UK markets rose to record highs once again this week, with the FTSE 100 Index gaining 1.67% to trade at 8,430 points at the time of writing.
The Bank of England (BoE) has kept interest rates at a 16-year high for at least another month, as Governor Andrew Bailey said he would not bow to political pressure to cut rates. The BoE’s Monetary Policy Committee announced the decision at midday on Thursday, opting to keep the current rate of 5.25% which was set last August. However, the BoE signalled it would cut rates this summer if inflation stays low.
Speaking at a press conference on Thursday, Baily said “It’s likely that we will need to cut bank rates over the coming quarters, possibly more so than currently priced into market rates”.
Investors are currently expecting the BoE to make two 0.25% cuts by December. The Monetary Policy Committee voted by 7-2 to keep the benchmark rate at 5.25%, with deputy governor Sir Dave Ramsden and external member Swati Dhingra voting for an immediate cut. Economists polled by Reuters had forecast just one vote for a cut, in line with the Monetary Policy Committee’s last meeting in March.
The BoE is now expecting inflationary pressures to fade slightly faster than previously assumed, forecasting that inflation will drop to the 2% target in the second quarter of 2024, before edging higher again to 2.6% in the second quarter of 2025. It also predicted that inflation would subsequently fall to 1.9% in two years’ time and 1.6% in 2027.
The UK economy grew by 0.6% in the first quarter, boosted by car manufacturing and broad-based growth in services. This was the fastest quarter-on-quarter growth figure since 2021 and above the 0.4% forecast by the BoE and economists polled by Reuters. The GDP figures released by the Office for National Statistics on Friday marked the UK’s formal recovery from the shallow recession of the second half of 2023, when output slightly fell for two consecutive quarters, reflecting the impact of high borrowing costs and prices.
Commodity markets
In the commodity markets, Brent crude futures traded around $84 per barrel on Friday and are set for a weekly rise, as falling US crude inventories and higher Chinese imports supported expectations for demand growth in the world’s two largest oil consuming nations.
According to the Energy Information Administration, crude inventories in the US fell last week by 1.4 million barrels to 459.5 million, more than analysts’ expectations for a 1.1 million-barrel decline. Additionally, customs data released on Thursday showed shipments to China in April totalled 10.88 million barrels per day, up 5.45% from a year earlier.
The recovery in oil prices was also helped by increasingly slim hopes of an Israel-Hamas ceasefire, after Hamas said on Wednesday it was unwilling to make more concessions to Israel. A senior Israeli official said late on Thursday that the latest round of indirect negotiations in Cairo to halt hostilities in Gaza had ended and Israel would proceed with its operation in Rafah and other parts of the Gaza Strip as planned. Israeli forces bombarded areas of Rafah on Thursday, as Prime Minister Benjamin Netanyahu dismissed US President Joe Biden’s threat to withhold weapons from Israel if it assaults the southern Gazan city.
Gold traded around $2,370 an ounce on Friday and is set for a weekly rise, supported by softer than anticipated economic data from the US, bolstering expectations that the Federal Reserve’s interest rate cuts may happen sooner than expected.
Equity markets
US equity futures rose on Friday, as investors look ahead to more Federal Reserve commentary to gain clarity on the path for interest rates. In Thursday’s regular session, the Dow Jones Industrial Average gained 0.85%, the S&P 500 advanced 0.51%, while the Nasdaq Composite rose 0.27%.
The number of Americans filing new claims for unemployment benefits rose last week to the highest level in more than eight months, demonstrating further evidence that the US labour market is cooling.
Initial claims for state unemployment benefits increased 22,000 to a seasonally adjusted 231,000 for the week ended May 4th, the highest level since the end of last August. Economists polled by Reuters had forecast 215,000 claims in the latest week. Some of the rise was likely related to seasonal issues following the recently ended school spring breaks. The data shows that the US labour market is steadily rebalancing in the wake of interest rate hikes from the US central bank since March 2022 to dampen demand in the overall economy.
Elsewhere, the average rate for a 30-year fixed mortgage in the US dropped by 0.13% from the previous week to 7.09%, marking a decline after five consecutive weeks of increases and reaching the lowest rate in four weeks. In comparison, the average rate for a 30-year fixed mortgage was 6.35% in the same period last year. Many potential sellers remain hesitant to list their home and part with lower mortgage rates from years prior, which is adversely impacting supply and keeping US house prices elevated, adding to the overall affordability challenges that potential buyers face in a high-rate environment.
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