UK inflation fell sharply in October and faster than the Bank of England anticipated, further reducing the prospect of any more rate hikes in this tightening cycle.
It was already likely that the BoE was done raising rates but as that was based on the view that inflation would fall to 4.8% last month, that could have changed with a higher reading this morning. Instead, it fell even further to 4/6% so there’s unlikely to be a big swing on the MPC in favour of hiking now, not unless the data performs much worse over the coming months.
It’s not just the headline numbers that are encouraging though. Much like the other data we’re seeing, the most recent monthly figures look extremely promising too, suggesting the pace of disinflation has accelerated recently in a manner consistent with inflation now running much lower than the annual comparisons suggest.
If we continue to see this over the coming months, especially if paired with similar trends in monthly wage growth, that first rate cut from the BoE could come earlier than many expect.
There will obviously be areas of stubbornness in the data, most notably services, but if monthly wage data continues to print at levels consistent with the 2% inflation goal and CPI data too, it’s surely only a matter of time until services fall as well. All things considered, this week’s data from the UK looks incredibly promising.
US retail sales, PPI, and a manufacturing survey in focus
There’s still plenty more to come today, in a week filled with major economic releases from both sides of the pond. US retail sales, PPI inflation and the Empire State manufacturing index are due later and will offer some further insight into the resilience of household demand, price pressures and the manufacturing recession.
Oil prices easing again after running into a brick wall around October lows
Oil prices have bounced back over the last four trading sessions but appeared to run into a brick wall yesterday around $84 in Brent and $80 in WTI. That’s around the October lows in WTI and perhaps a sign that traders have not become less bearish despite promising inflation data and improved prospects for an economic soft landing.
Considering the more than 10% decline we’ve now seen from the September peak, you have to wonder whether Saudi Arabia and Russia will feel compelled to extend their unilateral cuts beyond the end of the year in fear of what will happen if they don’t. OPEC attempted to push back against pessimistic expectations recently but clearly to no avail. While they may not be too concerned about current price levels, the trend will be making them uncomfortable.
Gold moving closer to $2,000 back by better fundamentals
The US inflation data on Tuesday was a big positive for gold, which rallied as the dollar and US yields both fell. That came as markets fully priced out any further rate hikes from the Federal Reserve and the first rate cut by May. It’s hard to argue considering the recent progress and suddenly gold is on an upward trajectory, not far from $2,000, and backed by better fundamentals.