UK CPI bump sees rate cut expectations slip

• Rise in UK CPI sets back expectations for a May rate cut
• ECB similarly seek to quell dovish monetary policy expectations
• US retail sales and Fed speakers in view

The FTSE 100 has found itself on the back foot in early trade as markets begin to backtrack on expectations of easing from the Bank of England this year. Today’s higher CPI inflation reading always looked a distinct possibility, but the size of the rise has caught many off guard. There is a hope that this festive episode of the inflation report will represent a short-term bump in prices as retailers take advantage of a rise in demand ahead of Christmas. Nonetheless, the 0.6% month-on-month rise in core CPI provides the strongest gain in seven months, further delaying the expected return to target. With markets shifting expectations of a May cut from 70% to 53%, we are seeing GBP rally and FTSE bulls reduce their exposure.

Comments from key ECB members are having a similarly detrimental effect on market sentiment today, with Knot and Lagarde both noting that the markets expectations for widespread easing is lessening the need for the bank to act. Markets had entered 2024 with a key concern that needed to be resolved, with expectations for easing standing in stark contrast to the path laid out by the central bankers. Recent comments from the ECB seek to close that gap between what markets expect and what is likely in terms of monetary easing, although that comes at the expense of market sentiment for the time being.

Looking ahead, all eyes turned to US retail sales as a key leading indicator for consumption in the month of December. With earning season in its infancy, we are likely to see volatility for US High Street names should today’s retail sales reading indicate any particular strength or weakness in terms of consumption over the festive period. Traders will also keep a close eye out for commentary from Fed members Barr, Bowman, and Woods, with a significant risk that they further reiterate the view that markets had got somewhat carried away over the pace of monetary easing expected this year.