Impact of UK Inflation Data on Markets and Currency

In an alternate scenario, if Rishi Sunak had chosen to delay the election until the last minute, is it possible that the combination of low inflation could have prevented the defeat of the Tory party?

I wrote in May: “The drop in inflation, down largely to a 12% drop in household energy costs, would take the UK way below the rate of inflation in the EU and the US and do a lot to help Rishi Sunak…delaying the election is a bet on things in the UK improving over the coming months – it could pay off. I discussed why there are reasons to be more upbeat about the UK economy in the latest edition of Overleveraged.”

Of course, there was a lot more to the Tory defeat than inflation. Anyway, we are where we are. This morning, UK stocks are rallying sharply, and the sterling is sliding on much weaker inflation data. European indices are softer, with downbeat earnings from ASML and LVMH weighing. Meanwhile, a report suggests France may have to sell down part of its $57bn stock portfolio, which has added a touch extra pressure to the CAC as LVMH dipped 6%. The FTSE 100 gained 0.75% in early trade, with recently beaten-down heavyweights Shell and BP both rallying more than 1%.  

US Markets: A Mixed Bag Amidst Chipmaker Declines

US stock markets fell from their all-time highs, with chipmakers dragging on those ASML earnings, which were released early, sending the stock down 16%. Nvidia dipped 4.5% to push the Nasdaq down 1% for the session. SPX dipped three-quarters of a percent. Mixed bank earnings as Goldman Sachs profits rose 45%, whilst Bank of America earnings fell 12% on lower rates and higher loan losses. GS benefitted from a big jump in trading revenues. Shares in both were barely changed though. Dow heavyweight UnitedHealth shares were slammed down 8% on a higher medical costs ratio, weighing heavily on the DJIA, which dipped 0.75%.

Sterling's Struggles: Inflation Data Hits a Two-Month Low  

Cable wobbles

Sterling ran the stops at $1.30 to hit a two-month low after UK inflation data came in way softer than expected, raising the prospect of some ‘more aggressive’ rate cuts in the words of Andrew Bailey. UK headline CPI fell to 1.7%, less than the expected 1.9%, the first time it’s fallen below the BoE’s 2% target since 2021. Core inflation fell to 3.2% also below forecast.  The key services inflation figure dropped from 5.9% to 5.6%, whilst the core services figure dropped from 5.6% to 4.9%.  

Gilt Yields and Rate Cut Expectations

Gilt yields retreated sharply, with the 10-year back to 4.092%, down around 7bps on the session and now well back from the 4.260% area we traded at a couple of days ago. The UK inflation print seems to be weighing on yields across the board and has given a boost to gold this morning.

It's left traders betting that not only is the Bank of England certain to cut rates next month but will also follow up with another in December. It also raises the chance, albeit slim, that the MPC goes for a jumbo cut in November in acknowledgement that they could and should have cut in September. The OIS market now shows ~91% odds of a 25bps rate cut next month, up from around 80% before the inflation data. Beyond this, the markets now imply rate cuts at five of the next six BoE meetings through to the middle of next year.

Cable breached the $1,3040 support of recent days to hit $1.30, where it briefly attempted to hold the line before sinking further. There is a sense from this data – one of the weakest core inflation MoM rise for a September in 25 years (similar in France) – that UK inflation is not proving any stickier than anywhere else. Rates markets are now pricing for lower GBP at a time when UK assets could get a double whammy from the Budget and US elections. Regarding gilts, the data helps wipe the slate clean a bit in terms of the market noise - we now probably have a clearer picture of what impact extra borrowing might have when the Budget comes.

Trump's Stance on Monetary Policy: A Controversial Opinion

Presidential hopeful Donald Trump was on good form at a Bloomberg event in Chicago, where he faced some rather challenging questioning.  Trump said, “What is the Wall Street Journal now? They've been wrong about everything. So have you, by the way.”  But this on bossing the Fed to do his bidding was interesting: “I don't think I should be allowed to order it [monetary policy], but I think I have the right to put in comments as to whether or not the interest rates should go up or down.”  

Kiwi Dollar Weakens as Inflation Stabilises

Elsewhere, the Kiwi fell to a two-month vs the US dollar as inflation cooled to 2.2%, within the RBNZ’s 1-3% for the first time since early 2021.

Japanese Yen Faces Pressure Amid Weak Machinery Orders  

The yen struggled a bit overnight after pushing higher on Tuesday, with data showing Japan's core machinery orders fell 1.9% in August from the previous month.

Oil Prices Stabilise While Gold Approaches Record Highs  

Oil is steady, with spot Brent at $74 and spot WTI at $70 this morning, after recovering some ground off yesterday’s two-week lows. Gold crept higher, re-approaching its record peak, with rates lower post the UK CPI.

Can see the little pop for gold on the UK inflation print.