UK inflation fall sparks Santa rally: Rate lower hopes increase shares

Shares rose and bond yields fell as buyers cheered a sharper-than- anticipated fall in inflation.

The ‘Santa rally’ was pushed by intensifying hypothesis that, with inflation in retreat, the Bank of England might lower rates of interest as many as six instances in 2024 to lower than 4 per cent by this time subsequent 12 months.

In shares, the FTSE 100 hit its highest degree since May earlier than giving up some beneficial properties, but it surely nonetheless completed 77.65 factors, or 1 per cent, greater at 7715.68.

And yields on UK ten-year bonds, which go down as their costs rise, fell shut to three.5 per cent – the bottom since April.

Markets globally have been in exuberant temper for the reason that US Federal Reserve final week signalled a sequence of charge cuts for 2024 in what was seen as a major ‘pivot’.

Santa rally: The FTSE 100 hit its highest degree since May earlier than giving up some beneficial properties, but it surely nonetheless completed 77.65 factors, or 1%, greater at 7715.68

Yesterday, Wall Street shares took a breather after hitting document highs.

But bond markets within the US and Europe adopted Britain’s rally. US ten-year Treasury yields hit a five-month low and Germany’s ten-year bond yields fell beneath 2 per cent for the primary time since March.

It got here because the Office for National Statistics stated that the UK’s inflation fell to three.9 per cent in November, which was down from 4.6 per cent in October.

That was the bottom degree since September 2021 and properly beneath the 4.4 per cent anticipated by economists. The decline was pushed by falling gas costs in addition to slowing meals inflation.

Markets now see a 50/50 probability of the Bank of England slicing rates of interest as early as March subsequent 12 months, from 5.25 per cent to five per cent, and a near-80 per cent probability of a lower by May.

Traders are betting on a succession of charge cuts, with a 50 per cent probability that they could possibly be as little as 3.75 per cent by this time subsequent 12 months.

That put stress on the pound, which fell by a cent to only over $1.26 versus the greenback earlier than making up some floor. 

Neil Wilson, chief market analyst at Finalto, stated the inflation figures had been ‘a Christmas gift for the chancellor, the Bank of England and the economy’.

On the inventory market, retailers Marks & Spencer, Ocado and B&Q proprietor Kingfisher had been up greater than 2 per cent.

Bond buyers, in the meantime, are betting on the UK having to chop charges because the financial outlook darkens.

They embrace bond dealer Pimco, which has stated Britain risked a ‘hard landing’.

Luke Hickmore, funding director at Abrdn, stated the inflation knowledge stated rather a lot about how weak the UK financial system is.

He believed charges can be lower within the UK earlier than the US, the place inflation is 3.1 per cent however not seeing such sharp declines.

Pantheon Macroeconomics consultants suppose inflation in Britain will fall quicker than predicted by the Bank of England, hitting the two per cent goal by May.

Investec economist Sandra Horsfield instructed that the Bank’s insistence that rates of interest must keep greater for longer would quickly change.

‘The message until now from the monetary policy committee (MPC) had been to push back against ever more exuberant market expectations of rate cuts,’ she stated.

‘With the facts changing before the MPC’s eyes, some softening within the rhetoric appears nearly assured in 2024 – even when the MPC is not going to wish to see charge lower expectations going too far and loosening monetary situations as far as to threaten progress on inflation.’