The FTSE 100 surged in early trading on Wednesday as the latest inflation figures showed consumer prices had risen less than expected in the last 12 months. Headline CPI came in at 3.9% year-over-year in November, the lowest level in two years. Analysts had been expecting the figure to drop to 4.3% from 4.6%. Core inflation also dropped more than expected to 5.1% from 5.7%.
The softer data underpinned expectations for the Bank of England to start cutting rates sometime next year. Before the data and the FOMC’s surprise dovish tilt last week, markets were pricing in the first cut from the BoE sometime in the third quarter of 2024. As of Wednesday morning, the first full 25bps cut is priced in for May, but there are 13bps of easing priced in by March. By year-end, markets anticipate 134bps of easing, which would entail five 25bps cuts in 2024.
This seems to contradict the messaging that came from the BoE in their meeting last week. The central bank failed to acknowledge rate cuts, going as far as to reiterate that further rate rises could be possible if needed. Markets failed to believe this, and the Federal Reserve is mostly to blame for that. Their unexpected dovish tilt opened the door for other central banks to welcome talk about easing, but neither the BoE nor the ECB took the bait. Regardless, markets see the Fed’s change in position as the turning point in monetary policy across central banks in developed economies, which means they expect the BoE to follow suit sooner or later.
The BoE’s reluctance to show a dovish inclination at their meeting on Thursday last week weighed on UK stocks, especially those most sensitive to rates. The FTSE 100 shed over 1% as the central bank remained firm in its hawkish stance, but Wednesday’s softer CPI data has pushed the index to a seven-month high.
The softer data underpinned expectations for the Bank of England to start cutting rates sometime next year. Before the data and the FOMC’s surprise dovish tilt last week, markets were pricing in the first cut from the BoE sometime in the third quarter of 2024. As of Wednesday morning, the first full 25bps cut is priced in for May, but there are 13bps of easing priced in by March. By year-end, markets anticipate 134bps of easing, which would entail five 25bps cuts in 2024.
This seems to contradict the messaging that came from the BoE in their meeting last week. The central bank failed to acknowledge rate cuts, going as far as to reiterate that further rate rises could be possible if needed. Markets failed to believe this, and the Federal Reserve is mostly to blame for that. Their unexpected dovish tilt opened the door for other central banks to welcome talk about easing, but neither the BoE nor the ECB took the bait. Regardless, markets see the Fed’s change in position as the turning point in monetary policy across central banks in developed economies, which means they expect the BoE to follow suit sooner or later.
The BoE’s reluctance to show a dovish inclination at their meeting on Thursday last week weighed on UK stocks, especially those most sensitive to rates. The FTSE 100 shed over 1% as the central bank remained firm in its hawkish stance, but Wednesday’s softer CPI data has pushed the index to a seven-month high.