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Inflation and Rebellion on the Rise

UK inflation moves in the opposite direction to expectations, pushback on market theory from members of the Fed and ECB, Rishi sees resignations, and looking to todays data.

It’s a UK story this morning, with inflation surprising markets to the upside and Rishi attempting to face down a rebellion. For the time being the Pound remains unmoved, as these are possibly equal and opposite forces…

Inflation in December ticked up by 0.1% to 4%, whilst the core number – excluding food and fuel – rose from 5.1% to 5.2%. The move is minor, but is in the opposite direction to expectations, and is the first time that prices have risen month on month since February last year.

December might yet prove to be an outlier, as one of the main contributing factors was alcohol and obviously these sales increase significantly in December and then fall sharply in January. Counter to that though is the Ofgem price cap that gets lifted again this month, which will be slightly inflationary – as well as the Middle East issues potentially feeding into energy prices.

Staying with an inflation and interest rates theme; members of both the Fed and the ECB pushed back on the market theory that rates will fall faster and sooner than central banks are forecasting.

Fed Governor Chris Waller said yesterday “with economic activity and labour markets in good shape and inflation coming down gradually to 2 percent, I see no reason to move as quickly or cut as rapidly as in the past.”

Separately the ECB Governing Council member Gedimanas Simkus said of European monetary policy “If we don’t see any surprises that would change the data and the thinking, I’m positive about rate cuts this year…I’m far less optimistic than markets about rate cuts in March or April”.

We’ll be looking for whether the market realigns its expectations over the coming sessions over the pace of cuts, which will have an impact all the way down the chain from government borrowing costs through to mortgage rates, which are all being priced off expectations of future cuts that the market has already factored in.

Back to the UK

Rishi Sunak saw two deputy chairs of the Conservative party resign last night and a rebellion of 60 of his own MPs over the Rwanda bill, the biggest revolt that he’s faced in his 15 months in the top spot.

Rishi held his nerve and didn’t make any amendments to the bill ahead of today’s Commons vote, but it has cost him a lot of support from the right of his party and we’re not too sure that the left of the party are big fans of the plan anyway!

We’ll find out tonight, when the vote goes to the wider House of Commons, where 32 votes against the bill from his party would lead to defeat, though tory whips are confident they’ll get it through.

As a sweetener Mr Sunak has reportedly offered to make available 150 judges for ‘round the clock’ appeal hearings on Rwanda deportations, which seemed fanciful given the backlog in the wider justice system and how this would exacerbate that, let alone that you can summon such resource to dozens of immigration cases at the cost of serious crimes being heard and justice served.

The Judicial office has pre-emptively slapped this down anyway, saying “The deployment of judges is a matter for the judiciary. In line with new provisions in the Illegal Migration Act, the judiciary have identified a number of first-tier tribunal judges who may be asked to sit in the upper tribunal to deal with any increase in appeals that arise from the Act. The decision to do so will be taken by the senior president of tribunals when the provisions in the Act commence, taking into account the interests of justice and the need for all matters before the tribunals to handled quickly and efficiently”.

Looking to today

With UK inflation now behind us, we look to European numbers at 10am, which are expected to stay constant at 2.9%. The afternoon has a busy US calendar with retail sales, industrial production, the Beige Book and a selection of Fed members giving speeches on various subjects – none of them specifically monetary policy, but we wouldn’t be surprised if they manage to weave in the message that ‘markets have got the pace of future rate cuts wrong’.

Have a great day.