UK markets had another positive week with the FTSE 100 Index hitting a four-year high, rising by 2.1% to trade at 7,840 points at the time of writing. The export orientated index has been benefiting from the reopening of the Chinese economy despite some concerns that it could also trigger another wave of Covid-19 infections.
The UK economy expanded in November 2022, easing from a 0.5% growth in the previous period but beating market forecasts of a 0.2% decline. Data showed that consumers kept spending despite the severe cost of living squeeze, led by food and beverage services, in a month when the FIFA World Cup started.
The British Pound held above $1.22, the highest level since December 14th as investors welcomed positive economic data, which reduced the chances of the UK slipping into a technical recession in the final quarter of 2022. On the monetary policy front, Bank of England Chief Economist, Huw Pill, warned about the risks of persistent inflation pressures from a tight labour market. The UK central bank is likely to raise interest rates again to 4% next month, following nine consecutive rate hikes. Markets are split on how much further interest rates will rise beyond that, with current consensus pointing to rates peaking at around 4.5% by the middle of 2023.
Commodity markets
In the commodity markets, Brent crude futures traded around $84 per barrel on Friday and are on track to gain around 6% this week, rising on optimism that demand for fuel will grow this year. The world’s largest oil importer China is making significant efforts to boost its economy while ending its strict Covid zero policy.
Concerns surrounding the impact of sanctions on Russian supply also raised the outlook for oil, as European Union curbs aimed at Russian fuel product sales are due to take effect in February. Elsewhere, OPEC+ decided to stick with its policy of restricting global oil supplies by 2 million barrels per day, a move due to run to the end of 2023.
Gold prices extended gains this week, trading above $1,900 an ounce, a level not seen since April last year, as the Dollar continued to fall and Treasury yields retreated, as investors digested the latest US consumer price inflation report. Markets are now betting the US Federal Reserve will downshift to a smaller 0.25% interest rate hike in its next meeting, after delivering a 0.5% increase in December.
US equity markets
US equity futures rose on Friday as investors awaited earnings reports from major banks while assessing the latest inflation report and its implications on monetary policy. The major averages closed higher in Thursday’s regular trading session, with the Dow Jones Industrial Average and the Nasdaq Composite Index both gaining 0.64%, while the S&P 500 Index added 0.34%.
Annual US inflation fell in December to its lowest level in more than a year, in a further sign that price pressures have peaked amid the Federal Reserve’s historic campaign to tighten monetary policy. The US consumer price index published on Thursday, declined for a sixth consecutive month, registering an annual increase of 6.5%. Whilst US inflation is still running near a multi-decade high, this was the lowest level since October 2021 and represents a notable decline from the 9.1% reached in June. Compared with the previous month, prices dropped 0.1%.
The report widely matched Wall Street projections, offering hope to investors that price pressures have peaked and reinforced the view that the Federal Reserve will slow its aggressive tightening campaign. On the contrary, several Federal Reserve officials reiterated their hawkish stance this week, with Chair, Jerome Powell, saying that “restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy”.
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