- UK inflation dropped from 6.7% to 4.6% in October, spurred by a fall in energy prices.
- The consumer prices index sits at a two-year low, with October’s figure marking the steepest single month decline in 31 years.
- US consumer prices, meanwhile, increased at 3.2% last month versus 3.7% in September, according to new data.
Markets were buoyed by inflation news and the prospect of lower rates, with bond and equity markets rallying on Wednesday. In the UK, the week’s figures offered some much-needed respite to the Bank of England (BoE) amid its battle to tame inflation and revealed a considerable drop in energy prices year-on-year and an easing of services sector price growth.
While this latest data suggests a rosier outlook for inflation on both sides of the Atlantic, many commentators remain cautious.
The steep drop in the UK Consumer Prices Index (CPI) fuelled speculation that the BoE could potentially cut rates in 2024.
“This new data opens the door to potential earlier rate cuts next year, or at the very least supports pricing for this in the UK front-end market. Services CPI, which the bank watches closely, is now even lower than their expectation,” notes Orla Garvey, Senior Portfolio Manager for Fixed Income at Federated Hermes Limited.
But the question still lingers as to whether the UK has a more persistent inflation problem, she warns.
“For that to be resolved we need to see core inflation moving lower and the labour market continuing to loosen. In our view, there is more to come.”
Figure 1: UK and US inflation data fell more than forecast in October
The question still lingers as to whether the UK has a more persistent inflation problem.
How did markets react?
Global stocks advanced on the back of the October inflation data as investors took it as a sign that the US Federal Reserve and the BoE may have finally reached the end of their hiking cycles.
The MSCI World Equities Index rose on Tuesday as the inflation data was announced, while bond markets also rallied (see the story below). The S&P 500 is up 3.3% over the last five days.
In Asia, encouraging economic data and lower-than-anticipated US inflation also boosted stocks. Retail sales in China and a pick up in the manufacturing sector indicated the struggling economy could be gathering pace.
Figure 2: Markets respond optimistically to inflation data
Stephen Auth, Chief Investment Officer for Equities at Federated Hermes, expects
markets to grind higher into year-end and through 2024 and has positioned his portfolio accordingly. “We remain tilted towards value stocks and are underweight growth stocks, and have been using big pullbacks to add to equity exposure. We shifted to neutral in cash during the October pullback, ending nearly two years of overweight exposure to an easy-to-deploy asset class that also offered value in this higher-rate, challenging environment.”
“We think forward returns on the overall market likely will be in the single digits, making stock picking more critical to stock returns,” he explains.