UK markets hit a record high this week but pulled back on Friday, with the FTSE 100 Index rising by 0.2% to trade at 7,880 points at the time of writing. The UK economy stagnated in the final quarter of 2022, narrowly avoiding a recession despite output shrinking by more than expected in December.
UK gross domestic product was unchanged between the third and fourth quarters of 2022, following a contraction in the previous three months, according to data published by the Office for National Statistics. This was in line with analysts’ expectations but weaker than the 0.1% expansion expected by the Bank of England.
The flat reading means that the UK avoided a technical recession, which is defined as two consecutive quarters of falling output. In the fourth quarter, the UK economy remained 0.8% below the level in the same period in 2019, before the pandemic. By contrast, the US economy was up 5.1% over the same period and output in the eurozone grew 2.4%. The UK economy is the only G7 economy not to have regained the ground lost during the pandemic. Living standards have been hammered by inflation and the fourth quarter stagnation figure reflects the impact of strikes. The Bank of England has warned that the UK is likely enter a shallow but lengthy recession, starting in the first quarter of this year and lasting over a year.
Commodity markets
In the commodity markets, Brent Crude futures traded around $87 per barrel on Friday, and are on track to rise around 7% this week, after Russia announced plans to cut output by 500,000 barrels a day in March. The unexpected move is a retaliation against the European ban on seaborne imports and price caps for Russian oil products, causing a wave of volatility in oil markets. Concerns are now beginning to mount about tight global oil supplies at a time when demand is likely to rebound. Earlier this week, a crucial oil terminal in Turkey suspended operations due to the recent earthquake and a key oil field in Norway unexpectedly shut down.
Meanwhile, the world’s top exporter, Saudi Arabia, raised crude prices for Asian markets for the first time in six months, in the latest signal that demand could be poised to bounce on the likelihood of higher imports from China.
Gold traded around $1,860 an ounce on Friday and is set to decline for the second straight week, weighed down by hawkish signals from Federal Reserve officials who reiterated their commitment to bring down inflation with more rate increases. Investors are now looking ahead to more Federal Reserve commentary and US consumer sentiment data on Friday, as well as next week’s US inflation data for clues about the trajectory of central bank policy tightening.
US equities
US equity futures fell on Friday, as the prospect of further policy tightening from the Federal Reserve amid its fight against inflation weighed on sentiment. In regular trading on Thursday, The Dow Jones Industrial Average fell 0.73%, while the S&P 500 Index declined 0.88% and the Nasdaq Composite lost 1.02%. The yield on the US 10-year Treasury note, seen as a proxy for global borrowing costs, moved towards 3.7%, as investors reassessed the Federal Reserve’s plans for rate hikes. Investors now see the US central bank raising the Fed funds rate to 5%-5.25%, with expectations of a further 0.25% rise in March and May before pausing. The number of Americans filing for unemployment benefits rose to 196,000 last week, up from the previous week’s nine-month low of 183,000 and above expectations of 190,000. Nevertheless, the latest figures suggest that the labour market remains tight, which could contribute further to inflationary pressure in the world’s largest economy.
The trade deficit in the US widened to $67.4 billion in December 2022 from a downwardly revised $61 billion in November. Considering the full 2022, the US trade deficit went up to a record high of $948.1 billion, equivalent to 3.7% of GDP from $845 billion in 2021, as rising inflation, high energy prices and robust demand pushed imports to the highest level ever. The deficit with China widened to $382.9 billion and the one with Canada to $81.6 billion.
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