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Market Update

Long-awaited fall in inflation marks a turning point with economic relief in sight

Date:
July 21, 2023

Summary

Gilts rally and market expectations around peak rates reduce after better inflation print and more in today's fortnightly.

Market update

Economic news

  • Headline CPI decreased to 7.90% in June, below the May print of 8.70% and outperforming the market consensus of 8.20%.
  • Market reaction was positive considering previous months of disappointing inflation data and robust wage growth.
  • Core CPI dropped to 6.90% in June from 7.10% in May, sparking hope that the Bank of England (BoE) will not have to raise base rates as much as previously expected.

        Source: Bloomberg

        • The cooling of CPI was primarily attributed to lower motor fuel prices, but other goods and services also experienced downward pressure.
        • The decline in CPI has left markets cautiously optimistic about U.K. inflation potentially reaching a turning point, and there are predictions that tightening monetary policy will take effect.
        • The BoE's base rate is projected to peak at 5.80%, with markets now pricing in a 25 bps (previously 50 bps) increase at its August MPC meeting.

        Source: Bloomberg, Chatham Financial

        Sterling bond market

        • The June CPI data release caused gilts to rally, resulting in a 20–30 bps reduction in rates across the curve.
        • The market's response was positive, indicating optimism about U.K. inflation possibly reaching a turning point.
        • The gilt curve is now 30–50 bps lower up to 10 years and 35–20 bps lower from 15 years onwards compared to the past fortnight.

                  Source: ONS

                  Housing association spreads

                  • Housing associations (HAs) spreads tightened by one to two basis points in the past fortnight.
                    • This tightening could be attributed to a more optimistic outlook on the macro economy, providing some relief to the sector.

                    Source: Bloomberg

                    Capital markets

                    • West Kent secured £50M through the aggregator lender THFC.

                    Banking market

                    • Chatham has observed some widening of margins. Unlike the capital markets, banks have been slower to pass on increased margins, making bank funding an appealing option for HAs due to lower all-in cost of debt.
                    • The banking market still remains attractive for borrowers looking to secure short-term liquidity. However, overall pricing is starting to balance out for borrowers seeking longer term-funding.
                    • We will likely see capital markets activity increase over the latter half of 2023.

                      Indicative pricing

                      *including on cost

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                      Disclaimers

                      This material has been created by Chatham Financial Europe, Ltd. and is intended for a non-U.S. audience. Chatham Financial Europe, Ltd. is authorised and regulated by the Financial Conduct Authority of the United Kingdom with reference number 197251.