UK inflation decline unlikely to throw off November hike

A welcome decline in UK CPI does highlight the fact that hike expectations have got a little extended over the medium-term. However, rising rates do seem inevitable, with UK banks likely to benefit as a result.

• European markets struggle despite recent US Q3 earnings strength.

• UK inflation decline unlikely to avert November hike.

• Bank stocks are likely to benefit from rising rates.

European markets are struggling to gain traction in early trade today, despite a welcome decline in UK CPI inflation that could take some of the heat off the Bank of England. While earnings season remains in its infancy, an impressive 84% of the S&P 500 companies that have reported thus far have seen beats on earnings. Nonetheless, concerns remain over the Q4 outlook, with price and logistical pressures remaining a major hurdle to overcome in a bid to benefit from the strong consumer demand.

The recent surge in inflation has been taken very seriously at the BoE, with a rate rise widely expected in just over two weeks. This places the UK well ahead of the curve compared with our US and eurozone counterparts. Today’s decline in both headline and core CPI brings the potential for markets to row back on the somewhat over-the-top shift that saw markets predict five 25bp rate hikes in the next six meetings. However, while the long-term projections seem a little overdone, prices do remain well above target and there is a risk that cold winter weather conditions and a surge in consumer demand bring another bout of price pressures to the table. Markets are now pricing in a 78% chance of a November rate hike, down from 82% pre-CPI.

While long-term rate expectations may somewhat overcooked, this is certainly an environment that is beneficial for UK banks which have largely pushed through the pandemic with minimal damage. Rishi Sunak also looks set to provide a welcome boost for the banks at next week’s budget, with rumors of an impending 60% reduction in the tax rate paid on bank profits. Nonetheless, this move is largely a plot to negate the jump in corporation tax planned for 2023. With corporation tax rising from 19% to 25%, this move to reduce the bank levy from 8% to 3% should minimize the net impact for banks compared with the wider economy.

Ahead of the open, we expect the Dow Jones to open 11 points higher, at 35,468.