UK markets were positive this week, with the FTSE 100 Index rising by 1.4% to trade at 7,610 points at the time of writing. UK GDP grew by 0.2% between July and August, driven by a service sector recovery, according to data from the Office for National Statistics. However, the increase followed a contraction of 0.6% in the previous month, when strikes and wet weather disrupted economic activity.
The Bank of England’s Chief Economist, Huw Pill, said that decisions on interest rates will be ‘more finely balanced’ following the release of the figures, which suggested that the UK economy was near-stagnant in the third quarter. Much of the effect of the Bank of England’s monetary tightening over the past two years is still feeding into the economy. Therefore, whether interest rates have risen sufficiently to curb inflation, or whether further rate rises are needed is currently unknown.
Huw Pill’s comments are likely to reinforce expectations that the Bank of England will keep interest rates unchanged at 5.25% when its monetary policy committee meets next month, aiming to bring inflation back to target by keeping policy tight, rather than tightening it further.
The data released by the Office for National Statistics on Thursday showed that in August, the economy was smaller than its 2022 peak last May, indicating the persistent effect of high inflation and borrowing costs on UK output.
Further signs of the impact of high borrowing costs on the economy came on Thursday from the Bank of England’s credit condition survey, a quarterly survey of banks and building societies. It showed the proportion of lenders reporting an increase in household defaults on mortgages over the past three months minus those reporting a decrease, rose to 43%, the highest since the second quarter of 2009. Default expectations for the next three months were even higher.
Elsewhere, UK house prices have fallen by a modest 2.8% in nominal terms since their peak in March 2022, but by 13.4% in real terms, according to analysis of the Nationwide house price index by estate agent, Savills. After adjusting for inflation, average real house prices are no higher than they were in late 2015, Savills said.
Commodity markets
In the commodity markets, Brent crude futures traded around $89 per barrel on Friday, and are set for a weekly rise, amid persistent supply-side concerns. The US imposed the first sanctions on owners of tankers carrying Russian oil priced above the G7’s price cap of $60 per barrel to enforce measures meant to punish Russia for the invasion of Ukraine.
OPEC also said it expected global crude stockpiles to decline by 3 million barrels per day this quarter, excluding further supply disruptions from the Israel-Hamas war. Putting a lid on prices, US government data showed US crude inventories rose by 10.2 million barrels in the last week to 424.2 million barrels, much higher than analyst expectations for a 500,000-barrel rise. US crude output also hit a record 13.2 million barrels per day during the week.
Meanwhile the International Energy Agency lowered its oil demand growth forecast for 2024, suggesting harsher global economic conditions and progress on energy efficiency will weigh on consumption. The agency now sees 2024 demand growth at 880,000 barrels per day, compared with its previous forecast of 1 million barrels per day.
By contrast, OPEC stuck to its forecast for relatively strong demand growth next year, expecting it to reach 2.25 million barrels per day.
Gold rose to around $1,885 an ounce on Friday, heading for its best week in seven months, amid tensions in the Middle East. Gold prices were also supported by comments from several Federal Reserve officials, who suggested that higher treasury yields could help to tighten financial conditions, without the central bank needing to lift its own interest rate.
Equity markets
US equity futures traded slightly below the waterline on Friday, as investors looked ahead to corporate earnings reports from the big banks. In Thursday’s regular trading session, The Dow Jones Industrial Average declined 0.51%, the S&P 500 Index fell 0.62%, while the Nasdaq Composite dropped 0.63%.
US inflation was higher than forecast in September, raising the prospect that the Federal Reserve may raise interest rates following similarly robust recent data on the strength of the jobs market. The US consumer price index rose by 3.7% year on year, according to the Bureau of Labor Statistics, the same pace as the previous month, whilst economists had expected a slight decline. On a monthly basis, inflation decelerated from 0.6% to 0.4%, thanks in part to lower pressure from energy prices. However, ‘core’ inflation, which strips out volatile energy and food prices, remained steady at 0.3% month on month. Core inflation edged down from 4.3% to 4.1% on a year on year basis. The data points to an economy that is reaccelerating, as opposed to an imminent recession.
Investors modestly increased bets that the Federal Reserve would raise interest rates again before the year-end, though the odds remain around 50.50. Although rates may still rise a little further, we are probably close to the end of the hiking cycle. The focus now appears to be shifting towards keeping rates at these high levels, potentially for an extended period.
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