Market report: Bets on interest rate cuts rise as UK headline inflation falls sharply
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “After years of runaway price rises, inflation falling below 2% will come as huge relief to consumer and companies, lifting expectations for further two interest rate cuts this year. The last time inflation was below 2% was in April 2021 as the country had just emerged from the third lockdown and strict social distancing measures were in place, squeezing demand.
The numbers demonstrate that there was more caution than expected when it came to spending in September, with travellers a lot more reticent to shell out for expensive air fares. There was a notable dip in ticket prices compared to September 2023, after what appears to be a last hurrah of spending in August, when prices were a lot higher than a year ago. This may be a symptom of increased nervousness as the UK Budget looms. Price cuts at the petrol pumps have also, as expected driven inflation lower, on the back of a drop in the oil price during the month. Inflation is now lower than forecast by the Bank of England, but there are still some expectations it could pop up again in the months to come.
However, it does seem as though the fight against insidious price rises has been won, and combined with slowing wage growth, financial markets have piled on the bets for a rate cut in November with the chances now being put at more than 91%.
The FTSE 100 has eked out a positive start, as the era of super-hot prices has turned into a more chilled zone. Investors are shaking off some nervousness which saw another volatile session of trading in Asia, amid a wait for fresh detail on further stimulus for China’s economy. Stocks on Wall Street are set to stabilise, having tracked lower. Sentiment around chip stocks soured amid speculation that further export restrictions on semi-conductors could be on the way, and weaker than expected outlook from chip-equipment maker ASML.
Investors are assessing fresh reports of an even deeper fiscal black hole, which the UK government appears intent on filling through tax rises. The gap chancellor Rachel Reeves wants to close in the public finances is now reported to be closer to £40 billion. The Treasury’s fishing net to scoop in more revenues is now being cast wider, and with two weeks to go until Budget Day, speculation over the extent to which employers will be hit with tax rises, via national insurance contributions, is set to increase to fever pitch. There is a chance that some may pass on the higher costs of taking on new staff, in the form of higher prices, a risk which will be closely monitored by Bank of England policymakers. However, for now given how low inflation has fallen, this potential concern is being shrugged off. Bond investors seem a bit more sanguine about any changes to government borrowing rules, with gilt yields easing off, helped by lower interest rate expectations.
Crude prices have eked out minor gains, following sharp falls as supply fears linked to the Middle East crisis dissipate a little. Brent Crude is hovering around $74 a barrel after Israel signalled it was likely to hit Iranian military targets rather than its oil facilities. There’s also a weaker outlook in terms of demand, with China’s slowdown playing on minds and forecasts from OPEC and the IEA for lower appetite for crude around the world”.
