Market report: Inflation bites while Musk’s mega-merger ambitions fuel SpaceX enthusiasm
Susannah Streeter, chief investment strategist, Wealth Club: ‘The heat is on, with UK inflation turning steamier again. Price growth is accelerating once more, as the economic fallout from the war in Iran continues to seep through the economy. The CPI reading came in higher than expected, rising to 3.5%, and this sobering snapshot for September is expected to be part of a trend of higher inflation through to the start of next year, given how energy prices are staying unrelentingly high. The shockwaves from higher oil and gas prices are still working their way through supply chains, with motorists feeling particular pain at the pumps. While food prices have remained more stable, with companies absorbing rising costs, the worry is these can’t be contained for much longer and will soon be passed on to consumers.
October could deliver another chill for households, with the prospect of more price hikes lurking around the corner. The Bank of England had expected inflation to average 3.75% in the final quarter of this year, before edging towards 4% at the start of 2027. But now it looks more likely it will head even higher and even further away from the bank’s 2% target. It’s clear that the Bank has a battle on its hands to tame prices. There will be particular concern among policymakers about services inflation accelerating from 3.4% to 3.7%, suggesting prices are becoming embedded in the economy. This is also showing up in the core inflation rate, which strips out energy, food, alcohol and tobacco, and rose from 2.6% to 2.8%. Markets are pricing in at least four interest rate hikes between now and the end of the year, with the likelihood of a rate rise in November increasingly. With the fires of inflation burning, Bonfire Night looks set to see borrowers scorched with the first hike of many. However, much will also depend on whether demand will be doused by this wave of rising prices. With job vacancies falling and companies reticent about hiring staff, this could also stop inflation becoming embedded in wages, which may limit future rate hikes.
The government’s predicament with the public finances has just become trickier. September’s £24.5bn of public sector borrowing was higher than both the £23.9bn expected by markets and the OBR’s March forecast of £22.5bn. Borrowing is now £6bn above the OBR’s forecast for the financial year to date, adding to the fiscal fright facing the chancellor. It does make it look more likely that there won’t be many tricks or treats stored in the red box and that the chancellor will opt for a highly cautious Budget, with tougher fiscal choices left lurking until next year.
Right now, there’s little respite around the corner for inflation, given that the war in the Middle East appears even more entrenched. Brent crude, the benchmark, has risen again, staying stubbornly above $110 a barrel. Oil prices have risen by more than 10% this month as Saudi Arabia has been dragged deeper into the conflict following unrelenting attacks by Houthi rebels. Strikes on vessels using the Strait of Hormuz have also intensified. There had been hopes that mediation talks with Iranian officials led by Pakistan would help resolve the situation, but any potential deal still looks as though it’s far on the horizon.
With security of energy supplies becoming such an urgent issue, it’s not surprising that the UK government has approved more drilling in the North Sea. The Jackdaw gas field is expected to help bolster domestic supplies, but it won’t provide an immediate fix for the energy squeeze, with new production still some way off. Jackdaw could eventually supply around 6% of UK North Sea gas production, but wholesale prices remain heavily influenced by international markets.
In the US, investors look set to shrug off inflationary concerns bubbling away amid worryingly high energy prices, and are focusing on a raft of earnings reports, with Elon Musk’s ambitions providing plenty of lift-off.
SpaceX has rocketed higher on a fresh wave of enthusiasm after revenue soared 161% in the third quarter and Musk revealed talks have begun to explore a tie-up with Tesla. This would be a mega-merger if it happened, with both companies enjoying eye-watering valuations and a combined valuation of around $3.5tn.
There is a distinct whiff of inevitability around this potential move. Bringing Tesla into the fold does seem as though it’s always been on the agenda for Musk. He’s already brought his AI operations into SpaceX, and with Tesla’s ambitions in robotics and autonomous driving increasingly overlapping with his wider technology empire, bringing more of his businesses under one roof appears to be part of his plan to dominate the domains of space, AI, satellites and transportation.
Shareholders have to agree, but given the cult-like following Musk enjoys among many investors, as evidenced by his ability to get his eye-watering remuneration deals over the line, there’s a strong possibility he’ll get his way.
There is a clear strategic logic to bringing these businesses together, with the potential to share expertise in AI, chip design, robotics and connectivity. But there are also big questions about how a combined giant would allocate its enormous capital spending commitments, and whether investors would be comfortable owning such a sprawling empire. A deal could give Musk greater freedom to move money and resources between his businesses, but it would also leave shareholders exposed to a much broader range of risks. With valuations already stratospheric, the challenge will be turning that grand vision into returns that justify the price investors are being asked to pay.’