UK inflation falls by more than expected in November

Inflation in the UK slowed more than expected in November. CPI fell -0.2% m/m (against a forecast for 0.1% gain) and the annual rate declined to 3.9% y/y from 4.6% in October. Lower fuel prices were a key driver of disinflation in November, with the transport component of the CPI declining -1.7% m/m. However even excluding fuel and food, core inflation fell sharply to 5.1% y/y from 5.7% in October, well below the median forecast of 5.6% y/y. While the better-than-expected inflation data should provide some comfort to the Bank of England, policymakers will want to see further slowing in wage growth and more data showing that inflation is on track to reach 2% next year before they start to lower rates. The market is now pricing a 50% probability of a first rate cut by the Bank of England in March 2024, up from 20% before yesterday’s inflation print.

The Conference Board's Consumer Confidence Index rose by more than forecast to 110.7 in December from 101.0 in November, reaching a five-month high. Both the current situation and the expectations components improved reflecting a still strong labour market and lower fuel prices. The recent rally in stocks likely also contributed to improved consumer sentiment. Separately, US existing home sales rose 0.8% m/m in November, also better than the market had expected, after declining -4.1% m/m in October.

Bank deposits in the UAE banking system grew 1.4% m/m and 11.4% y/y in October, up from 10.7% y/y in September. Gross loan growth slowed to 5.1% y/y in October from 5.8% y/y the prior month. Loan growth to the public sector has accelerated sharply this year to 9.6% y/y in October, exceeding the pace of private sector loan growth which slowed to 4.8% y/y in the same month.

Today’s Economic Data and Events

17:30 US Q3 GDP (third reading) forecast 5.2% y/y

19:00 US leading index (Nov) forecast -0.5%

Fixed Income

• Better than expected inflation data in the UK saw 10y gilts rally sharply as the market repriced expectations for the Bank of England’s monetary policy easing next year. The 10y gilt yield fell -12.5bp to 3.5%, the lowest level since April.
• Yields across the US treasury curve also fell, with the 2y yield down -9bp to 4.33% and the 10y yield down -8bp to 3.85%. However the 20y Treasury auction saw weak demand, with the 20y yield trading slightly higher after the auction.

FX

• GBP weakened -0.4% against the dollar yesterday as the market brought forward expectations of rate cuts by the bank of England after a positive surprise on inflation data. EUR, JPY and CHF all strengthened against the USD however, as did the major commodity currencies.

Equities

• There was some profit taking in US equity markets, despite the rally in bonds yesterday. The S&P500 and Nasdaq Composite both closed down -1.5% on the day, while the Dow Jones Industrial Average fell -1.3% after reaching a record high earlier this week.
• The UK’s FTSE100 rallied on improved sentiment and lower gilt yields, closing up 1%, while European indices were mixed with little change from Tuesday.
• In the region, the DFMGI closed up 0.4% while ADXGI and Tadawul both declined slightly.

Commodities

• Crude oil prices rallied for the third consecutive day on Wednesday with WTI gaining 1.1% to USD 74.22/b while Brent rose 0.6% to USD 79.7/b. Gains were pared after the EIA report showed a crude stock build of almost 3mn barrels in the US last week, partly due to a rise in US oil production to 13.3mn b/d – a new high.