Ear to the Ground

14 November 2023

It will come as no surprise as to what the main topic of conversation is for this edition, and that of course is inflation.  It was a big week, with both the US and UK reporting their latest figures.  First up we had weaker than expected data from the US.  Year on year to October inflation rose at a lower than expected 3.2%, which compared to the consensus forecast of 3.3% and previous reading of 3.7%.  Energy costs fell, whilst there were smaller rates of increase for items such as food, shelter, and vehicles. 

UK inflation also came out weaker than expected.  The year-on-year rate to October was 4.6%.  This was well below the September reading of 6.7%.  Much of the fall was expected due to the reduction in energy prices following the decision of Ofgem to lower the household bill cap.  Perhaps more important therefore was the fact that the actual was below the consensus forecast reading of 4.8%.  As well as the lower energy costs, there was also a lower rate of inflation within key areas such as food, transport, clothing, and leisure areas such as restaurant prices.

The weaker inflation data proved positive news for fixed income markets.  Whilst we saw US Treasuries rally, the 10-year yield now standing 4.44% at the time of writing having been above 5% only a few weeks ago, it was the UK gilt market which was the largest beneficiary.  The 10-year yield here stands at a little under 4.1%, again having been c.4.65% this time last month. 

From the 10th November to close on the 16th the ICE Bank of America UK Gilt All Stock index was up over 1.8%, ahead of both corporate and high yield indices.  Since the 19th October gains have been even more impressive, with the gilt index up 5%. 

Conversely, wage inflation in the UK, as measured by average earnings including bonuses, to September came in above expectations.  Whilst the figure of 7.9% was below the previous months reading of 8.2%, it was ahead of the consensus forecast of 7.4%.  This places the consumer in a better place, with wage inflation running ahead of consumer price inflation, but remember the former is running at a one-month lag.  The market consensus is now firmly in the camp that we have reached terminal interest rates for this cycle in both the UK and US. 

Whilst the move down in inflation is most certainly welcome by most, members of the rate setting committees from the UK and US central banks are keen to emphasize that the job is not yet done.  Whilst there may be little chance now of interest rates rising from here, they appear keen to remind the market that the inflation rate remains above target.  Therefore, interest rates could remain elevated and monetary policy conditions tight for a period to achieve this.  We have already seen comments such as “the last mile will be the hardest.”  Still, at least we are heading in the right direction.

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