Stocks Rally to Records on AI, Trade and Strong Results

Goldman Sachs economists have revised their forecast, now anticipating a Bank of England rate cut at its upcoming November meeting, citing softer inflation, cooling private sector pay, a weakening labor market, and weaker growth data. This outlook is further supported by expectations of a contractionary government budget later in November. While market traders have increased their probability for a November cut to 32%, a December cut remains the more widely expected outcome at 68%.

Analysis

Goldman Sachs economists have revised their Bank of England rate cut forecast, now anticipating a 25 basis point reduction at the upcoming November meeting, a shift from their previous December expectation. This updated outlook is primarily driven by recent economic data indicating softer-than-expected inflation, cooling private sector pay growth, a weakening labor market, and overall weaker growth figures.

Further bolstering this revised forecast is Goldman's increased confidence in a "large, contractionary impulse" from the government's budget on November 26. While market traders have adjusted their expectations, assigning a 32% probability to a November cut (up from 2%), the consensus still leans towards a December cut with a 68% probability.

The broader UK market, as reflected by the FTSE 100, is experiencing a rally attributed to AI, trade, and strong corporate results, with health-care company GSK and retailer Next specifically upgrading their guidance. Concurrently, the British pound has extended its declines, likely influenced by the increased probability of earlier rate cuts.

Key Decisions for Investors

• Investors should closely monitor the Bank of England's upcoming November meeting statement and subsequent communications for any signals regarding the timing and pace of potential rate cuts, as market expectations are still split between November and December.
• Given the pound's extended declines and the increased likelihood of earlier rate cuts, investors with significant GBP exposure or those trading UK assets should evaluate potential currency hedging strategies or adjust their FX outlook.
• While the broader FTSE 100 shows strength, the prospect of rate cuts and a contractionary budget could create divergence; investors should specifically review sectors sensitive to domestic economic conditions and interest rates, alongside companies like GSK and Next with positive idiosyncratic guidance.