UK markets suffered a volatile week but ended near record levels, with the FTSE 100 Index rising by 2.7% to trade at 8,475 points at the time of writing. UK inflation unexpectedly slowed to 2.5% in December, paving the way for further interest rate cuts next month.
The consumer price inflation figure, which was below November’s 2.6% reading and pulled lower by restaurant and hotel prices, led to a rally in UK equity and gilt prices. The data provided some relief for Chancellor Rachel Reeves, who is contending with higher borrowing costs fuelled by fears the UK could be entering a period of stagflation, in which sluggish growth is accompanied by persistent price pressures. However, economists still expect inflation to reaccelerate in the months ahead, particularly given that December’s drop was driven by volatile factors such as lower airfares.
The recent increase in UK borrowing costs, which last week hit a 16-year high, has threatened to blow a hole in the Chancellor’s promise to balance day to day spending with tax receipts by 2029. Following the inflation data, traders were pricing in more than an 80% chance of a 0.25% cut in February, compared with about 60% beforehand. The data showed that services inflation, which is closely watched by the Bank of England as a gauge of underlying price pressures, slowed sharply to 4.4%, from 5% previously. It was also below the 4.9% expected by economists. Core inflation, which excludes food and energy, dropped to 3.2% from 3.5%.
The UK economy grew by 0.1% in November, below the 0.2% growth forecast by economists polled by Reuters and following a 0.1% contraction in both October and September, according to data published on Thursday by the Office for National Statistics.
The disappointingly modest return to growth for the UK economy is unlikely to ease stagflation concerns and is it is doubtful that it will have sparked a more notable improvement in economic activity across the fourth quarter. November’s expansion was the first since August, and led by the dominant services sector, which grew 0.1% and offset a 0.3% contraction in manufacturing. The construction sector grew 0.4% in November, following a 0.3% contraction in October. However, the UK economy remained 0.1% smaller in November than in March 2024, highlighting the challenge for Chancellor, Rachel Reeves as she comes under increasing pressure to rebuild confidence in the government’s fiscal plans.
Elsewhere, UK retail sales unexpectedly declined 0.3% month over month in December 2024, following a downwardly revised 0.1% rise in November and compared to forecasts of 0.4%
Commodity markets
In the commodity markets, Brent crude futures traded around $81 per barrel on Friday and are set for a weekly rise due to the latest sanctions on Russia and a larger than forecast fall in US crude stocks. US crude oil stockpiles fell last week to their lowest since April 2022, as exports rose and imports fell, the Energy Information Administration said on Wednesday. The 2 million barrel draw was more than the 992,000 barrel decline analyst had expected in a Reuters poll. The drop added to a tightened global supply outlook after the US imposed broader sanctions on Russian oil producers and tankers. The sanctions have sent Moscow’s top customers scouring the globe for replacement barrels, while shipping rates have also surged.
The Biden administration on Wednesday imposed hundreds of additional sanctions targeting Russia’s military industrial base and evasion schemes. Limiting oil’s gains, Israel and Hamas agreed to a deal to halt fighting in Gaza and exchanged Israeli hostages for Palestinian prisoners. On the demand front, global oil expanded by 1.2 million barrels per day in the first two weeks in 2025 from the same period earlier, slightly below expectations, JP Morgan analysts wrote in a note. The analysts expect oil demand to grow by 1.4 million barrels per day year on year in the coming weeks, driven by heightened travel activities in India, where a huge festival gathering is taking place, as well as by travel for Chinese New Year celebrations at the end of January.
Gold prices traded around $2,710 an ounce on Friday, hitting a one month high, following a soft core inflation reading this week that increased the chances of a more dovish Federal Reserve policy.
Equity markets
US equity futures rose on Friday with equities gaining momentum this week, as a surprise decline in US core inflation boosted bets on further Federal Reserve interest rate cuts this year. In Thursday’s regular trading session, the Dow Jones Industrial Average fell by 0.16%, the S&P 500 lost 0.21%, whilst the Nasdaq Composite retreated 0.89%.
US stocks and bonds rallied this week after data published on Wednesday showed underlying price pressures in the world’s largest economy easing more than expected, prompting investors to bet on swifter interest rate cuts this year.
The figures from the Bureau of Labor Statistics showed that headline annual inflation rose in line with expectations to 2.9% in December, from 2.7% in November. However, core inflation, which strips out volatile food and energy costs, fell unexpectedly to 3.2% from 3.3% a month before. Investors are now betting that the Federal Reserve will cut rates by July, compared to September before the data was published. The probability of a second cut this year implied by futures markets climbed to roughly 60%, from about 20% earlier in the week. US central bankers have signalled in their own projections that they will only cut rates by a further 0.5% this year.
Donald Trump, who takes office on Monday, has laid out aggressive plans to impose tariffs on a vast swath of imports, implement a huge crackdown on undocumented immigrants and enact sweeping tax cuts. Economists have warned such plans could boost inflation further.
The number of Americans filing new applications for unemployment benefits increased more than expected last week, but remained consistent with a healthy labour market. Initial claims for state unemployment benefits rose by 14,000 to a seasonally adjusted 217,000 for the week ended January 11th, the Labour Department said on Thursday. Economists polled by Reuters had forecast 210,000 claims for the latest week.
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