UK markets were little changed this week with the FTSE 100 Index falling by 0.62% to trade at 7426 points at the time of writing.
UK inflation fell to 10.7% in November, an easing in the rise of petrol prices helped to lower the rate from a 41-year high of 11.1% last month. The figure was better than an expected 10.9% rise, economists said the annual inflation rate has now probably passed its peak with the sharp price rises of the past 18 months coming to an end.
Nevertheless, the Bank of England still raised interest rates by 0.5% to 3.5% as inflation remains near a 40-year high. This marks the tenth consecutive interest rate rise and brings borrowing costs to the highest level since 2008.
Commodity Markets
In the commodity markets, Brent crude futures traded around $81 per barrel on Friday and are set to end the week higher as investors weighed hopes of a revival in Chinese demand and tight global supplies against concerns about a recession in the developed world.
Looking towards 2023, OPEC said it expects oil demand to grow by 2.25 million barrels per day over the next year to 101.8 million bpd, with potential upside from China, the world’s top importer.
The international energy agency predicts Chinese oil demand recovering next year after a 400,000 bpd contraction in 2022, and raised its 2023 oil demand growth estimate to 1.7 million bpd for a total of 101.6 bpd. Road and air traffic in China has rebounded sharply, data suggests.
On the supply side, OPEC+ has decided to stick to its existing policy of reducing oil output by 2 million barrels a day from November through to 2023.
Gold traded around $1,780 an ounce on Friday after the US Federal Reserve delivered a smaller 0.5% interest rate hike, signalling the terminal rate will be higher than initially expected. Gold prices have been trading at near six-month highs recently, as investors predict that major central banks will soon begin to start slowing the pace of rate increases.
US Equity Markets
US equity markets fell heavily on Thursday with all three major US indices lower, the Dow Jones Industrial average -2.25%, the S&P 500 -2.49% and the Nasdaq -3.23%.
Markets reacted to Wednesday’s Federal Reserve 0.5% rate hike with an indication that the US Fed was not yet finished rising interest rates.
Despite the ongoing inflation concerns, US consumer price inflation eased more than expected in November to its lowest level in almost a year, falling to 7.1% last month. This was lower than the 7.3% forecast by economists and down from 7.7% in October.
US CIP is now at its lowest level since December 2021. Energy and goods prices have begun to slow this year, having previously helped to push up the annual increase in the CIP index to 9.1% in June. However, services related costs have risen at an alarming pace bolstered in part by an acceleration in wage growth because of the surprisingly resilient labour market.
Nevertheless, investor sentiment remained cautious due to a hawkish Federal Reserve and concerns about a looming recession. The peak federal funds rate is now projected at 5.1% next year, with cuts in rates coming only in 2024.
Federal Reserve Chair Jerome Powel stated that interest rates will remain elevated for some time, however, the US central bank is getting close to reaching the end of its tightening cycle.
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