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Wednesday, May 14, 2008

US Inflation - Better than Expected

Better than expected inflation figures from the US managed to pull the FTSE up by its bootstraps today. The UKs leading benchmark index was down 80 points before the US CPI figures came in and managed to push back into the black going into the close. Unfortunately, there were no positive surprises coming from the MPC today, just more bad news on inflation and growth prospects for the UK economy. Last week we noted that further rate cuts were less probable than people were starting to price in to the markets.

Today were seeing an unwinding of these positions as fund managers pull out of financial stocks. Barclays, HBOS, Lloyds and RBS were amongst the biggest fallers today with credit agency Experience down over 3%. We continue to see the MPC taking a tough line on inflation and consequently view the upside for financial sector as severely limited in relation to the downside risk.

Banking stocks might be seen as cheap at the moment in relation to their dividend yields, but investors are still mindful of how cheap Northern Rock and Bear Stearns looked before they went to the wall.