Yet, the story of the UK’s changing financial landscape is not that simple. Market expectations about the Bank of England’s terminal rate are moving wildly. Evidence in recent months indicates that the terminal rate is likely to end up closer to 3.25%. That’s down from previous estimates of 3.5%. This new amendment is a direct reaction to some major economic signs. These key indicators, however, have sparked deepened concerns regarding the country’s expected return to fiscal discipline and subsequent economic well-being.
Most notably on Tuesday, the unemployment rate inexplicably increased, a surefire early warning of some serious job market deterioration. Stubbs Wage growth numbers missed the mark. More importantly, this simply serves to prove that workers are not getting the pay raises they require and are desperately deserving just to keep pace with inflation. These favorable domestic and international developments have caused many analysts to argue that there is actually more room for rate cuts than many had earlier believed. The markedly dovish outlook seems to have helped pierce the data through the 3.5% terminal rate handle to the downside.
With the next budget announcement imminent, uncertainty continues to hang in the air. Due on November 26, this announcement has the potential to be a game changer for market confidence. Analysts suggest that Chancellor Reeves’ actions following the announcement will be crucial in determining whether markets maintain faith in the UK’s fiscal discipline. Not doing enough to inspire confidence could bring an abrupt move higher along the yield curve. This shift is an important indicator of increasing investor concerns.
Changes in the US employment landscape are upending that. This has understandably left a trail of fear and anxiety among players within the UK market. As global economic conditions shift, so too do they impact local mood and strategic outlook.
Despite these challenges, there is a silver lining. And the expected reopening of government functions should further improve risk sentiment. This change does provide an opportunity to improve investor confidence in the UK’s outlook. At a time when the markets have to walk a tightrope on mixed messages. Of course, all eyes are on the early 2020 budget and its power to reshape monetary policy.