UK markets ended the week in positive territory, with the FTSE 100 Index rising by 1% to trade at 7,670 points at the time of writing.
The UK economy returned to growth in April, driven by a rebound in consumer spending and fewer strikes, although the prospect of higher interest rates clouded the outlook.
GDP grew 0.2% between March and April, reversing some of the contraction seen during the previous month, according to data published by the Office for National Statistics on Wednesday. The expansion has increased optimism that the UK economy will escape a recession this year, although with the full effects from higher interest rates yet to be felt, it is still too soon to sound the all-clear.
The strong labour market and the resilience of the economy will support market expectations that the Bank of England will continue raising rates in the months ahead to bring inflation down to its 2% target.
The outlook for the UK economy has vastly improved during the past few months, largely reflecting the fall in wholesale gas prices from their peak in summer. However, moves to withdraw or reprice mortgage deals have increased in recent weeks, as the financial markets react to stubbornly high inflation data, which has changed expectations of how far that the Bank of England will have to raise interest rates.
Two of the UK’s largest Mortgage lenders, NatWest and Nationwide, announced on Thursday they were increasing their interest rates, piling further pressure on household budgets and the government as it tries to contain the cost-of-living crisis.
Commodity markets
In the commodity markets, Brent crude futures traded around $75 per barrel on Friday, and are set to end the week unchanged, as investors assess the impact of China’s interest rate cuts and the US Federal Reserve’s interest rate pause on demand.
A weaker Dollar supported the oil price, as it makes oil cheaper for holder of other currencies. The International Energy Agency announced in its latest monthly report that global oil demand will rise by 6% between from 2022 to reach 105.7 million barrels per day in 2028 on the back of petrochemical and aviation sectors. Although it expects that demand will trickle to a halt in the near term as Chinese consumption is set to slow down after an initial pent-up recovery.
Gold traded around $1,965 an ounce on Friday, making slight gains this week, benefitting mainly from the Dollar’s weakness. However, gains were minimal, as the European Central Bank delivered another 0.25% rate hike on Thursday, while the Bank of England is set to raise rates again at its June policy meeting, and the Federal Reserve hinted that further interest rate hikes are on the horizon.
US equity futures
US equity futures were firmly in the green on Friday, as investors became increasingly optimistic about the monetary policy outlook. In Thursday’s regular trading session, The Dow Jones Industrial Average soared 1.26%, while the S&P 500 Index rose 1.22% and the Nasdaq Composite gained 1.15%. The annual pace of US inflation eased last month to its lowest level in more than two years, with the consumer price index climbing 4% in May, a considerable decrease from the 4.9% annual rise registered in April. This was the slowest increase since March 2021 and a significant drop from its peak of 9.1% in June 2022.
The latest inflation reading came just before the Federal Reserve’s two-day policy meeting, which concluded with the Federal Open Market Committee voting unanimously to forgo another 0.25% increase and hold the federal funds rate at the existing target range of between 5% and 5.25%. However, the Federal Reserve signalled its support for two more interest rate rises this year, including one that could be implemented at its next meeting in July.
Elsewhere US initial jobless claims for the week were 262,000, sharply above expectations of 249,000, and unchanged from the previous week’s revised level. This reflects some softening in the US labour market, after a prolonged period of tightness, as US businesses start to feel the impact of the Federal Reserve’s aggressive tightening campaign.
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