UK markets were volatile this week, but managed to end in positive territory, with the FTSE 100 Index rising 1% to trade at 7,650 points at the time of writing. The UK entered a technical recession at the end of 2023, with GDP falling by 0.3% in the final three months of the year compared with the previous three months, following a 0.1% decline in the third quarter, according to data published on Thursday by the Office for National Statistics.
Two consecutive quarters of contracting GDP is commonly defined as a technical recession, although many economists believe stagnation is a better description, in the absence of a sharper or more sustained downturn. The figure was worse than expected, with economists polled by Reuters having forecast the economy would contract by 0.1% in the final quarter, as high borrowing costs, inflation and strikes hit activity.
The figures create a challenging backdrop for the Chancellor of the Exchequer,Jeremy Hunt as he prepares for the March budget. Hunt is considering slashing billions of pounds from public spending plans to fund pre-election tax cuts to boost the Conservative party’s re-election chances.
Consumer price inflation in the UK rose at an annual rate of 4% in January, the same rate as in December, the Office for National Statistics said on Wednesday. Although this was still double the Bank of England’s target, analysts had expected inflation to increase to 4.2%, slightly above the central bank’s estimate of 4.1%. The figures prompted investors to increase bets that the central bank could start cutting its benchmark rate, which stands at 5.25%, from June.
UK wage growth eased by less than expected in the three months to December, with the annual pace of growth in average weekly earnings, including bonuses, slowing to 5.8%, according to data from the Office for National Statistics released on Tuesday. The figure was down from a summer peak of 8.5% and from 6.7% in the three months to November. Whilst it is good news for consumers that wage growth is now comfortably above inflation, it will give the Bank of England new grounds for caution over the timing of rate cuts.
Elsewhere, UK retail sales rebounded in January, rising by 3.4%, following a revised fall of 3.3% in December. The numbers suggest the economy is starting to shrug off some of the weakness seen at the end of 2023, when the UK slipped into a technical recession.
Commodity markets
In the commodity markets, Brent crude futures traded around $82 per barrel on Friday, and are set for a moderate decline, on a weak global demand growth forecast for 2024. Crude oil demand is expected to grow by 1.2 million barrels per day this year, down nearly 50% from growth of 2.3 million barrels per day in 2023, according to the International Energy Agency.
“The expansive post-pandemic growth phase in global oil demand has largely run its course” the International Energy Agency wrote in its February oil market report on Thursday.
Supply, meanwhile, is expected to exceed demand and grow by 1.7 million barrels per day this year, driven primarily by higher production in the US, Brazil, Canada, and Guyana. OPEC, on the other hand, is forecasting a much tighter oil market this year, with demand growing by 2.2 million barrels per day, outpacing production growth of 1.2 million barrels per day outside the cartel.
In the Middle East conflict, Israel bombed Lebanon on Wednesday in retaliation for rocket attacks that killed at least one person and injured seven more in Northern Israel. Also, talks in Egypt at securing a temporary ceasefire in Gaza appear to have stalled.
Gold traded around $2,005 an ounce on Friday to near a two-month low, as investors assessed comments from Federal Reserve officials on unexpectedly high January inflation, that has reduced hopes for swift and deeper interest rate cuts this year.
Equity markets
US equity futures were mixed on Friday as investors assessed further corporate results and macroeconomic data for insights about the Federal Reserve’s future path. In Thursday’s regular session, the Dow Jones Industrial Average rose 0.91%, the S&P 500 gained 0.58%, while the Nasdaq Composite advanced 0.30%. US inflation cooled less than expected in January to 3.1% year on year. Economists polled by Bloomberg has forecast annual consumer price inflation of 2.9%, down from 3.4% in December.
The data released on Tuesday reduced the likelihood of an interest rate cut in May implied by futures markets from 50% to 30%, while the chances of a cut in March were almost fully eliminated. The Federal Reserve’s preferred measure of inflation is the core personal consumption expenditures index, which has slowed more drastically than CPI.
The core PCI index was up 2.9% in January on an annual basis, the first reading of less than 3% in about three years. US retail sales fell by 0.8% in January, falling the most in nearly a year, and below expectations of a 0.2% drop. The data revealed that sales of building materials and garden equipment saw the biggest fall, dropping 4.1%, while petrol stations fell 1.7%. Meanwhile, online sales fell 0.8% and business at clothing and accessory stores decrease by 0.2%.
A report by the Labor Department on Thursday showed the number of Americans claiming unemployment benefits fell by 8,000 from the prior week’s upwardly revised value to 212,000 for the week ending February 9th, firmly below market estimates of 220,000. Companies are mostly reluctant to lay off workers after struggling to fill jobs during and after the Covid-19 pandemic. The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 30,000 to 1.895 million during the week ending February 3rd, the claims report showed.
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