Morning Update

This morning’s data release from the ONS suggests that UK inflation has fallen greater-than-expected. Headline inflation fell 210bps to 4.6% on an annualised basis over September, missing market projections of a 4.8% print, and easing to its lowest level since October 2021. Ofgem’s recent reduction to the energy price cap is also understood to have heavily fed into the easing of the index. On a month-on-month basis, CPI came in at 0% over October, compared with the previous print of 0.5% in September and the 2% level recorded in October 2022. Here, the ONS cited that “the largest downward contribution to the monthly change in both CPIH and CPI annual rates came from housing and household services, where the annual rate for CPI was the lowest since records began in January 1950.”

The UK’s core inflation index also eased from 6.1% (annualised) to 5.7%, again softer-than-expected and marking the lowest level in over a year-and-a-half.

Notwithstanding how inflation remains double the Bank of England’s target, this morning’s inflation print will be met with some level of comfort from Threadneedle Steet and the Treasury, particularly given that the Chancellor will be delivering his Autumn Statement next week.

This morning’s inflation print has affirmed the view market’s that the BoE are unlikely to raise rates further. Earlier this month, the Bank of England met market expectations in holding their benchmark policy rate at 5.25%, marking the second consecutive hold.

Yesterday saw pressure on the US dollar following a softer-than-expected US inflation print which resulted in money markets downwardly revising rate expectations from the Federal Reserve. While on Monday, money markets were implying a 14% chance of a 25bps hike from the Fed on 13th December, this was subsequently revised lower to a mere 4% chance by the end of yesterday’s session. This came as CPI eased to 3.2% on an annualised basis, marginally lower than the market expectation of 3.3%. In fact, this represented a fall of 50bps from September’s print and marked the lowest headline inflation since July. On a monthly basis, the US Consumer Price Index eased to 0% over October, having fallen 40bps from last month’s print and missing expectations of 0.1%.

When looking at core prices – which strips away the often-volatile energy and food items – the index eased 10bps to 4% on a yearly basis. This was similarly softer-than-expected and brings the index down to its lowest level in over two-year. While the sight of a fall in core prices will be met with some comfort across the Fed and US Treasury Department, inflationary pressures in the housing index continue to cause headwinds in the former’s target of brining inflation down to their 2% target. Indeed, the shelter element accounted for over 70% of the total increase in the index, as the US housing market adjusts to monetary conditions being at their tightest level in decades. Hence, when looking at the annualised ‘supercore’ consumer price index (which strips out housing as well as food and energy prices), the index eased to lowest level since December 2021.

With markets downwardly revising rate expectations and gaining greater credence to the notion that the Fed may have reached their terminal rate, yields on the US 10-year bond fell by over 15bps during yesterday’s session to around 4.5%, marking the lowest level in seven weeks. Similarly, the yield on the US 2-year, which is more sensitive to near term rate expectations, has fallen some 20bps since the print. Given yesterday’s inflation print, attention now turns to the FOMC rate decision on 13th December.

At 1330 this afternoon, markets will turn their attention to the US where retail sales and PPI figures will be released. The former is projected to come in at -0.3% on a month-on-month basis, marking a considerable fall from last month’s print of 0.7%. As we looked at previously, research conducted by the Federal Reserve Bank of San Francisco indicates that US households have eroded more than 90% of the excess savings they accrued over the pandemic in 2020 and 2021. Hence, this may be a sign that the US retail sector faces headwinds as consumer adjust their spending habits.Meanwhile, US PPI is projected to come in at 2.7% on an annualised basis.