UK stocks on the rise as jobs report and Fed outlook help sentiment

• FTSE 100 hit record high after long weekend
• AUD weakens despite higher RBA inflation projections
• UK construction PMI rebound driven by commercial activity

The FTSE 100 has returned from its long weekend with a bang, as the index hit yet another record high thanks to a wide-reaching risk-on surge that pushed the bourse 1% higher in early trade. Recent strength has largely taken place on the back of the financials and commodities sectors, but today has seen the vast majority of the index in the green as indices continue to feed off the back of Friday’s US jobs report. The combination of higher unemployment alongside weaker-than-expected payrolls and average earnings figures represented a goldilocks scenario for markets. Jerome Powell has similarly played a key role in driving market sentiment, with recent comments from the Fed Chair shifting market expectations towards a November cut instead of December.

The RBA took centre stage overnight, with the bank opting to keep rates unchanged at 4.35% as expected. While the bank have seen cost pressures abating, they noted the fact services inflation had hindered that pace of disinflation. Notably, the bank’s quarterly monetary policy statement saw them increase short-term inflation projections, with both headline (3.8% from 3.2%) and core (3.4% from 3.1%) CPI expected to rise this year. This keeps us in a position where markets signal an expectation that we will have to wait until next year to see the RBA push rates lower, with a 2024 rate hike currently seen as more likely than a cut this year.

The UK housing sector has come into focus today, with the latest Halifax house price index and construction PMI released over the course of the morning. Last month had seen jitters in the homebuilding sector, with the Halifax HPI showing a concerning 1% decline in UK house prices (since revised up to -0.9%). However, today’s tentative 0.1% rebound for the Halifax HPI came alongside a sharp surge in the construction PMI reading, which rose from 50.2 to 53.0. Nonetheless, investors in the housebuilding sector should remain cautious for now, with the gains seen for the construction PMI driven solely by commercial and civil engineering work rather than residential house building. With inflation remaining unpredictable given recent gains, the subsequent jump in mortgage rates should continue to keep a lid on house prices for now.