I missed the UK data but Justin was all over it:
The likelihood of a Bank of England rate cut in December has increased, according to analysis from Aberdeen, after new data showed UK inflation unexpectedly failed to rise.
In a note to clients, the asset manager called the flat inflation reading a “positive surprise for the Bank of England and markets,” as a pick-up had been widely anticipated.
Aberdeen cautioned that some “technical factors around airline prices” may have contributed to the softer-than-expected number. However, the firm stressed that the report is consistent with a more fundamental trend of cooling price pressures.
“More fundamentally,” the note stated, “last week’s labour market report also showed that wage growth is moderating.”
On balance, Aberdeen’s view is that the “UK’s inflation problem looks slightly less bad now than it did a few weeks ago.”
While the firm believes a rate cut in November “may still prove to be too soon,” the positive data has firmed up the outlook for easing. “The prospect of a December rate cut has increased,” Aberdeen concluded, adding that it “still expect[s] significant easing over the next year.”
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The immediate market impact of this data and analysis is a bullish repricing of UK assets.
- UK government bonds (gilts) are likely to rally, pushing yields lower as investors increase their bets on a December rate cut.
- Conversely, Sterling (GBP) will likely face downward pressure, as the prospect of earlier easing reduces its appeal.
- UK equities, especially rate-sensitive stocks, could gain support from the combined relief of cooling inflation and the prospect of lower borrowing costs.
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Aberdeen Group is a global investment company and asset manager
