UK Rates Markets Price in Fewer Cuts on Inflation Print

Central Banks Swerving? 

A wee bit of a central banker mess this week. Too much Davos maybe. And too much inflation – it’s picking up again – non-linear, lumpy disinflation was always going to be the story of the first part of 2024. ECB hawks talk up rates staying where they are, then Lagarde says likely to cut in the summer. Fed governor Waller says no need to move as quickly on rates as in the past, but can cut this year as long as inflation doesn’t rebound. All that loose talk in Dec is priming the economy to do just that. 

And now Bank of England faces inflation ticking up…the dreaded wage price spiral is here. CPI rose to 4.0% Or is it just the Red Sea mess? Odds of a May cut have fallen from around 84% yesterday to 58% this morning after the print. This is bound to make the BoE extra cautious over timing its rate cuts. It could delay the first cut and slow down the pace of cuts this year – but it’s only one data print. Only one but nevertheless one that speaks to the non-linear disinflation we have anticipated. 

Rate Cuts, Cut 

 GS: “.. We have not made any changes to our baseline forecast that the FOMC will deliver a series of three consecutive cuts in March, May, and June before slowing to a quarterly pace .. However, we see Waller’s comments as increasing the risk that the first cut could come somewhat later or that the FOMC might prefer to cut once per quarter from the outset.” 

So, markets are generally speaking trimming expectations for rate cuts this year – as anticipated – which is pressing on risk assets. This fits with our characterisation of Q1 being a time of great uncertainty over rates and a likely downside repricing for risk after a Goldilocks run up during the last two months of 2023. 

Turbulence on the Soft Landing 

The Atlanta Fed is out with a paper that one could read as saying that they’re going to cut reasonably aggressively (accepting higher inflation as the danger). “The notion that the last mile of disinflation is more arduous than the previous miles does not receive compelling support”, it says. Mmm… 

Sterling Shines 

Very solid bounce for the pound on the inflation data has poured extra pressure on the FTSE 100, whilst lower crude prices also had an impact after some soft China data. GBPUSD rallied handsomely off its 50-day line at 1.260 on the inflation print however the bias remains bearish after slicing below the 21-day EMA in the previous session on broad dollar strength. Meanwhile the euro is a tad softer against the dollar. 

US Equity Struggling 

The FTSE 100 fell 1.3% to its lowest since early December, whilst the DAX shipped almost 1% in early trade. Wall Street closed lower on Tuesday with Boeing weighing heavily on the DJIA, and Morgan Stanley shedding 4% as costs rose at its wealth management division and it had to squirrel away more money for the FDIC. GS rose a touch on a beat. 78% of the 30% of S&P 500 companies that have reported have beaten expectations, which had been beaten down in recent weeks to lower the bar. As is often the case when stocks struggle, gold is ticking up in yields and USD at its best in a month pressuring the 50-day line and trend support.