Gilt Yields Rise as Investors Weigh on UK Labour Market

As markets weigh on the Fed’s interest rate decision at 1900 today, all eyes were on US inflation data released yesterday afternoon. With US headline inflation falls 90bps to 4% (against expectations of 4.1%), markets gained greater confidence that the FOMC would opt to skip a rate hike. With policy markers looking at month-on-month core inflation (which excluded volatile indexes such as energy & food) the index remained unchanged at 0.4%, though it slowed to 5.3% on an annualised basis. With inflation showing signs of slowing, all eyes turned now turn to the Fed tonight.

In May, the Fed raised their main policy rate to 5.25% marking the tenth consecutive hike which brought borrowing costs to the greatest level since 2007. The Fed minutes expressed that “several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary”. In other words, with inflation falling in line with expectations, given that several policy markers remain “data dependent”, it is expected that the Fed will vote to ‘skip’ a hike today. Nevertheless, with the minutes stating that “many participants focused on the need to retain optionality after this meeting”, some continue to question whether the Fed may raise again later this year.

UK GDP figures show that the economy expanded 0.2% in April following a 0.3% contraction recorded in March. This indicates that the size of the UK economy is now 0.3% larger than its pre-pandemic level, though many of the UK’s peers surpassed this milestone months ago. Markets reacted positively to the services sector growing 0.3% over April, following a 0.5% contraction over March as output in consumer-facing services rallied 1%. Nevertheless, the ONS noted that “at the sector level, the main contributors to the monthly decrease were seen in private housing repair and maintenance and private housing new work, which decreased 5.7% and 3.0%, respectively.”

Markets have been buoyed on improved growth forecasts for the UK, with the Bank of England now expecting the economy to grow a quarter-of-a-percent in 2023 and three-quarters-of-a-percent in 2024 (against previous expectations of eight consecutive quarters of economic contraction from Q4 2022 to Q4 2024).