Market Report - 20/07/2023
UK inflation drops to 15 month low; Pound and Bond yields tumble
The Office for National Statistics announced yesterday that UK inflation has fallen to a 15-month low. The consumer price index rose by 7.9% in the year to June, new figures from the Office for National Statistics show, down from 8.7% in May. That’s the lowest reading since March 2022, despite it remaining at painfully high levels.
Core CPI, which excludes energy, food, alcohol and tobacco, rose by 6.9% in the 12 months to June 2023, down from 7.1% in May (which was a 30-year high).
Economists had expected core inflation would stick at 7.1%, so this could encourage the Bank of England that inflationary pressures are a little less sticky than feared – although it is worth noting the Bank’s target is to bring headline CPI inflation down to 2%; meaning policymakers could still press on with interest rate rises in the month ahead.
The undershoot in CPI data prompted markets to lower expectations for future Bank of England interest rate hikes, which in turn weighed on UK bond yields and the pound. Early responses from economists have suggested the Bank of England will raise interest rates by a further 25 basis points in August whereas the market consensus was for a 50bp hike – which was largely priced in.
Sterling had dropped sharply, as investors reacted to the news. The pound has rallied through 2023 thus far as UK inflation has proven more resilient than expected and prompted the Bank of England to take a more assertive stance on monetary policy by hiking interest rates and dropping its cautious guidance.
The response to inflation data so far has seen UK bond yields beginning to tumble, which could benefit those looking to remortgage in the months ahead (two-year gilts are used to price the cost of fixed-rate mortgages.) The price of UK government bonds are rallying, driving down the yield on gilts. The yield on a two-year UK bond has dropped to 4.8%, down from over 5% last night – and a 15-year peak of 5.5% earlier this month.
In the equity markets, The FTSE 250 is on track for best day since February. We saw an immediate 3% jump following the release of CPI data yesterday morning. The FTSE 100 rallied at a slightly lower pace of 1.3% to 7,548 a less pronounced jump than the FTSE 250 which more SME’s and is more UK-focused.
The BOE will no longer be expected to hike interest rates as aggressively as previously expected, also offering some respite for those hoping to bring down mortgage payments. So while the near-term outlook for sterling has turned lower as a result of falling rate hike expectations, the longer-term outlook will have likely improved alongside the economic outlook.
In other news, the ONS also announced that rents have soared at fastest rate since 2016. Tenants’ prices have increased at the fastest rate since at least seven years. It was noted that the private rental prices have increased by 5.1% in the 12 months to June, the largest annual percentage change since its data began in January 2016.
Breaking down by each country; In England, private rental prices increased by 5.1% in the 12 months to June, or by 4.9% if you exclude London (where they rose 5.3%). Rent rose by 5.8% per year in Wales, up from 5.0% in May 2023, and the highest annual percentage change at least 2010 (when the Wales data series began).
Private rental prices in Scotland increased by 5.5% in the 12 months to June 2023. The ONS has also reported that average UK house price inflation has slowed, with prices rising by 1.9% in the 12 months to May, down from a 3.2% rise in April.
In Europe, inflation was 5.5% in the year to June, statistics body Eurostat reports, matching its initial estimate, down from 6.1% in May, however, core inflation in the eurozone rose.
Underlying prices, stripping out energy, food, alcohol & tobacco, rose by 5.5% per year last month, up from 5.3% in May, and higher than the initial estimate of 5.4%.
Across the wider European Union, the inflation rate was 6.4% in June. The lowest annual rates were registered in Luxembourg (1.0%), Belgium and Spain (both 1.6%). The highest annual rates were recorded in Hungary (19.9%), Slovakia (11.3%) and Czechia (11.2%).