Morning Update. UK Inflation: Headline Down, Core Up.

UK Inflation: Headline Down, Core Up.

This morning, markets are reacting to headline inflation figures in the UK coming in at 9.9%, some 0.3 percentage points below expectations and 0.2 percentage points below last month’s print. While headline inflation was up, core inflation – which excludes energy and food – came in at 6.3%, indicating an uptick from last month’s level of 6.2% and subsequently demonstrating the extent to which inflationary pressures from energy has percolated through the economy. On a monthly basis, CPI rose by 0.5% in August, compared with a rise of 0.7% in August 2021.

Food and non-alcoholic drinks had the largest upward contribution to the annualised print, while rising prices related to transport, recreation and cultural activities were the main upward contributor to the month-on-month pressures. Meanwhile, the falling price at the pumps had the largest downward pressure on inflation as global oil prices fell over the course of August.?

Money markets have now fully priced in a 50bpt hike with around a 70% chance of a 75bpt rate hike at the BoE’s next interest rate decision on Thursday 22nd.

US Inflation Rises

Yesterday afternoon, US inflation came in 0.2 percentage points above expectation at 8.3% - though it was slightly down from last month’s print of 8.5%. However, the primary market reaction came from the news that core inflation had come in at 6.3% which was not merely 0.3 percentage points above expectation but was crucially higher than last months print, indicative of the fact that inflationary pressures persist and are increasing amongst many aspects of the US economy.

While going into the print, money markets had priced in around a ? chance of a 75-basis point rate hike at the Fed’s meeting in early November, such a hike has now pretty well been priced into the market, driving up further dollar strength. Moreover, as markets weigh in on the Fed’s rate hike next week, money markets are pricing in around at 30% change of a 100-basis point hike. The news sent the US 10-year Treasury up by some 0.2 percentage points to 3.75 percent. Subsequently, the DXY close at 109.8 pts up from the session’s open at 108.2 pts (as it reached highs of just over 110).?

Further Pressure on Global Equities

Yesterday’s CPI print saw further downward pressure on equities around the world. For example, the S&P 500 closed down 4.3 per cent, which indicated its worst performance since June 2020 as the Nasdaq closed down over 5%. This came as investors weighed in on the Fed raising rates more aggressively than previous expected.?

During this morning’s session In Europe, the Stoxx 600 has sunk 0.4% extending losses of yesterday as the FTSE 100 trades below 7350 having started yesterday morning at 7500 pts. Asian markets have also suffered losses with Hong Kong’s Hang Seng index losing 2.4% and Japan’s Topix slumping 2%.

Energy Update:

In the oil markets, WTI crude futures closed below $86dpb yesterday having fallen from above $89dpb. This comes as fears mount over the prospect of global economic downturn and investors speculate over a future slump in demand, though OPEC indicated that there would still be a growth in demand for oil over the course of 2022. Prospects over a resumption of the 2015 Iranian nuclear deal also appear to have decreased, adding upward pressure on oil prices. Concerning gas prices, TTF futures are currently trading at around €210 per megawatt hour – down around 4.7% on the month but up around 200% on the year.