The Daily Brief

The case for a second Bank of England hike gained ground in yesterday's session. Deputy Governor Lombardelli said that, absent clearer evidence of easing inflation pressure, there is likely to be a case for raising rates again in the near term, describing a labour market that is cooling through slower hiring rather than layoffs and so leaving wage pressure stickier than rising unemployment would usually imply. A leading UK economic think tank went further, arguing Bank Rate may need to reach 5% from today's 4%, and that even a second hike would leave inflation above target until the end of the decade.

Markets now treat December as close to a coin toss, a significant shift for a central bank that only raised rates for the first time in more than three years last week. None of it protected the pound. Sterling fell around 0.7% to near 1.335, surrendering all of Monday's gain within hours of the US inflation report, as the dollar rose against every major currency. The asymmetry is the point: a hawkish Bank is already largely reflected in the sterling curve, where several further hikes are priced, while a Fed that might move by half a point in December is new information.

When both central banks are tightening, the currency whose central bank surprises hawkishly wins the day, and yesterday that was the Fed. Gilts offered the pound little help either. The 10-year gilt yield rose about 7 basis points to around 5.21%, but the move followed Treasuries rather than any domestic news, which means higher UK borrowing costs without the widening rate differential that would normally support the currency. That leaves Thursday's third-quarter GDP figure carrying unusual weight.

Consensus looks for growth of 0.7% on the quarter, with September itself expected to be flat to slightly negative; a strong quarter would harden the December case, while a contraction in the final month would hand the doves their best argument since the hike. Near 1.335, GBP/USD sits almost exactly on the 1.334 midpoint of its range between the early-October low near 1.318 and last week's high around 1.350, having travelled from the upper part of that range to its centre in a single session.

The rate argument now cuts against the pound at the margin: the Fed repricing is fresh, the Bank's is mostly priced, so a return towards 1.350 would need a firm GDP figure and a pause in US yields at the same time. With US core inflation running at roughly a 3.7% annualised pace over three months and Fed officials lining up behind a larger move, the balance of risk tilts towards the lower half of the range, around 1.325, before the top is tested again.

Core consumer prices rose 0.3% in October, the third consecutive month at that pace and a tenth above consensus, while headline prices rose 0.4% against a 0.3% forecast. Energy did the cooling in the headline; services did the heating underneath, with services excluding housing up 0.4% on the month. Over three months, core is now running at around a 3.7% annualised rate, nowhere near a pace consistent with a 2% target, and because last year's shutdown left no October 2025 data, there was no annual figure to soften the impression. The monthly core number was always going to carry the signal, and it said the Fed's work is unfinished.

The threshold had been set in advance. Hours before the release, Governor Waller said a core reading of around 0.3% or higher would mean a half-point hike should be considered in December; the print landed on that line. Dallas Fed President Logan said at least two more quarter-point increases are needed and that the Fed may be able to move faster this winter, while Philadelphia Fed President Paulson backed further gradual hikes and set out what would make her accelerate. A December hike is now close to fully priced, with roughly a one-in-eight chance of a half point, and the debate has moved from whether to how much.

The front end of the curve did the repricing. The two-year Treasury yield jumped about 17 basis points to near 4.73%, its largest one-day rise since April 2025, and the 10-year touched 5% before settling near 4.99%. The Dollar Index rose around 0.55%, recovering all of Monday's oil-driven fall, and sits near 102.3 this morning. Today adds a wrinkle: US cash Treasury markets are closed for Veterans Day while equities trade normally, so the bond market's fuller verdict on the print is deferred until Thursday, with producer prices due on Friday. When bond liquidity thins, currencies tend to do more of the price discovery, which can exaggerate moves in either direction.

At around 102.3, the index is back at the top of its 101.2 to 102.3 range, roughly a full point above Monday's low and about half a point above the 101.75 midpoint, so a single report has repriced the whole range. With a December hike close to fully priced, further gains need the half-point scenario to build from its current one-in-eight odds, which a firm producer price report or a run of hawkish Fed speakers could deliver. A soft PPI would most likely send the index back towards the 101.75 midpoint, but while core inflation keeps printing at 0.3%, the asymmetry has flipped since Monday: the range ceiling is the more likely test than the floor.

