Slowing inflation points to rate cuts next year. By Michael Hewson (Chief Market Analyst at CMC Markets UK)
Back in June when the Bank of England unexpectedly raised rates by 50bps to 5% on the back of much more hawkish commentary from the likes of the Federal Reserve, as well as the ECB market pricing for UK rates rose to 6.25%, in a move that looked clearly overpriced.
UK 2-year gilt yields spiked up to 5.56% and their highest levels since 2008 as markets grew concerned that further aggressive moves on rates would be needed to contain the inflation genie, which in the UK was proving to be much stickier than expected.
At the time I suggested that these concerns were overstated given the direction of travel on headline inflation in the US, as well as in Europe, which was already slowing sharply, not to mention what we were also seeing in China where we were seeing clear evidence of deflation.
Other warning signs of sharply slowing inflation were evident in the PPI numbers which in Europe have been negative for over a year now, and which in the UK have been negative, or close to negative since July.
Yesterday US CPI for October also confirmed that inflation was heading lower, slowing from 3.7% to 3.2%, while core prices slipped from 4.2% to 4.1% in a sign that price pressures were continuing to slow.
More importantly super core inflation which the Fed monitors closely also slowed as well, and with the risk of a US government shutdown this weekend postponed until January next year, the economic risks to the US economy appear to have diminished further.
Bond markets are already reflecting this narrative even as central bankers continue to push the higher for longer narrative, with US 10-year yields falling to their lowest levels since September, below 4.5%, having risen as high as 5.01% in October.
Today UK headline inflation showed another sharp slowdown, dropping form 6.7% in September to 4.6% in October as the effects of the energy price cap fell out of the headline number for the second time this year.
