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Morning Update

Expectations on this years rates, tensions rise in the Red Sea, growing death toll following the earthquake in Japan, and what's happening today.

As the arrival of the new year ushers in a sense of looking forward, the Times have published an article which shows that 45% of respondents seeing the Bank of England cutting rates 3 times or more this year. With the BoE’s current benchmark rate being maintained at 5.25% (following three consecutive holds), the majority of respondents however projected that two rate cuts over the course of 2024 would be the most likely outcome.

On the 20 December, the latest set of CPI data indicated that headline inflation had slowed to 3.9% marking its lowest level since September 2021, as core inflation eased to 5.1%, its lowest since January 2022. The UK is not out the woods yet, with for example Moody’s forecasting that the economy will have the greatest rate of inflation in the G7 group next year.

With markets continuing to keep a close eye on inflation, as they attempt to chart the course of the Bank of England’s tightening cycle, this morning has seen the British Retail Consortium’s

shop price index came in unchanged at 4.3%. Some relief however come from food price inflation which eased to 6.7% over December, a fall of 1.1 percentage points from November. This also represented the lowest level in a year and half.

Here, the BRC cited the impact of seasonal offers which helped ease inflationary pressures at the checkout for many shoppers. Commenting on the latest figures, the BRC’s CEO Helen Dickinson said that “Retailers will continue to do all they can to keep prices down in 2024, but there are obstacles on the road ahead. New border checks for EU imports, hundreds of millions more on business rates bills from April. Government should think twice before imposing new costs on retail businesses that would not only hold back vital investment in local communities, but also push up prices for struggling households.”

Geopolitical Tensions Continue to Rise in the Red Sea

Geopolitical tensions in the Red Sea have continued to escalate over the weekend, with Iran sending a warship to the area following the US destroying three boats operated by Houthi rebels. The area of the Red Sea which has dominated headlines in recent days is of global importance given that it is the narrowest point between the Red Sea and the Gulf of Aden. As such, it is estimated some 12% of global shipping passes through this narrow stretch of sea, with pretty well all the traffic heading from or through the Suez Canal.

Over the weekend, the UK’s defence secretary Grant Shapps told The Telegraph that the UK was considering the possibility of conducting “direct action” against Houthi rebels. Here, Shapps indicated that the government “won’t hesitate to take further action to deter threats to freedom of navigation in the Red Sea”. This came after a government spokesperson said that “We call for the Iranian-backed Houthi to cease these illegal attacks and we are working with allies and partners to protect freedom of navigation”.

Death Toll in Japan Rises Following Earthquake

The death toll in Japan has continued to grow following a devastating 7.6 magnitude earthquake off the West Coast of the country on New Year’s Day. The earthquake – which also triggered a series of Tsunami warnings – has destroyed numerous homes in the Ishikawa prefecture with many more buildings being left without power. Japan’s chief cabinet secretary, Yoshimasa Hayashi has also released a statement this morning which said “to the people of Japan, please be on alert that there may be earthquakes for about a week of an intensity scale of up to seven”.

Today’s Data

Following this morning’s release of the BRI’s UK inflation index, markets will be keeping a close eye on the release of Manufacturing PMI data. Here, 0900 will see the release of Eurozone manufacturing PMI data followed by UK and US data at 0930 and 1445, respectively.