Christmas fears over High Street slowdown

Government bond yields fell to a six-month low yesterday as investors increased their bets on an early rate cut following a sharp fall in retail sales.

In a somber update ahead of the crucial Christmas period, the Office for National Statistics said the amount of goods sold fell 0.3 percent in October, following a 1.1 percent fall in September.

That brought sales volumes back to levels last seen in February 2021, when tough Covid lockdown restrictions were in place – undermining the High Street in the process.

After a grim start to the so-called ‘golden quarter’ for retailers, chains will be pinning their hopes on a great Black Friday and Cyber ​​Monday at the end of the month to get Christmas back on track. The figures sparked renewed concerns about the health of the economy, increasing pressure on Chancellor Jeremy Hunt to take action in next week’s autumn statement.

It also sparked fresh speculation about when the Bank of England will cut interest rates, with the central bank’s deputy governor warning that further rate hikes may be needed to curb inflation.

Betting on the financial markets suggests that there is a more than one in three chance that the first cut will occur in May and that the odds of a decline of almost 70 percent will have fallen from the current level of 5.25 percent to 5 percent or lower in June.

These expectations were reflected in bond markets as the yield on 10-year government bonds – a key measure of government borrowing costs – fell to 4 percent.

That was the lowest level since May and down from highs of around 4.75 percent in August, when there were fears the Bank was ready to raise rates again.

The yield on two-year government bonds also fell below 4.5 percent after being above 5.5 percent in July.

Analysts said the drop in bond yields would likely lead to further cuts in mortgage rates, providing a boost to millions of borrowers.

“Where government bond yields lead, mortgage rates tend to follow,” says Laith Khalaf, head of investment analysis at AJ Bell, adding: “Interest rate expectations bounce around like jelly on a trampoline, taking bond prices with them. Right now the market is getting excited about rate cuts, but it could also be disappointed.”

Investors have stepped up their bets on rate cuts since this week’s official figures showed inflation fell sharply from 6.7 percent in September to 4.6 percent in October. It was the biggest fall since 1992. But inflation remains well above the 2 percent target, prompting Bank of England officials to warn that an early rate cut is highly unlikely.

Bank officials are trying to quell rumors of early interest rate cuts. Megan Greene, a member of the Monetary Policy Committee, warned this week that global financial markets are “not really on target yet” that borrowing costs will have to remain “restrictive” for some time to come.

In a speech yesterday, Deputy Governor Dave Ramsden said he “does not rule out” having to raise interest rates further if there are “more persistent inflationary pressures”.

The comments underlined the gap between the rhetoric from Threadneedle Street and the views of economists and traders.

A report from Goldman Sachs this week suggested that rates could be cut as early as February if the economy enters a recession.

Victoria Scholar, head of investments at Interactive Investor, said: ‘While higher interest rates appear to be the most likely outcome in the coming months, rate cuts look likely to start next year barring any major spikes in inflation.’

The Bank has raised interest rates from a record low of 0.1 percent to a 15-year high of 5.25 percent in a desperate battle to get inflation back under control. Inflation has fallen from a peak of 11.1 percent in October last year to the current level of 4.6 percent, but remains above the 2 percent target.

Martin Beck, chief economic adviser at the EY Item Club, said the fall in retail sales shows “the impact of higher interest rates is increasing.”