Goldman: Welcome Disinflation In UK, More Room For Front-End Rally

Goldman Sachs note that “the decline in headline UK inflation in October was slightly larger than expected.”

• “Coupled with sequential declines in wages, this points to a less concerning inflation outlook, and suggests the UK is less of a high inflation outlier among the G10.”
• “At the same time, while visibility on the labour market remains poor given the upcoming revision to ONS methodology, the evidence does suggest the UK economy remains weak and the labour market softer.”
• “Alongside ongoing risks to consumption from higher rates via the housing market, we think that the BoE will ultimately be among the first G10 central banks to cut rates and expect to see front-end yields move lower vs. the U.S. and EU.”
• “For Gilts, we focus on the potential for the Chancellor to make use of additional fiscal headroom at the Autumn Statement by providing some tax relief.”
• “While lower inflation may make it easier for the market to digest additional fiscal loosening, we continue to expect the Gilt market will remain more volatile than G3 peers, with two-sided risks around current Gilt yields.”
• “On relative pricing, we continue to expect swap spread tightening especially in the 3-10y sector.”