Today's markets: A small reprieve for Rachel Reeves

One way to kill ‘rising inflation, low economic growth’ fears is to have figures showing inflation is falling, even if it is only temporary. A small bit of luck for the chancellor Rachel Reeves this morning, with UK consumer prices index falling to 2.5 per cent in December, down from 2.6 per cent a month earlier. Economists had expected it to stay the same. Bond yields are down a touch, but the most important thing is they’re no longer rising.

Okay, it’s not huge, but it’s something. A small window of relief for those watching the bond market. The more notable change was in core CPI, which fell to 3.2 per cent from 3.5 per cent, while services inflation, the element of price rises that has had the Bank of England the most worried, fell a huge 0.6 points to 4.4 per cent, well below the 4.8 per cent expectation. However, economists think much of this is short-lived and inflation measures will start creeping up again this month. But for now, it is what it is. The pound stopped its slide and rose 0.1 per cent this morning.

Markets are also more cheerful, the FTSE 100 is up 0.7 per cent, helped by housebuilders continuing their run from yesterday, following Persimmon’s update yesterday which showed prices and completions were on the up, helped out today by the Office for National Statistics’s house price index showed prices rose 3.4 per cent in the 12 months to October, up from 2.8 per cent a month earlier. Persimmon, Barratt Redrow and Taylor Wimpey are all high up on the risers table this morning. More on company news here.

Shares in Frankfurt are also doing well, up 0.5 per cent, despite the German economy contracting 0.2 per cent in real terms in the past 12 months. The Cac is up a small 0.08 per cent. 

Overnight, shares in New York were in the green, but there’s little movement ahead of the US’s CPI print coming out this afternoon, which has the potential to send markets both ways. Anything that supports the narrative that the US economy is too hot for rate cuts could send tech shares, and thus the major indices, down. If it looks like the hard economic data supports a cut sooner rather than later, and maybe even two cuts this year, then expect the opposite.

Traders will rush, move quickly and ask questions later. But the sensible thing will be to look into the details, it’s not just about the headline figures, it’s about what’s causing it. The jobs data from last week all have individual flaws, but the narrative they point to cannot be ignored. The same applies to the CPI data, and you need to ask whether it’s a short-term blip, what’s causing it and what’s the trajectory. Anything that falls in line with what the Federal Reserve suggested in December, then we could still be on for two cuts, from July, maybe March, although unlikely. If the US economy is running away, then it’s anyone’s guess. Markets are rounding on one cut in September, but as we said yesterday, that seems overly pessimistic. At least we’ll know for sure later on.

By Taha Lokhandwala