UK markets rose this week, with the FTSE 100 Index gaining 1.35% to trade at 8,020 points at the time of writing. The UK economy grew for the second month in a row in February with GDP rising 0.1% between January and February, the Office for National Statistics said on Friday.
This was in line with analysts’ expectations and down from growth of 0.3% in January. Growth was driven by an expansion in manufacturing, raising the likelihood that the UK economy expanded overall in the first quarter, marking the end of the technical recession it slipped into at the end of 2023.
Investors are now pricing in two 0.25% interest rate cuts from the Bank of England this year, after policymaker, Megan Greene, argued that investors had underestimated the risk that inflation would remain high for longer in the UK than in other advanced economies.
Investors are no longer fully pricing in the first UK interest rate cut in August and now expect borrowing costs to begin to fall in either August or September. The two cuts now expected this year, contrast with the more than six cuts anticipated in January.
Market expectations have shifted in a similar fashion in the US and the Eurozone with investors in both regions slashing the number of interest rate cuts they expect this year by at least half. Growth in retail sales picked up in March, increasing at an annual rate of 3.5% last month, up from 1.1% in February, according to data from the British Retail Consortium.
March’s reading was above the 12 month average of 2.9% and points to signs of a recovery for the sector on the back of easing price pressures. The surge in sales was largely driven by food purchases, which increased 6.8% in March, on the back of stronger sales volumes, even as the prices of some staple items have started to moderate.
Elsewhere, UK lenders reported a return to growth in the demand for mortgages in the first three months of 2024, according to the Bank of England’s quarterly survey of banks and building societies.
Commodity markets
In the commodity markets, Brent crude futures traded around $90 per barrel on Friday and are set to end the week unchanged as investors braced for a worsening of the Middle East crisis, potentially involving Iran, the third largest oil producer in OPEC.
The US and its allies see a major missile or drone strike by Iran or its proxies against Israel as imminent, people familiar with the intelligence told Bloomberg. Tensions in the Middle East are red hot, with Israel warning OPEC member, Iran on Wednesday it would attack the Islamic Republic if Tehran strikes Israel.
Iran’s Supreme Leader, Ayatollah Ali Khamenei, has threatened to punish Israel after Iran’s consulate in Damascus, Syria, was destroyed by a missile attack last week, killing seven Iranian military officials. Israel has not claimed responsibility for the strike but the US has assessed that Israel is responsible. Inflation fears kept a lid on prices after a hotter than expected US consumer price reading in March haunted the market.
Gold traded around $2,400 an ounce on Friday, hitting an all-time high for an eighth straight session as softer than expected US producer prices data boosted hopes for US interest rate cuts this year, while persistent geopolitical tensions and central bank buying continued to support the gold market.
Equity markets
US equity futures were mixed on Friday, as investors prepared for the start of the earnings season with major banks set to release their latest quarterly results. In Thursday’s regular session, the Dow Jones Industrial Average fell 0.01%, the S&P 500 rose 0.74%, while the Nasdaq Composite gained 0.99%.
Investors reduced their expectations on Federal Reserve interest rate cuts on Wednesday after US inflation surpassed expectations and President Joe Biden, acknowledged there was “more to do” on fighting price rises. Inflation data from the Bureau of Labor Statistics revealed that in seasonally adjusted terms, its consumer price index (CPI) increased at a month-on-month pace of 0.4% in March. The increase was higher than expected amid gains in the cost of energy, clothing and medical care services. Year-on-year, CPI increased by 3.5%, compared with 3.2% in February and forecasts of a 3.4% rise.
Core inflation, which excludes changes in food and energy costs, also exceeded expectations, remaining at 3.8%, the same rate as February. Economists had expected a core rate for March of 3.7%. Even before the data, higher than expected releases in January and February had already sparked concerns among rate setters that inflation would prove too sticky to enable them to cut rates as soon as expected.
While Federal Reserve officials still believe they remain broadly on track to hit their 2% target, the minutes of the Federal Open Market Committee’s March vote showed factors ranging from higher oil prices and housing costs to looser financial conditions, posed upside risks to the base case.
The Federal Reserve is now expected to start reducing interest rates in September, much later than originally forecast, with only two cuts now pencilled in for the year, according to the CME’s FedWatch Tool. A Labor Department report showed the Producer Price Index rose 0.2% month-on-month in March, compared with a 0.3% increase expected by economists polled by Reuters. This kept alive hopes of possible rate cuts by year end.
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