Ear to the Ground

18 October 2024

The prospect for further interest rate cuts in the UK was raised this week following the release of important economic data.  Firstly, we saw wage growth continue to slow, with average earnings excluding bonus rising 3.8%, lower than the 4.1% recorded last month.  Unemployment meanwhile held steady at 4%.  Perhaps the most striking and supportive for further cuts to be seen was the release of consumer price inflation for September.  This came in at a year on year increase of 1.7%.  This was materially below the August reading of 2.2%.  Not only that but it caught out market commentators and economists alike.  The consensus forecast had been for a fall to 1.9%.  The current rate is now undershooting the 2% target.

Core inflation, which excludes the more volatile components of food and energy, remains more stubborn, at an elevated rate of 3.2%, but it also continues to make strides lower, falling from 3.6% the month before and was also below the consensus forecast.  A fall in services inflation was a key driver.  The Bank of England next meet to discuss monetary policy and set interest rates on the 7^th November.  The current consensus forecast is that we will see another 0.25% cut.

Following the inflation data we saw a fall in the yield on the 10 year gilt, however it still continues to hover around the 4% level.  The yield on the 2 year gilt meanwhile is around the same level and therefore the yield curve shape remains very flat.

Inflation figures were also released in the euro area which leaned towards a further interest rate cut by the European Central Bank (ECB).  Here we saw a rate of 1.7%, therefore comparable with the UK.  This again represented a meaningful fall from the August reading of 2.2%, was below the consensus forecast of 1.8% and below the target set for the ECB of 2%. 

The ECB duly delivered, reducing the deposit facility rate by 0.25% to 3.25%.  This was very much in line with forecast.  Following the announcement, the ECB president, Christine Lagarde, stated that the fall in inflation has surprised the ECB and that this cut was going some way to try and ensure a soft economic landing.  This possibly suggests we could see another cut before the year end, but the ECB remains committed to any future decisions being data dependent, rather than providing specific forward guidance.

Finally, finishing with a stock, it has been a difficult week for ASML, the Dutch company who is one of the world’s leading manufacturers of chip-making equipment.  The company saw a heavy fall in its share price after issuing a sales forecast which disappointed the market, coming in at the lower end of the forecast range.  There was an initial negative response in the share price of US AI related stocks, such as Nvidia, but then a subsequent recovery.  Something to ponder for investors however as we move into the third quarter earnings season.