FTSE 100 rises and gilts recover as traders increase bets on interest rate cuts
Gilts posted a recovery on Wednesday, while the FTSE 100 opened higher, after the latest inflation figures came in lower than expected.
New figures from the Office for National Statistics (ONS) put the headline rate at 2.5 per cent in December, down from 2.6 per cent the month before.
Services inflation, seen as a better measure of domestic price inflation, sunk to 4.4 per cent. This was down from 5.0 per cent in November and below the 4.8 per cent expected by City experts.
Michael Brown, senior research strategist at Pepperstone, said the figures will come as a “significant relief” to both Rachel Reeves and Andrew Bailey amid jitters in the UK gilt market.
Investors have grown nervy about the prospect of persistent inflation in the UK in recent weeks, which has push gilt yields up to their highest level in decades as investors pared bets on interest rate cuts.
However, yields softened across the curve on Wednesday as traders moved to price in at least two interest rate cuts this year.
“The Bank of England will likely feel emboldened to continue its easing cycle in February,” Sanjay Raja, Deutsche Bank’s chief UK economist said.
The yield on the rate-sensitive two-year gilt fell eight basis points in early trade, while the yield on the 10-year dipped six basis points.
Equities also opened higher, led by housebuilders on the back of hope of more interest rate cuts.
The FTSE 100 rose 0.74 per cent in early trade with Persimmon, Taylor Wimpey, Barratt and Berkeley all among the FTSE’s top risers.
The FTSE 250, which is more aligned with the health of the domestic economy, climbed 1.5 per cent to trade at 20,056.85, with housebuilders also among the top performers.
“Housebuilders are on the front foot in early trade, as interest rate cuts are forecast to come a little more swiftly. That’s expected to accelerate the recovery we’ve seen in the housing market,” Susannah Streeter, head of money and markets, Hargreaves Lansdown said.
Although sterling opened lower, it soon gained some ground against the dollar, but was trading roughly flat at $1.221.
“The market isn’t too sure where to take the pound it seems,” Kyle Chapman, FX markets analyst at Ballinger Group said.
The pound fell to its lowest level against the dollar in over a year last week due to concerns about the UK’s economic outlook.
Normally the prospect of lower interest rates would weaken the pound, because it means investors receive less of a return on their investments, but – as Kathleen Brooks, research director at XTB, noted – “these are not normal times for UK assets”.
She suggested the pound could stage a “short-term relief rally” because it was likely to ease fears about stagflation.