Markets react to UK CPI, as Barclays sets the bar for UK banks

The pound has sunk on Wednesday after UK inflation was softer across the board. GBP is the worst performing currency in the G10 FX space on Wednesday and GBP/USD looks like it is heading back to the lows of the month at $1.3250. UK bond yields are tumbling, which are undermining the weakness in the pound.

Rate cut bets ramp up post CPI report

The softer inflation print is welcome news, however, as it has boosted the chances of an early Christmas present from the Bank of England. There are 17 bps of cuts priced in by the UK OIS market for December, compared to 10 bps of cuts expected on Tuesday. Traders are betting that the softer inflation print could drive the BOE to cut rates by year end, as this inflation print gives the BOE more leeway to loosen monetary policy earlier than anticipated. The next BOE meeting takes place in November, and it will be watched closely to see if there is a dovish shift at the bank indicati8ng whether or not a December rate cut is possible.

Inflation peaks at lower level than expected

The September inflation print is important since this was the month when the BOE expected inflation to peak at 4% before falling from there. Since the peak may be lower than expected at 3.8% for headline inflation, and 3.5% for core price growth, then it could be downhill from here.

Price resets tend to take place in April in the UK, and the final months of the year can see inflation pressures weaken. The BOE and the Chancellor will hope that this rings true. In August, the BOE expected inflation to peak at 4% and then to fall in 2026 and finally reach the 2% target rate in 2027. Although the BOE said that there were risks around this forecast, they also said that if spending fell faster than expected, this could dampen price pressure further. Thus, a weak outlook for the consumer combined with a lower inflation impulse could be the right conditions for a sooner than expected rate cut.

UK bonds shine

UK Gilts are the top performers globally this morning, the 2-year yield is lower by 9bps and the 10-year yield is down more than 7bps. In the past month, UK 2-year yields are lower by 21bps, and the 10-year yield is down by 31bps, outpacing losses for European and US yields.

The decline in yields is down to a confluence of factors including concerns about the growth outlook, today’s lower CPI print, and hopes that Chancellor Rachel Reeves will build a larger fiscal headroom in her budget. While tax rises are not good for growth, a mix of tax increases and substantial spending cuts could keep yields subdued.

Overall, UK stocks and bonds are stealing the show today, while the pound sinks. The FTSE 100 is bucking the trend across Europe where stocks are falling, the UK index is up by 0.5%, boosted by some strong earnings data.

Barclays does the heavy lifting for the UK’s financial sector

Barclays is leading the UK’s banking sector higher today and its share price is higher by more than 3% after it released earnings earlier. The bank said that it had little exposure to private credit, which is a bonus for nervy investors. The bank also reported solid investment banking and retail lending numbers, which is sweetening the mood for shareholders on Wednesday. The strong results is not having much of an effect on other UK lenders, and Barclays is doing the heavy lifting for the UK’s financial sector today. This could be because of the ramping up of interest rate cut bets, which could hurt bank lending margins in the future.

Precious metals stabilize as miners lead the FTSE 100 higher once again

The stabilization in the gold and silver price is also having a positive impact on the FTSE 100, and gold miners including Fresnillo and Endeavour are higher by more than 3% today as the gold price stabilizes above $4,100. The fact that Tuesday’s abrupt sell off did not trigger a fall below $4,000 is also positive for the outlook for precious metals. That suggests that Tuesday’s price move was a shake out, after a strong runup in the price of gold and silver, rather than a sign of deeper issues in the market.

Tesla results in focus

Ahead today, the focus will be on Tesla earnings after the market closes, and the market reaction to Netflix’s earnings. Net income was weaker than expected, due to a tax issue in Brazil. However, the underlying results were strong. The stock price is down more than 7% in pre-market trading, however, this is due to idiosyncratic issues related only to Netflix, and it may not lead to a broader sell off in the tech space.

Netflix shares sink after Brazilian tax issue

The Netflix results suggest that traders are showing no mercy to companies this earnings season. One bad move or one earnings miss is being punished. However, we think that after a knee jerk reaction to this news, investors could buy the dip, since the fundamentals of the company remain strong and user engagement remains high even in the face of threats from YouTube and other free streaming services.