South Africa's own data gave the rand no shelter in yesterday's session. Unemployment rose to 33.7% in the third quarter, the highest in more than four years, and factory output fell 3.5% year on year in September, worse than the 2% decline expected, with motor vehicles and transport equipment down 15%. A 0.9% quarterly rise in manufacturing softens the picture, but the composition matters: autos are the sector most exposed to the loss of US trade preferences from next year, so weakness there reads as structural rather than seasonal. Domestic fundamentals are not a reason to sell the rand on their own, but they offer nothing to lean on when the external backdrop turns.

And the backdrop turned. The rand weakened to around 16.51 from 16.36, giving back almost all of Monday's gain, as the dollar rallied on hot US inflation and gold fell more than 2.5%. Monday's combination of a softer dollar, cheaper oil and firmer gold had flattered the currency; Tuesday removed two of the three and left only oil, which stayed near a two-month low. Within two sessions the rand touched its strongest close since late September and then surrendered it, with no domestic news doing the work in either direction.

The rate cushion is also thinner than it looked. The South African 10-year bond yield rose around 10 basis points to about 8.51%, climbing off a three-month low, as a more aggressive Fed narrowed the yield advantage that has underpinned demand for rand assets. The Reserve Bank meets on 19 November, the day after October inflation, and weak activity data alongside lower fuel costs weaken the case for adding to the 7.25% repo rate. A hold protects growth, but it leaves the currency more exposed to swings in US rates, because the carry gap would then narrow every time the Fed leans harder.

At 16.51, the rand sits just inside the stronger half of its 16.34 to 16.80 range, about 6 cents from the 16.57 midpoint and 17 cents from Monday's strong edge. The distance to January's 16.29 high, the strongest level since 2022, is about 22 cents; the distance to the March low near 17.20 is nearly 70 cents, and the domestic data have removed any internal argument for closing the first gap rather than the second. With the Fed repricing higher and gold under pressure, the balance of risk leans towards a move through the midpoint and on towards 16.80, unless oil falls further or Thursday's bond market reopening takes the edge off the dollar's rally.

5%. The US 10-year Treasury yield touched that level yesterday before settling near 4.99%, up about 10 basis points in a session. The number matters well beyond the US: it is the discount rate for global equities, the opportunity cost of holding gold, and the benchmark against which most other borrowers price. The 10-year gilt is already above it at around 5.21%, Australia's 10-year has crossed it, and Japan's 10-year rose to about 2.77% on hawkish signals from the Bank of Japan. A third firm US core print has turned a regional rate story into a global one.

Gold took the clearest hit. It fell about 2.6% to around $4,030 as real yields rose and the dollar firmed, silver dropped more than 3.5%, copper fell to a four-month low and bitcoin to a three-month low. At least one major bank has cut its gold forecasts, to $4,150 for this year and $4,800 for next, citing a hawkish Fed. Gold has steadied near $4,045 this morning, but the episode is a reminder that metals rallies built on falling yields unwind quickly when yields turn, which matters for exporters whose revenues track them.

Equities absorbed the shock with more rotation than rout. The S&P 500 fell about 0.4% and the Nasdaq around 0.9%, with losses concentrated in technology as Nvidia fell around 5.5% for a second day amid a board investigation into its chief executive, while six of eleven S&P sectors still closed higher. Japan's Nikkei is up again overnight, holding above 60,000. The pattern suggests investors are repricing duration and the AI trade rather than abandoning risk, which keeps the pressure on rate-sensitive assets without triggering a broad flight to safety.

Oil is the one market still pulling the other way. Brent touched a two-month low near $90.60 yesterday after US officials signalled that sanctions and the naval blockade were working well enough to avoid further major strikes on Iran, then recovered to around $92.50 this morning as attacks on shipping around the Strait of Hormuz continued, with ten recorded so far this month after 37 in October. Reports of a 9 million barrel build in US crude stocks are capping the bounce. Cheaper energy remains the only tailwind that importers paying in sterling or rand kept through Tuesday.

Near 4.99%, the 10-year sits about 11 basis points above Monday's 4.88% and a whisker below 5%, while the gap between the two-year and 10-year yields has narrowed from around 32 to around 26 basis points in a single session. That flattening is the market pricing a Fed that tightens into slowing growth, a combination that has historically weighed on cyclical assets and emerging market currencies more than on the dollar. With cash Treasuries closed today, Thursday's reopening is the real test; while core inflation runs at 0.3% a month, the balance of risk favours yields holding the 5% area over a retreat towards 4.88%, and Brent, about $3 below the $95.50 midpoint of its war range, offers importers only partial compensation.