Janet Yellen, the chairwoman of the US Federal Reserve, said “growth is a touch stronger, unemployment is a shade lower” as she announced a 0.25 per cent increase in interest rates on Wednesday — the first since December 2015. She went on to forecast three 0.25 per cent increases next year rather than the expected two. The markets reacted quickly, and none too subtly.
Gold fell to $1,125 an ounce, which had a knock-on effect on the price of mining stocks such as Randgold Resources and Fresnillo. The dollar rose to a 14-year high, almost reaching parity with the euro. Bank equities rose too, with financial institutions standing to gain more than most from the interest-rate rise. Royal Bank of Scotland rose by 2.6 per cent and Barclays by 2.5 per cent.
The shock was short-lived and the Dow Jones Industrial Average recovered (opening on Friday at 19,905) and the euro and yen started to regain ground against the dollar. Sterling remained flat, close to its three-week low of $1.237. The weakening of the pound since the UK’s vote to leave the EU pushed inflation to a two-year high in November, according to the Office for National Statistics. It said that the Consumer Price Index rose to a higher than expected 1.2 per cent in November — up from 0.9 per cent in October.
The Retail Price Index, which includes housing costs, rose from 2 per cent in October to 2.2 per cent in November. The rises were a consequence of the escalating price of imported goods, principally driven by the higher price of fuel. The cost of raw materials and fuels bought by UK manufacturers is 12.9 per cent higher than it was this time last year.
As a result the price of food and clothes is rising and commentators expect the continued slide in sterling to feed through into yet higher prices next spring. The Bank of England expects inflation to continue to rise during 2017 to 2.7 per cent and remain above the 2 per cent target until 2020.
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However retail sales, including petrol, rose 5.9 per cent last month, in line with forecasts, but down from the 7.2 per cent increase recorded in the previous month. Sales of fuel dropped to their lowest level in two years after the sharpest rise in petrol prices since 2011, but retailers benefitted from the Black Friday sales weekend in November, which boosted the sale of electronic goods.
The strengthening of the greenback has benefited the FTSE, where the majority of companies report their earnings in dollars, with Burberry, BP, GlaxoSmithKline, AstraZeneca and Standard Chartered all showing gains on Friday. The index surpassed the 7,000 mark after the rate rise this week on the back of the surge in value of the dollar.
On Tuesday ITV and Sky rallied after 21st Century Fox made a bid for the proportion of Sky that it doesn’t own. Rupert Murdoch, the chairman of News Corp and the owner of The Times, is also co-chairman of 21st Century Fox, the leading shareholder in Sky, which rose 0.9 per cent. Fox’s bid led to speculation that there might be a similar approach for ITV — its shares rose 4.1 per cent.
Another notable mover this week was Centrica, the owner of British Gas, which went up 4.3 per cent after it raised its annual profit forecast on Thursday.
Finally a dose of festive cheer was delivered in the form of December’s CBI Industrial Trends Survey yesterday, with orders in the manufacturing sector up to their highest level in 20 months in November, despite expectations that they would deteriorate. Some 35 per cent of manufacturers reported an increase in production over the past three months, 16 per cent reported a fall. This is the best result since mid-2014. The mechanical engineering and aerospace sectors were the main drivers of the improvement.