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The pound and U.K. government bond yields fell on Wednesday, while the London stock market jumped, as traders boosted bets that the Bank of England will make a bigger batch of interest cuts in 2024, after inflation hit its slowest pace in more than two years.
The Office for National Statistics said the consumer prices index rose 3.9% in the year to November, sharply down from the previous month’s 4.6% and lower than economists forecast for a 4.3% reading.
Month-on-month CPI fell 0.2%, against expectations for a 0.2% rise following October’s unchanged level.
U.K. annual headline inflation has now fallen from a multi-decade peak of 11.1% in October 2022, to its lowest level since September 2021. Though it remains nearly twice the Bank of England’s 2% target, the pace of the decline prompted traders to bet the BOE will feel able to cut borrowing costs aggressively as it looks to support a stuttering economy.
Markets now indicate 138 basis points of rate cuts will come in 2024 — or about five 25 basis point cuts — up from 117 basis points before the latest inflation data were released, according to Reuters.
Economists at Goldman Sachs, led by Sven Jari Stehn, said services, core, and headline inflation surprised consensus and Bank of England expectations meaningfully to the downside.
“Taken together with the sharp slowing in sequential wage growth observed last week, recent data on key indicators of inflation persistence have surprised the BOE’s projections meaningfully to the downside, and we pull forward our first BOE cut to May (vs. June previously),” the Goldman Sachs team said in a note.
The perceived shift in monetary policy trajectory encouraged buying of U.K. government bonds, with the 2-year gilt yield
BX:TMBMKGB-02Y
dropping 15 basis points to 4.134%, the lowest since May. European benchmark rates also fell, with the 2-year German bond yield
BX:TMBMKDE-02Y
down 6.6 basis points to 2.456%, the lowest since March.
The pound
GBPUSD,
fell 0.6% to $1.2650, while stocks jumped at the prospect of lower borrowing costs, with the FTSE 100
UK:UKX
adding 0.6% as interest rate sensitive sectors like homebuilders, real estate and utilities had a good day.
“Considerably lower than expected inflation figures have put a rocket under the U.K. stock market as investors take the view the Bank of England will have no choice but to cut rates soon,” says Russ Mould, investment director at AJ Bell.
“The Christmas party in markets that Jay Powell’s dovish messaging on Fed rate prospects kicked off is in full swing in the U.K. today,” said Sandra Horsfield, economist at Investec.
The mood across the rest of Europe was less chipper, with the DAX
DX:DAX
in Germany down 0.1% and the CAC 40
FR:PX1
in France up 0.1%.
A notable poor performer was Argenx
ARGX,
Shares in the Dutch, but Belgium-listed, biotech group plunged by a third at one point after it said a late-stage trial did not meet primary or secondary endpoints.
