UK inflation held steady at 3.8% in September, marking the third consecutive month at this level. This came as a positive surprise, with market expectations pointing to a rise to 4%. Services inflation, which is a key data point watched by the Bank of England (BoE) remained at 4.7%, again defying expectations of a rise.
While it is encouraging inflation has not risen further at 3.8%, nearly double the BoE’s target, inflation remains at an uncomfortable level. This poses challenges not only for the central bank but also for the Government, as pressure continues to mount ahead of Chancellor Rachel Reeves’ delayed Autumn Budget. Predicting the future is not one of the skills we possess, however, it is becoming increasingly likely that Reeves will opt to raise taxes, potentially targeting higher earners, to address the shortfall in public finances. UK assets responded favourably to the inflation data, with equities rising, led by small and mid cap companies, while gilt yields fell across the board (prices rose), with 10-year yields initially dropping to a 10-month low of 4.37% before rising to 4.42%.
We’ve followed developments in Japanese politics closely, and this week the rollercoaster came to an end as Ms Takaichi, leader of the Liberal Democratic Party (LDP), became the country’s first female prime minister. She overcame the challenge of the former coalition partner Komeito resigning, and instead formed an alliance with the right-wing Nippon Ishin (Japan Innovation Party). A known advocate of Abe-style fiscal stimulus, Ms Takaichi’s appointment sparked what’s being dubbed the “Takaichi Trade,” sending Japanese equities to new record highs.
The tough work begins immediately for the new premier, who is finalising a purchase package to present to US President Trump in the coming weeks. The $550bn deal signed by former Prime Minister Ishiba in September must be honoured to ensure tariffs remain at 15%. In addition, Japan’s defence spending is likely to be reviewed, with the aim of accelerating it beyond the current 2% of GDP target. However, a challenge remains: the LDP and Ishin parties are still two seats short of a majority in the Lower House, meaning Ms Takaichi will need to continue seeking support to pass budgets and key legislation.
In the US, the government shutdown has entered its 24th day, with no agreement in sight between the Democratic and Republican parties. For the Federal Reserve, already facing a challenging environment, things are only getting tougher ahead of next week’s meeting. The suspension of key economic data has left policymakers with a veiled view of the economy. Fed officials remain divided: some warn of reaccelerating inflation driven by ongoing tariff uncertainty, while new Fed Governor Miran argues that interest rates are still too high, and inflation is set to fall. Later this afternoon US inflation data will be released, despite the government shutdown. While most data is suspended, the Bureau of Labour Statistics made an exception for the September CPI report because it’s required to calculate the Social Security Administration’s annual cost-of-living adjustment. This inflation release is the only major economic report being published during the shutdown, and it’s expected to have a significant market impact given the lack of other dates and its proximity to the Fed meeting next week. Adding to the uncertainty, new risks emerged last week with loan loss disclosures from two major banks and renewed tensions between the US and China over rare earth minerals. Despite “flying blind,” markets still expect the Federal Reserve to cut rates by 25bps (0.25%), bringing the benchmark rate down to 4%.
On the subject of renewed tensions, the US imposed sanctions on Russia’s major oil companies, with President Trump citing Russia’s lack of commitment to ending the war in Ukraine. The planned summit between President Trump and Russian President Putin collapsed after Russia made it clear that any peace deal would require Ukraine to cede control of the southeastern Donbas region. In response, Trump has indicated that his upcoming talks with Chinese President Xi will include efforts to use his influence to help bring the conflict to an end.
This week, OpenAI made its first move to monetise its 800 million weekly active ChatGPT users by unveiling an artificial intelligence (AI)-powered web browser. Named ChatGPT Atlas, the launch presents a direct challenge to Google’s dominance in the browser market. The browser aims to enhance user experience by generating more personalised data based on browsing behaviour. Alphabet (Google) shares fell 1.8% on Wednesday but recovered to end the week up around 1%.
Gold and silver came under severe pressure this week with prices falling sharply. Given the volatility in the precious metals and the rapid price appreciation seen in recent months a period of consolidation is not unexpected and healthy for future gains. The structural drivers of gold still look in place and it is an asset class we remain positive on over the long-term.
Nathan Amaning, Investment Analyst
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