Bond Watch: what lower inflation and a July election mean

Welcome to interactive investor’s ‘Bond Watch’ series, covering the latest market and economic news – as well as analysis – that is relevant to bond investors.                  

Our goal is to make the notoriously complicated world of bond investing simpler, by analysing the week’s most important news and distilling it into a short, useful and accessible article for DIY investors.                 

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UK inflation falls to 2.3% 

Inflation in the UK is nearly back at the Bank of England’s 2% target, following a big drop in the consumer price index for April.  

The sharp fall in the headline inflation figure in April is largely due to a sizeable decline in Ofgem’s energy price cap. Food inflation also eased further last month, providing some more relief to shoppers struggling to deal with higher costs. 

Myron Jobson, senior personal finance analyst at ii, also notes that core inflation, which strips out volatile food and fuel prices to give a sense of the underlying trend, also fell to its lowest level since October 2021. This is a positive sign for the Bank of England, but there is still work to be done. 

• Inflation eases to 2.3%, but hopes of imminent rate cuts dashed
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The lower reading was slightly higher than economists’ forecasts, suggesting that interest rate cuts may not be imminent.  

Neil Birrell, chief investment officer at Premier Miton Investors, says that UK inflation is not getting back to target as fast as the Bank of England would like, which will probably delay the first interest rate cut.  

“The service sector has proved to be the sticking point and it will remain the bank’s focus over the next month or two, ahead of a potential rate cut in the summer,” he said.  

UK gilt yields rose following the news, as investors pushed back their expectations for the first interest rate cut.  

Election announced 

Investors finally have a date for the general election: 4 July 2024. This is earlier than most analysts expected and came as a surprise when it was announced on Wednesday evening.  

However, stock and bond markets did not move much following the news. Royal London Asset Management’s head of multi asset Trevor Greetham does not expect the election to be a market-moving event.  

Greetham says: “The opinion polls are strongly skewed towards a victory for Keir Starmer’s Labour. Moreover, macro-economic policy differences are far smaller than they were in 2019 when Boris Johnson squared up against Jeremy Corbyn. This time, both parties are pledging to stick to fiscal rules and to stay outside the EU Single Market. Either party would inherit severely strained public finances, limiting their room for manoeuvre.” 

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On the other hand, Greetham thinks that the US election in November will be more important for investors.  

“The polls are close enough for either Biden or Trump to win the presidency and there are major geopolitical forces hanging on the outcome – not least the war in Ukraine and the degree to which China feels emboldened to act against Taiwan, after their January 2024 election saw victory for the pro-independence party,” he said.