Market Report – Off to the races!
- UK inflation falls faster than economists expected
- Expectations of rate cuts from the Bank of England build
- Gilt yields tumble
- Futures markets predict strong start for UK stocks today
- QE or HS2?
Steve Clayton, head of equity funds, Hargreaves Lansdown:
“Santa must think Rishi Sunak has been a good boy this year, because he’s just delivered the best Christmas present the beleaguered Prime Minister could have hoped for. UK inflation slowed in November to 3.9%, from 4.6% the month before. That’s a much bigger drop than the 4.3% outcome that most economists were predicting. Within the mix, food price inflation dropped back into single digits for the first time since June 2022. The overall drop was led by food, leisure and energy prices rising more slowly. Core inflation, which excludes the more volatile components, also fell by a broadly similar pace, dropping to 5.1% from 5.7% previously.
Inevitably, speculation that the Bank of England will begin to lower interest rates in the first half of next year is rising. Sterling is falling this morning as its future support looks to be weakening if UK rates are going to be coming down. Gilts are expected to be well bid this morning as the market prices in a more benign inflationary outlook. Futures markets are predicting that UK stocks will be off to the races this morning, with a rise in the FTSE of approaching 1% indicated. At the risk of playing Scrooge, this sort of stuff can spin on a sixpence. A bad reading in December could wipe all of this euphoria out in a flash. Should we be concerned about this? Well, it all depends on the weather. If we get a bitter January, then energy prices could quickly head higher. Time will tell.
Quantitative Easing was supposed to have prevented the world from descending into a deflationary maelstrom after the Global Financial Crisis of 2008/09. It involved central banks buying vast quantities of government and commercial debts to support the banking sector by capping rates and yields whilst injecting liquidity. No-one can really measure its impact; the only certainty was that a lot of money was printed to pay for this and that Governments found tame buyers for all the debts they were issuing at a time of weak economic conditions. Central banks ended up owning vast portfolios of bonds. The price of which has now tumbled due to the rise in interest rates seen over the last couple of years.
Michael Saunders, a renowned City economist, and one-time member of the Bank of England’s Monetary Policy Committee, has been looking at the cost of it all. It’s not small. In fact, for the price of a bond-buying scheme that might, or might not, have helped, you could have built HS2 with – even after its budget ballooned. So, something that might, or might not have done something, or a high-speed rail network. Ho hum..”
