Weekly Market Update 17/01/2025

According to data released on Wednesday by the Office for National Statistics (ONS), UK inflation slowed to 2.5% in December. This was below the November figure of 2.6%, and behind analyst expectations that inflation would remain at this level. According to swap markets, traders are now pricing in an 80% chance of a rate cut at the first Bank of England Monetary Policy Committee (MPC) meeting of 2025 next month. This could ease some pressure on Rachel Reeves as volatility in the gilt markets may reduce now yields have dropped from their 16-year-highs.

The UK economy grew by 0.1% in November, undershooting economist expectations of 0.2%, according to data released by the ONS on Thursday. This is the first expansion since August, led by strong services and construction sectors which negated a 0.3% contraction in manufacturing. However, the economy remained flat for the three months to November, extending the trend of flat output in the third quarter.

The ONS continued its week of UK data today, with the release of December’s retail sales, which unexpectedly shrank 0.3%, on a seasonally adjusted basis, compared to expectations of a rise of 0.4% as per economists polled by Reuters. This third data point in one week, indicating a slowing of the UK economy, reiterates the message that the MPC may need to start cutting rates next month. The release of the retail figures prompted some weakness in the pound, which dropped 0.5% to $1.218 in early trade. Gilts extended this week’s rally on the news and look set for their best week since July, with the FTSE-100 also buoyant and reaching a new all-time high level.

Andrea Wood, Chartered MCSI
Investment Manager