Morning markets – Multiple rate cuts diminishing as markets digest inflation data further

by | Apr 18, 2024

inflation

As the markets digest the latest inflation news, the consequences for interest rate cut expectations have been leading to many analysts reassessing the trajectory for the next few months. Could it still be a June cut? Or will it be the Autumn? It clearly all depends on inflation and commenting on the latest news and views, Lindsay James, investment strategist at Quilter Investors, said: 

“Following yesterday’s CPI data report in the UK, which revealed that inflation had fallen to 3.2%, albeit slightly higher than the market’s 3.1% expectation, market sentiment shifted. Investors now fully price in only one rate cut before November, and the likelihood of a second cut this year has diminished from 70% prior to the data release to approximately 30%.

“Whilst it was a fairly minor ‘miss’, the focus remains on persistent high inflation within the services economy, which only eased by a tenth of a percent to 6%. The largest cost headwind for service providers continues to be wages, and recent data showing 5.6% annual growth in total earnings has done little to reassure investors that inflation in the services sector will soon subside.

“Despite the potential positive impact of falling energy costs, which should help bring CPI closer to 2% later in Q2, structural imbalances in the labour market pose an ongoing challenge for the UK economy. Governor Bailey’s reassuring message that inflation is “pretty much on track” with the bank’s expectations suggesting that the stage may soon be set for the Bank of England and the ECB to consider rate cuts ahead of the Federal Reserve.

“While this development could have implications for sterling, UK investors allocating funds to overseas assets would generally benefit from a decline in sterling relative to international currencies. However, travellers to the US may find their holidays becoming even more expensive due to the currency exchange rate.”

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