US economic data drag Footsie lower

Inflationary economic data from the US meant that the FTSE-100 index lost ground for the second successive session yesterday, as investors were forced to reflect that the recent stock market correction might be far from over.

The 1.4 per cent quarter-on-quarter rise in the employment cost index and the 2.7 per cent rise in the first-quarter GDP price deflator were taken by some as a sign that the US Federal Reserve would be forced to raise rates by half a percentage point when it meets next month.

Both the Dow Jones Industrial Average and the Nasdaq Composite opened with triple digit losses, although the latter quickly recovered.

Footsie hit its low for the day of 6,127.9, down 128.6, as Wall Street opened and although it mounted a recovery, the index still finished 77.2 points lower at 6,179.3. It is still in correction territory, at more than 10 per cent down on the year-to-date.

Adding to investor gloom on interest rates was the European Central Bank's decision to increase rates by a quarter-point to 3.75 per cent. If the ECB's intention was to strengthen the euro, it failed; the European currency hit new lows within half an hour of the rate shift. The pound accordingly surged again, hitting 112.6 on a trade-weighted basis, its highest level since December 1985.

That will have increased the squeeze on UK exporters and intensified the dilemma for the Bank of England's monetary policy committee, which meets to discuss UK interest rates next week.

With all this macro-economic data flying around, developments in the UK corporate sector were left in the shade. The main news was the end of the mobile telecom licence auction, with all the existing UK operators proving successful (at a price) and the purchase by Standard Chartered of Grindlays Bank.

The daily battle between old economy and new economy stocks ended in defeat for the latter, with the Techmark 100 index having another bad day, closing 116.3 off at 3,511.17. Psion was a notable exception, chalking up its second consecutive day as the Footsie's best performer. The FTSE 250 finished with more modest losses, off 35.1 at 6,154.0, while the SmallCap index dropped just 2 to 3,155.2.

Traders reported that in spite of the important economic news, business was fairly slow. Investors may well be sitting on their hands during the current trading week. Volume was 1.67 billion shares by the 6 p.m. count.