UK Rates Poised to Settle at 3.25%, But November Budget Holds Key to Market Stability
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Markets are increasingly anticipating a more dovish stance from the Bank of England, with expectations shifting toward a terminal interest rate of 3.25%. However, the upcoming UK budget proclamation on November 26th introduces a notable element of uncertainty, capable of triggering both positive and negative reactions. Simultaneously, growing anxieties surrounding the US job market are tempering optimism stemming from the anticipated resolution of the US government shutdown.
Shifting Expectations for Bank of England rates
Sterling rates have been subject to considerable volatility as analysts and investors attempt to pinpoint the landing zone for the Bank of England’s monetary policy. As April – dubbed “Liberation Day” – the market consensus largely centered around a peak rate of 3.5%. However, recent economic data has challenged this assumption.
“Markets have mostly been focused on a terminal rate around 3.5%, but that handle seems to have been broken to the downside on the back of more dovish data,” one analyst noted. Tuesday’s economic reports, revealing higher unemployment and decelerating wage growth, further reinforced the belief that the Bank of England may have more room to implement rate cuts than previously anticipated.
Looking ahead, market participants are gaining confidence in a 3.25% terminal rate. Yet, the November budget remains a critical variable. A commitment to fiscal prudence – characterized by tax increases and spending reductions – would likely bolster a more accommodative stance from the Bank of England.
Though, current risk premium estimates suggest that this scenario is largely priced into the market. A failure by Chancellor Reeves to instill confidence in the UK’s fiscal discipline,on the other hand,could trigger a renewed surge in rates. “If, on the other hand, Chancellor Reeves fails to win markets’ confidence in the UK’s fiscal discipline, then we could very well see the curve move higher again,” a senior official stated.
US Economic Concerns Offset Government Reopening Optimism
While the impending resolution of the US government shutdown is generally viewed as a positive development, concerns about the health of the US job market are increasingly dominating investor sentiment. The market’s reaction to disappointing weekly payroll data released on Tuesday underscored this shift in focus.
Despite the potential for a positive impact from the government reopening, these anxieties are currently outweighing any associated benefits.
Wednesday’s economic Calendar: A Quiet Day with Focused Attention
Wednesday’s economic calendar is relatively light. Italy is scheduled to release industrial production figures, but these are not expected to considerably impact market movements. In the US, mortgage applications data from the Mortgage Bankers Association (MBA) will be closely watched, particularly given recent disruptions to government data releases. “
Central bank commentary will also be in focus. European Central Bank’s (ECB) Sabine Schnabel will address European reforms, while Bank of England’s Ben Broadbent will participate in a monetary research conference. From the Federal Reserve,potential speakers include John Williams,Raphael Bostic,and Lorie Logan.
Germany will auction €2.5 billion in 21-year and 31-year Bunds, and the US Treasury will offer $42 billion in securities.
disclaimer: This publication has been prepared by ING solely for facts purposes irrespective of a particular user’s means, financial situation or investment objectives. The information does not constitute investment suggestion, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more.
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