Stock markets hit record highs after news of a fall in US inflation

A fall in US inflation expected to pave the way for further cuts in interest rates pushed stock markets to record highs on Friday.

Ending a week of gains that began when the Chinese authorities approved a huge economic stimulus package, the S&P 500 index of major US companies soared above 5,750 to register a near 100% gain on a year ago.

Europe’s benchmark Stoxx 600 index rose 0.5% to reach a record high, while the German Dax, France’s CAC 40 and Britain’s FTSE 100 all rose.

US annual inflation, measured by the Federal Reserve’s preferred index, fell by more than expected to 2.2% in August – the lowest level since February 2021 – fuelling expectations that the central bank may cut the cost of borrowing more aggressively than previously forecast at its next meeting in November.

The prospect of 0.5 percentage point reduction in the US rather than a more modest quarter-point cut came after figures showed inflation in France and Spain also fell by more than forecast, raising the likelihood of another interest rate cut by the European Central Bank before the end of the year.

Recent reports by the International Monetary Fund and the Paris-based Organisation for Economic Cooperation and Development (OECD) have shown global growth being held back by a sharp slowdown in the US and China.

Some analysts have predicted that without extra measures to boost borrowing and investment, there could be a recession in the US next year and a sharp drop in China from the 5% growth rate target set by premier Xi Jinping.

On Tuesday, China’s central bank cut borrowing rates for mortgage holders and allowed investors to borrow more heavily at cheap rates.

Later in the week, Chinese leaders vowed to arrest a slump in the housing market and boost growth with an increase in benefits for the poorest and extra funds to local authorities, allowing them to intervene to protect house price values.

Russ Mould, investment director at AJ Bell, said: “A veritable feast of economic stimulus measures has led investors to take a more optimistic view of the earnings potential for Chinese companies and foreign ones selling into the country.

“Lower borrowing costs, smaller deposits for buying homes and more capacity for banks to lend money – these lay the foundations for greater economic activity among businesses and consumers.”

James Knightley, chief international economist at ING, said the Fed would be under pressure to maintain the pace of cuts to interest rates after a series of indicators showed the economy was weakening.

“The latest Conference Board consumer confidence report suggests households are becoming much more concerned about job security, which implies intensifying headwinds for consumer spending for all income groups,” he said.

“In an environment where inflation is looking much better behaved, the market pressure for ongoing substantial Fed interest rate cuts will persist.”

US data next week could show the unemployment rate rising to 4.3% and the number of additional jobs created falling from an average of 180,000 over the last year to below 75,000.

Knightley said that with inflation low and unemployment rising, “we expect the calls for a second half-point rate cut to grow markedly”.