London Markets: U.K. stocks flip higher as pound rally fizzles after wage data

U.K. stocks erased an earlier loss and swung higher on Tuesday after the pound pulled back from its highest level since the Brexit vote following a mixed report on the British labor market.

While the data showed wages now are rising faster than inflation, traders had hoped for a stronger number to cement expectations of a Bank of England rate rise in May.

What are markets doing?

The FTSE 100 index UKX, +0.29%  rose 0.2% to 7,211.87, climbing back from a 0.1% loss earlier in the session.

The turnaround came as the pound GBPUSD, -0.1116%  dropped to $1.4323, losing grip of its almost 22-month high of $1.4377. Sterling traded at $1.4338 late Monday in New York.

What is driving the markets?

Both the pound and stocks were driven by the February reading on the U.K. labor market. Wages both with and without bonuses rose 2.8%, meaning that for the first time in almost a year wages grew slightly more than inflation. Consumer prices rose 2.7% in February.

The data were in line with FactSet estimates, but some traders and analysts had hoped for wage growth including bonuses to come in at 3%. Such a reading was seen as strengthening the case for a BOE rate rise in May and the disappointment yanked the pound lower.

The unemployment rate, however, surprised to the upside, falling to the lowest level since 1975 at 4.2%, down from 4.3% in January.

U.K. inflation data out on Wednesday and retail sales figures on Thursday are now likely to be closely watched for any indications that they’ll seal the deal for a May rate hike.

What are strategists saying?

• “Whilst today’s stalling of wage growth is disappointing it is by no means a disaster, sterling had run away with itself prior to the release, and the disappointment has brought pound traders back to earth. However, in the bigger picture, the consumer is still in a stronger position than before, which means we could still expect a more hawkish BOE when they meet in May,” said Fiona Cincotta, senior market analyst at City Index, in a note.

• “There was certainly nothing in this data to dissuade markets from the view that a rate hike is likely in May. But it looks likely that the Q1 GDP numbers (due out next week) will turn out quite weak, and we would need to see signs of a rebound in subsequent quarters in order that the BOE can deliver a second rate hike before year-end,” said Peter Dixon, senior economist at Commerzbank, in a note.

Which stocks are in focus?

Shares of Associated British Foods PLC ABF, +4.18% ASBFY, -0.05%  rose 3.7% after the Primark parent said first-half pretax profit declined, but also backed its full-year guidance.

Outside the FTSE 100, shares of JD Sports Fashion PLC JD., +6.66%  rose 6.4% after the retailer said full-year pretax profit for fiscal 2018 jumped 24%.

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