Inflation affords some relief

• Global equities, with all major regions advancing strongly. The UK market led the way, rising 3.1%, while Asia ex-Japan and emerging market equities both added 3.0% in sterling terms
• Oil, with Brent crude rebounding 7.6% in US dollar terms

• Gold, which corrected -3.3% in US dollar terms 
• The yen, which weakened 0.6% against sterling

The latest UK inflation print focused the minds of market participants last week, as the long countdown to the Autumn Budget continues. The Office for National Statistics (ONS) announced annual UK consumer price inflation had held steady at 3.8% for a third consecutive month in September. The news was an unexpected positive for Chancellor Reeves, with the Bank of England (BoE) and economists anticipating a further rise to c.4.0%. A 3.8% headline rate of inflation is still uncomfortably above the BoE’s 2% target, but the latest reading is increasingly being seen as the peak of a year-long period of rising prints.

In addition to constraining the BoE’s leeway to support a seemingly weaker labour market and boost sluggish growth with lower borrowing costs, a high domestic inflation rate has added to UK government debt costs at a time when attempts to lower public spending have floundered. UK government gilts rallied on the back of last week’s news, in which yields fell, as markets moved to significantly increase the probability of a further BoE rate cut in December. Markets are now pricing a 75% chance of a cut, some 30% higher than before the inflation data was published.

The inflation print for September is of greater significance than most, as it is generally the benchmark for the annual uprating of benefit payments from the following April. Despite the relative light relief that lower-than-expected inflation should bring for government expenditure, the Chancellor is still expected to announce tax increases at the Autumn Budget in an effort to keep a lid on government borrowing costs. Part of the conundrum she faces, however, is that hiking certain taxes could further extend the current period of persistent above target inflation. 

Oil prices jumped last week as the US and European Union independently announced new sanctions on Russian energy producers, including Lukoil and Rosneft. WTI crude oil rose more than 6% to around $62 per barrel. The US hopes that more stick-than-carrot will bring Russia back to the negotiating table over the Ukraine war. Simultaneously, the US is threatening India with 50% tariffs if it continues to procure Russian oil. Whilst the White House is willing to use tariffs and sanctions to advance its strategic interests, this latest escalation is probably symbolic and unlikely to affect Russia’s position. Russia appears to be finding buyers for its oil, perhaps through so-called dark-fleets of tankers with opaque ownership that mask its provenance and destination. Having spent more than four years mostly above $62 per barrel, the price of oil is still relatively low. Although lower oil prices generally make for cheaper production and lead to lower inflationary pressure – often translating as an effective tax cut on consumption – it is also true that they can be a leading indicator of weakening demand, perhaps presaging slowing economic growth.

Gold experienced its biggest single day drop in 12 years last week, just a day after reaching a new all-time high. Prices soared to $4,381 per ounce last Monday, before pulling back by around -6% on Tuesday to around the $4,000 level. The decline of more than -3% over the week marked the first weekly fall in ten weeks, with the precious metal on a constant upward trajectory since 18 August. Despite the pullback, the price of gold is still up some +57% year-to-date and a remarkable +150% since October 2022. However, the rally had accelerated notably in recent months, and the correction likely reflects concerns that prices had become overly elevated too quickly. Silver and platinum also fell heavily in tandem with gold. The meteoric rise in the gold price has been driven by its status as a safe-haven asset – with concerns over growing government debt levels, the US dollar and geopolitical uncertainty to the fore. Demand from central banks looking to diversify their holdings away from the dollar has been a key driver over the past year or more, while investors have been piling into gold exchange traded funds in recent months. The latest climbdown in US-China trade tensions and short-term overbought conditions were perhaps the primary catalysts for some heat coming out of the market last week, but with the longer-term structural factors behind the appetite for gold still in place, last week’s move is not being widely viewed as a more significant change in sentiment.

• Australia-US critical minerals pact: President Trump and Prime Minister Albanese signed a reported $8.5bn agreement to boost rare earth and critical mineral supplies, reducing reliance on China 
• Italy to raise tax on wealthy expats: The Italian government announced plans to lift its “flat” tax on foreign-sourced income by 50% to €300,000. The tax has been part of a wider set-up designed to incentivise wealthy individuals to transfer their tax residence to Italy
• British Columbia moves to restrict cryptocurrency mining: The Canadian province moves to ban crypto miners from assessing its power grid and will limit electricity for artificial intelligence (AI) data centres to prioritise its clean energy and sustainable growth goals
• Argentina secures US dollar swap deal: Argentina’s central bank signed a $20bn currency swap with the US Treasury Department designed to help stabilise volatile FX and capital markets ahead of midterm elections
• US government shutdown: The US government shutdown entered its 24th day last Friday, now the second-longest in history. An estimated 1.4 million federal workers remain on unpaid leave or working without pay, while the impasse also delays the reporting of key US data points
• US inflation: US consumer price inflation rose 0.3% in September and 3.0% year-on-year, slightly below forecasts (0.4% monthly, 3.1% annual). The release was delayed by two weeks due to the government shutdown
• UK government borrowing: Borrowing hit a five-year high, with the ONS reporting that UK public sector borrowing rose to £20.2bn in September, up £1.6bn year-on-year, and the highest for the month since 2019
• Apple shares: The Apple share price hit another record high, surging over 6% last Monday following strong iPhone 17 sales
• China’s five-year plan: The Chinese Communist Party’s latest plenary session concluded last week – outlining goals for high-quality development and greater technological self-reliance. More details of the new five-year plan will follow in the coming weeks
• Xi-Trump summit in South Korea: Presidents Xi and Trump will meet this week – their first face-to-face talks since Trump’s return to office – amid efforts to ease trade tensions between the world’s two largest economies

Disclaimer

Past performance is not a reliable indicator of future returns. Nothing herein should be construed as a recommendation to hold, buy or sell any security or encourage any investment decision. The mention of any particular asset class, sub-asset class or company does not imply that it is held, or may ever be held, in any product or service.