UK markets pulled back this week, with the FTSE 100 Index falling by 2.1% to trade at 7,465 points at the time of writing. UK inflation held steady in September at 6.7%, maintaining pressure on the Bank of England to keep up its efforts to curb price growth.
The rate of consumer price inflation had been forecast to fall to 6.6% in the 12 months to September, according to economists polled by Reuters. The figures show that the UK continues to battle with a more persistent inflation problem than many of its peers. September’s year-on-year inflation rate exceeded those of France and Germany, as well as the most recent EU-wide and US rates of price growth.
The IMF also predicted this month that the UK would register a higher rate of inflation than other G7 countries next year. The sticky nature of UK price rises is partly explained by higher wage growth than in the US and Eurozone; a post-Covid contraction in the size of the workforce boosted pressure on companies to lift pay. The CPI figures showed price growth had been fuelled by factors such as higher fuel prices and rates on hotel accommodation, offsetting downward contributions from food and beverage prices.
Headline inflation is expected to fall sharply next month because of a cut in the cap on household energy prices and more favourable year-on-year comparisons. Signs that food prices are declining month on month, a trend analysts expect to continue, should also ease price pressures.
However, the widening conflict in the Middle East is a key risk factor in the outlook, with the recent jump in oil and natural gas prices suggesting inflation could be slower to subside.
UK residential rental costs rose 5.7% year on year in September, up from 5.6% in July, according to the Office for National Statistics. The figures represent the largest annual percentage increase since the data series began in January 2016, and lay bare the continuing effect of high mortgage rates on the property market.
Commodity markets
In the commodity markets, Brent crude futures traded around $93 per barrel on Friday, and are set to rise again this week, as escalating turmoil in the Middle East stoked fears about disruptions to global supplies.
Oil prices were supported after Federal Reserve Chair Jerome Powell said that the US central bank would be “proceeding carefully” on future interest rate hikes, which could slow the economy and dent fuel demand. Oil prices were further supported after OPEC member, Iran, called on an oil embargo on Israel over the conflict in Gaza.
Gains were limited after the US issued a six-month licence authorising transaction in the energy sector of OPEC member, Venezuela, whose government reached an agreement with the political opposition to ensure fair 2024 elections. The deal is not expected to quickly expand Venezuela’s oil output but could return some foreign companies to its oilfields and provide more cash-paying customers for its crude, experts said.
Gold traded around $1,985 an ounce on Friday, to near a two-and-a-half month peak as fears of an escalation in the Israel-Hamas conflict kept demand for safe-haven assets intact. Additionally, the chances that US interest rates are at a peak also boosted gold’s appeal as a safe haven. Gold’s resilience in the face of rising yields and a rebounding US dollar, especially over the past several days, has been testament to the geopolitical backdrop.
Equity markets
US equity futures fell on Friday, as a rally in Treasury yields continued to pressure equities, with the benchmark 10 year US yield briefly touching 5% for the first time since 2007. In Thursday’s regular trading session, The Dow Jones Industrial Average fell 0.75%, the S&P 500 Index lost 0.85%, while the Nasdaq Composite declined 0.96%.
The number of Americans filing new claims for unemployment benefits fell to a nine-month low last week, falling 13,000 from the prior week to 198,000 on the week ending October 14th, and well below market estimates of 212,000.
The result indicated that strong growth persisted in October as the labour market remains tight. The unexpected decline in initial jobless claims reported by the Labor Department on Thursday added to solid retail sales and factory production in September in suggesting sustained momentum in the US economy.
Although the upbeat economic data pointed to the possibility of the Federal Reserve keeping interest rates higher for longer, financial markets continued to discount a rate hike next month because of soaring US Treasury yields.
Federal Reserve Chair, Jerome Powell, pointed to a range of risks that officials now must consider as they determine how much more to squeeze the world’s largest economy to tame inflation in the latest indication that the US central bank will hold interest rates steady next month. He also emphasised that the impact of the Federal Reserve’s rate rising campaign of the past 18 months was not yet fully visible. Powell said that the US central bank would continue to watch for evidence that growth was not slowing sufficiently, or that the labour market remained tight, either of which could warrant further tightening of monetary policy.
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