UK markets declined slightly this week, with the FTSE 100 Index falling by 0.35% to trade at 8,320 points at the time of writing. The UK economy unexpectedly shrank by 0.1% in October, according to figures from the Office for National Statistics published on Friday.
The monthly change in GDP undershot the 0.1% expansion forecast by economists polled by Reuters and followed a 0.1% contraction in the previous month. The figures highlight the economic challenge for the new Labour government, which won the UK general election in July with a manifesto commitment to “secure the highest sustained growth in the G7”. They point to a weak start to the fourth quarter after annual economic growth slowed to 0.1% in the three months to September, down from 0.5% in the previous quarter.
The UK economy has grown in just one of the five months to October and growth is now 0.1% lower than before Labour came into power. However, growth is expected to accelerate to 1.7% in 2025. This is weaker than the 2.4% expansion forecast for the US but stronger than the 1.3% growth expected in the Eurozone.
High borrowing costs are still limiting household spending and business activity but they have come down from their peak after the Bank of England cut interest rates in August and November to the current rate of 4.75%. Markets are expecting more rate cuts next year, as inflation eases from its multi-decade high reached in 2022.
Hiring has fallen more sharply in the UK than in other major economies over the past year, as worries over weak growth and rising wage bills lead some businesses to cut headcount. UK job postings were 13% below their pre-pandemic level and 23% lower than a year ago, according to figures published by the job search site, Indeed. This was a bigger retrenchment than in any of the other markets it covers, including the US, France, Germany, Canada and Australia.
Commodity markets
In the commodity markets, Brent crude futures traded around $74 per barrel on Friday and are set to end the week higher, as investors focused on a forecast of ample supply, whilst expectations of higher demand next year from Chinese stimulus measures and expectations of another Federal Reserve interest rate cut next week, lifted sentiment.
The International Energy Agency said it expected non-OPEC+ nations to boost supply by around 1.5 million barrels per day next year, driven by the United States, Canada, Guyana, Brazil and Argentina. OPEC cut its demand growth forecast for 2024 for the fifth straight month on Wednesday and by the largest amount yet. Expectations for a further rate cut from the Federal Reserve next week spurred some optimism about economic growth and energy demand. Gasoline and distillate inventories rose by more than expected last week, according to data from the Energy Information Administration.
Investors are also anticipating a rise in Chinese demand for oil after Beijing unveiled plans this week to adopt an “appropriately loose” monetary policy in 2025, which could spur oil demand. Global oil demand rose at a slower than expected rate this month, but has remained resilient, analysts at JP Morgan said in a note on Thursday. Investors also assessed the impact of tighter sanctions on Russia and Iran on supplies from the major oil producers to China and India.
Gold prices traded around $2,670 an ounce on Friday and are set for a weekly rise, driven by reports of top consumer, China resuming gold purchases, and heightened expectations of an interest rate reduction by the Federal Reserve at its December 17-18th Meeting.
Equity markets
US equity futures rose on Friday as results from the semiconductor sector boosted sentiment. In Thursday’s regular session, the Dow Jones Industrial Average lost 0.53%, the S&P 500 fell 0.54%, while the Nasdaq Composite declined 0.66%.
US inflation rose to 2.7% in November, up from 2.6% in October, the Bureau of Labor Statistics announced on Wednesday. The figure was in line with the expectations of economists polled by Bloomberg, but still marked the second monthly increase in a row. November’s US inflation print has cleared the way for an expected 0.25% interest rate cut at the Federal Reserve’s meeting next week, according to industry commentators. This would take interest rates to a new target range of between 4.25-4.5%.
The trajectory for interest rates next year is less certain, as the central bank aims to keep inflation close to 2% whilst maintaining a healthy labour market. Federal Reserve officials have discussed slowing the pace of cuts as rates reach a more “neutral” setting that is high enough to keep inflation in check but sufficiently low to safeguard the labour market. They argue that if they cut rates too quickly, inflation may get above their 2% target, but moving too slowly could risk a sharp rise in the unemployment rate.
US Treasury Secretary, Janet Yellen said this week that the sweeping tariffs proposed by Donald Trump could “derail” progress on taming inflation. She argued that tariffs could have an adverse impact on the competitiveness of some sectors of the US economy and could significantly raise costs to households.
Elsewhere, the number of Americans filing new applications for unemployment benefits unexpectedly increased by 17,000 to a seasonally adjusted 242,000 for the week ended December 7th, as demand for labour cools.
The US Dollar also gained against the Euro and the Swiss franc, following rate cuts from the European Central Bank and Swiss National Bank on Thursday.
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