Stocks rose and bond yields fell as investors cheered a sharper-than-expected drop in inflation.
The ‘Santa Rally’ was triggered by growing speculation that the Bank of England could cut interest rates up to six times in 2024, bringing them below 4% by this time next year, as inflation recedes. .
On the stock market, the FTSE 100 Index gave up some gains after hitting its highest since May, but still ended up 77.65 points (1%) at 7715.68.
The yield on UK 10-year bonds, which has been falling as prices rise, fell to nearly 3.5%, the lowest level since April.
Global markets have been in a frenzied mood since the US Federal Reserve last week signaled a series of interest rate cuts ahead of 2024, seen as a key “turning point.”
Yesterday, Wall Street stocks took a breather after hitting record highs.
However, US and European bond markets followed the UK’s gains. The yield on the US 10-year bond fell to its lowest level in five months, and the yield on Germany’s 10-year bond fell below 2% for the first time since March.
This comes after the Office for National Statistics announced that the UK’s inflation rate fell to 3.9% in November from 4.6% in October.
This was the lowest level since September 2021 and was well below the 4.4% expected by economists. Lower fuel prices and slower food inflation contributed to the decline.
The market currently believes that there is a 50-50 chance that the Bank of England will cut interest rates as early as March next year, from 5.25% to 5%, and that there is a nearly 80% chance that the Bank of England will cut interest rates by May. .
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Traders are betting on a series of rate cuts, with a 50% chance of cuts to 3.75% by this time next year.
This put pressure on the pound, which fell 1 cent to just over $1.26 against the dollar before regaining some ground.
Neil Wilson, chief market analyst at Finalt, said the inflation figures were a “Christmas present to the chancellor, the Bank of England and the economy”.
On the stock market, retailers Marks & Spencer, Ocado and B&Q owner Kingfisher rose more than 2%.
Meanwhile, bond investors are betting that Britain will have to cut interest rates as the economic outlook darkens.
They include bond trader Pimco, which said Britain was at risk of a “hard landing”.
Luke Hickmore, investment director at Abdon, said the inflation figures said a lot about how weak the UK economy was.
He believed interest rates would be cut in the UK before the US, where inflation is 3.1% but is no longer falling as sharply.
Pantheon Macroeconomics experts say UK inflation is expected to fall faster than the Bank of England expected, reaching its 2% target by May.
Sandra Horsfield, an economist at Investec, suggested the central bank’s insistence that interest rates need to remain high for a long time could soon change.
“The message from the Monetary Policy Committee (MPC) so far has been to push back against ever-increasing market expectations for rate cuts,” he said.
“As the facts change before the MPC’s eyes, there is some softening in the rhetoric in 2024, even if the MPC does not want monetary conditions to be so accommodative that expectations of rate cuts go too far and threaten the development of inflation. That seems almost certain.”
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