Barely over a year ago it looked like the UK was a sick economy with few good prospects.
There was no industry to drive it forward. Its neighbours were weak. Its monetary policy was ineffectual. Its government was obsessed with cutting spending. It had a preposterous amount of debt and deleveraging it had to do.
Now the entire story has changed. The UK continues to post great economic numbers, the latest being its unemployment rate falling to 6.8%, a 5-year low.
In his note to clients this morning, SocGen’s Kit Juckes writes about the turnaround, and how markets are beginning to price in UK rate hikes before too long. Note that his comments came out a bit earlier, before we got the UK jobs data:
The UK interest rate market now considers a 2014 rate hike a distinct possibility – 15bp of hikes are priced in by December. That is twice the tightening that is priced into the US futures market. 3-month futures contracts meanwhile, now price the UK/US rate spread widening from 30bp now to 80bp by the middle of next year. That looks excessive. But, and here it really is time for a ‘Mea Culpa’, UK economic data have been and continue to be strong enough for these trends to go further. Sterling is powered by the way strong data impact rate expectations. This morning’s likely combination of falling unemployment and a base-effect-biased uptick in headline average earnings growth, along with the release of the Inflation Report, will probably increase the volume of those calling for the MPC to act soon.
Quite an impressive turnaround.
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