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Weekly comment: Positive news on UK inflation

Date: 25 July 2023

4 minute read

Weekly podcast – Market overview

This week’s host, Investment Manager, Harry Gibbon discusses the ups and downs of the past week with Head of Equity Research, Chris Beckett. Among the topics discussed – global inflation and interest rates, quarterly results, and much more.

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Market overview – Alan McIntosh, Chief Investment Strategist

A larger than expected slowdown in UK annual consumer price growth was cheered by UK stock investors last week, with UK indices rising more than 3%. The gains represented a marked outperformance against global peers, as the MSCI All Country World Index experienced a relatively subdued week, eking out a 0.2% rise.  

The latest UK consumer price index (CPI) fell to 7.9% in annual terms, down from 8.7% the previous month and dropping to its lowest level in over a year. Economists had forecast a reading of 8.2%, according to Reuters. Lower petrol prices and a fall in food inflation, along with easing price pressures in the service sector where the pace of annual increase came down to 7.2% from 7.4%, contributed to the declines. The core reading also provided good news, dipping to 6.9% annually from a cycle high of 7.1% the previous month, against consensus calls for an unchanged print.  

Although the level remains significantly above the Bank of England's inflation target and the highest among G7 peers - comfortably in excess of the equivalent readings in the US (3%) and continental Europe (5.5%) - the data comes as a welcome development and had a clear positive market impact.  

Although CPI readings have been declining since peaking at 11.1% annually in last November's release, they had been falling less than expected with the previous four readings all coming in above economist's median estimates. Against that backdrop last week’s data was especially pleasing and the Bank of England's terminal rate is now seen at around 5.80%, down from over 6.50% just a couple weeks ago, according to derivatives markets.  

UK government bonds rallied in response and the two-year gilt yield ended last week back below the 5% level at 4.93%, down over 80 basis points from recent highs. The pound also moved lower, pulling back from its recent peak against the US dollar to end at 1.29 after beginning the week at 1.31. The depreciation in sterling after a strong run up so far in 2023 provides potentially good news for the sizable number of UK-listed large cap companies that generate revenues overseas.   

Key events to come  

There are series of important events this week that could determine the path going forward for financial markets, with three central bank rate decisions and a raft of earnings updates. The Federal Reserve (Fed) and European Central Bank (ECB) are expected to raise interest rates further and markets are expecting 25 basis point increases from both.  

Given recent communications from rate setters the prospect of a different-sized rate move appears not that likely, but market participants will be watching closely for hints as to the future path of monetary policy – in particular in the US, where there's a growing feeling that the Fed could deliver no further increases after this week.  

US stock benchmarks gained 0.7% last week, although there was a modest pullback in tech-weighted indices following a strong outperformance year-to-date. The MSCI Europe ex UK added 0.6%, with modest rises in most major continental stock markets.  

Japan continues to be an outlier among G7 countries having maintained near-zero interest rate levels over the last 18 months. The Bank of Japan's upcoming meeting is not expected to deliver any change on this front, but the potential for a surprise remains. 


Harry Gibbon

Investment Manager

Chris Beckett

Head of Research

Alan McIntosh

Chief Investment Strategist

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