UK markets were positive this week, with the FTSE 100 Index rising by 1.5% to trade at 7,750 points at the time of writing.
The UK economy returned to growth in January, helped by the expansion of the services sector, following a technical recession in the second half of 2023. GDP rose by 0.2% between December and January, according to figures released from the Office for National Statistics on Wednesday. The rise was in line with analysts’ forecasts and marked a rebound from two consecutive quarters of economic contraction in the second half of 2023. January’s GDP growth raises expectations of the UK economy expanding in the first quarter, which would end the recession and give Prime Minister Rishi Sunak a boost ahead of the general election expected this year.
Despite the monthly growth in January, the UK economy remains fragile. Output was down 0.3% compared with January 2023, according to the Office for National Statistics, reflecting the impact of high interest rates and the cost of living crisis.
UK wage growth continued to slow in the three months to January, with the latest figures revealing average earnings, including bonuses, were 5.6% higher over the period than a year earlier, down from an annual growth rate of 5.8% in the three months to December. Excluding bonuses, annual pay growth slowed from 6.2% to 6.1%. The slowdown in total pay growth across the economy was slightly higher than analysts had expected, with total pay growth forecast at 5.7%, confirming the Bank of England’s view that inflationary pressures are easing in the economy.
Commodity markets
In the commodity markets, Brent crude futures traded around $85 per barrel on Friday, and are set for a weekly rise, underpinned by US inventory data and attacks on Russian refineries.
Ukraine carried out drone strikes on Russian refining facilities this week, causing a fire at Rosneft’s biggest refinery in one of the most serious attacks against Russia’s energy sector in recent months. After seriously damaging Lukoil’s refinery in Nizhny Novgorod on Tuesday, Ukraine hit refineries in the Rostov and Ryazan regions, Russian officials said. In Ryazan, a drone attack caused a fire at Rosneft’s refinery. Two sources familiar with the situation told Reuters that the refinery has been forced to shut down two primary oil refining units.
On the demand side, US crude oil stockpiles fell unexpectedly as processing increased and gasoline inventories decreased amid strong demand ahead of the summer driving season, the Energy Information Agency (EIA) said on Wednesday.
Crude inventories ended six straight weeks of builds to fall by 1.5 million barrels to 447 million barrels in the week ended March 8th, compared with analysts’ expectations in a Reuters poll for a 1.3 million barrel rise. The EIA also raised its view on 2024 oil demand growth for a fourth time since November, forecasting oil demand to rise by 1.3 million barrels per day in 2024, citing a slight supply deficit after OPEC+ members extended cuts from a surplus previously.
Gold traded around $2,170 an ounce on Friday, retreating from a record peak of $2,194.99 on Monday, as higher inflation data cooled expectations of early interest rate cuts by the Federal Reserve, boosting Treasury yields and the dollar.
Equity markets
US equity futures were mixed on Friday as investors digested the implications of another hot inflation reading. In Thursday’s regular session, the Dow Jones Industrial Average fell 0.35%, the S&P 500 lost 0.29%, while the Nasdaq Composite retreated 0.30%.
US inflation rose to 3.2% last month, above economists’ expectations of the annual rise in consumer prices remaining unchanged from January’s rate of 3.1%. The consumer price inflation numbers are expected to play an important part in the Federal Reserve’s meeting next week, when rate-setters are due to vote on whether to cut rates from their 23-year high of 5.25% to 5.5%. The March 20th meeting will also detail how many cuts the US central bank currently plans. At present, the Federal Reserve plans to reduce rates three times this year, whilst markets are expecting three or four cuts during the course of 2024.
The inflation figures released on Tuesday from the Bureau of Labor Statistics are likely to keep pressure on the US central bank to keep borrowing costs higher for longer, as inflation has started to move sideways and remains well above the 2% target. The figures also showed that core inflation, which excludes changes in food and energy costs, reduced to 3.8%, compared with 3.9% in January. Economists had expected a fall in the metric, which is seen as a better measure of underlying prices, to 3.7%.
Elsewhere, the Producer Price Index for final demand in the US rose by 0.6% month-on-month in February 2024, marking the largest increase since last August and surpassing market expectations of a 0.3% advance. Goods prices rose by 1.2%, the most in six months, primarily driven by a 4.4% surge in energy costs and a 1% uptick in food prices. On a yearly basis, producer price inflation accelerated to 1.6% from January’s 0.9%, surpassing forecasts of 1.1%.
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