Market Commentary: Week to 20 February 2024

Market News

UK inflation data released last week provided a surprise as headline inflation remained steady at 4% year-on-year, defying expectations for a slight increase. The core Consumer Price Index ("CPI") was also below forecast at 5.1%. Monthly CPI figures declined 0.6%, contrasting with the anticipated 0.3% drop. Despite services inflation persisting at 6.5%, slightly below projections, economists are optimistic, forecasting a dip in inflation to 3.4% in February and a return below the Bank of England's ("BOE") 2% target by April.

January's official labour market data revealed resilience in the UK job market. The claimant count increased by 14,100, slightly below the consensus, and the unemployment rate stood at 3.8%. Payrolled employees rose by 31,000 in December, with an additional 48,000 in January. Average earnings including bonuses declined to 5.8%;excluding bonuses it reached 6.2%. These figures reflect a more robust labour market than anticipated.

The latest UK data triggered notable volatility in expectations regarding BOE rate cuts. After the inflation update, markets shifted towards anticipating at least three rate cuts by year-end, impacting gilt yields and pushing sterling below $1.2550. The labour market's resilience and US inflation figures had temporarily tempered rate cut expectations to 0.6% this year. However, the UK inflation update swung sentiment back. Money markets are now pricing for BOE easing which now aligns with pre-labour market data, with around 0.7% of cuts expected in 2024.

A City AM survey found that 43% of economists now foresee the BOE initiating rate cuts in May. The market expects a total of two rate cuts in the second half of the year. However, BOE Governor, Andrew Bailey, continued to play down rate cut speculation during his recent appearance before the House of Lords’ Economic Affairs Committee. While acknowledging weaker-than-expected January inflation, Bailey emphasised the need for more evidence before considering rate adjustments.

Official figures reported by The Telegraph highlight that Britain is experiencing its longest period of falling or stagnant living standards since records began in 1955. Output per person sharply declined at the end of last year, implying that the economy has failed to grow since early 2022 after accounting for population growth. This underscores the depth of the downturn in living standards, even as the nation grapples with the technical recession.

Savills' analysis indicates a ￡27 billion drop in the value of the UK housing stock in 2023, marking the first annual fall since 2012. High mortgage costs and financial pressures have impacted the overall value, emphasising the challenges faced by the housing market.

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