.
Inflation holding steady was the last thing anyone expected in the face of higher oil prices caused by the Iran war. Central banks typically raise interest rates to fight inflation, and the latest reading suggests the Bank of England doesn’t need to rush to change monetary policy direction.
While banks would normally benefit from higher interest rates, the inflation reading is positive for consumer and business sentiment as it implies cost pressures aren’t as severe as previously expected. That in turn could drive greater appetite for borrowing, including mortgages.
Housebuilders are at the mercy of interest rates and a significant shift in rate expectations over the past week will be music to their ears. A week ago, the market was pricing in two rate hikes by early 2027 – that’s now been pared back to just one hike this December and no further change for at least the first half of next year.
While banks and housebuilders were in demand, it wasn’t enough to lift the FTSE 100 out of negative territory. The blue-chip index was weighed down by a further decline in the oil price to $78.68 a barrel, dragging shares in FTSE heavyweights BP and Shell lower.
In the US, the Federal Reserve will make its latest interest rate decision tonight and is not expected to make any changes. The real talking point will be new chair Kevin Warsh’s views on the outlook for rates. Markets aren’t expecting any change until at least the end of the year, and even that looks uncertain.
Markets are pricing in a 42% probability of a US rate hike at the December meeting, nearly the same as no change (41%). The US economy has shown remarkable resilience, throwing cold water on the idea which permeated at the start of 2027 that the Fed would have to cut rates several times amid concerns around the jobs market.
PZ Cussons’ trading update was light on words but heavy on positivity, triggering a bump in the share price. Trading is much healthier, problems with unfavourable foreign exchange rates have dwindled, and the balance sheet is much stronger. It’s a welcome update from the consumer goods business after multiple years of pain for investors.
BMW shares hit the brakes after guiding for a big drop in profits. The Iran war has had a negative impact on consumer sentiment and that’s dampened demand for its vehicles. It has also found life harder going in China because of competition from domestic players. The natural response is to look for ways to cut costs in the business, but messaging from the broader automotive sector would suggest BMW simply joins a growing line of car makers stuck in the slow lane for the foreseeable future.
AO World
Dan Coatsworth, Head of Markets at AJ Bell, comments:
Online electronics retailer AO was not exactly in ‘AO, let’s go’ mode after its results were overshadowed by warnings about cost pressures and an uncertain economic outlook.
During the pandemic the business was operating like a washing machine at top speed and this resulted in screws coming loose, leaving it on the market scrap heap in the post-Covid cost of living crisis. The repair job has been a painstaking one as profit has slowly been rebuilt by cutting costs and exiting underperforming parts of the business, while the balance sheet has also been fixed.
AO surprised investors with its takeover of electronics and computer games second hand platform MusicMagpie in 2025 – a loss-making operation seen as a distraction from the company’s recovery efforts.
However, full-year results show AO has addressed the losses the acquired business had chalked up. More broadly, group profit has bounced back strongly, and AO has kept a handle on costs by offshoring some of its functions in customer relations and sales as well as using more automation in its logistics.
A £20 million return of capital to shareholders, split between a special dividend and share buyback, is a reward for shareholders’ patience. The negative reaction to the results reflects lingering concerns about the impact of low consumer confidence on appetite for big-ticket appliances despite AO World sticking with guidance for the current year.
The latest UK inflation reading and the implication it has for interest rates is positive for AO, but investors remain cautious judging by the negative share price reaction.
Russ Mould: Investment Director
Russ Mould is AJ Bell's Investment Director. He has a Master's degree in Modern History from the University of Oxford and more than 30 years' experience of the capital markets.
He started out at Scottish...
