UK markets declined this week, with the FTSE 100 Index falling by 3.5% to trade at 7,250 points at the time of writing. UK wages grew much more than expected and at a record annual pace in the three months to June, with annual growth in regular pay, excluding bonuses, of 7.8%, according to data published on Tuesday by the Office for National Statistics.
This was the highest annual growth rate since comparable records began in 2001, and pushed nominal pay above price growth for the first time in more than a year. The larger than expected figures on pay have increased the likelihood of the Bank of England increasing interest rates by a further 0.25% in September, with the Monetary Policy Committee carefully watching wage growth and labour market data for signs of persistent price pressures.
UK inflation slowed in July, as a result of lower energy prices, but underlying price pressures failed to fall as expected, maintaining pressure on the Bank of England to keep interest rates high. UK consumer price inflation was 6.8% higher in July than a year earlier, with the rate of increase down from 7.9% the previous month, according to data published on Wednesday by the Office for National Statistics.
This was the lowest inflation rate since February 2022. Stripping out food and energy prices, core inflation rose at an unchanged annual rate of 6.9% in July, and services prices increased at a faster pace, maintaining pressure on the Bank of England to keep monetary policy tight in order to restore price stability.
Equity markets
US equity futures fell on Friday as investors digested the latest round of earnings and economic data, and as rates jumped to fresh highs. In Thursday’s regular trading session The Dow Jones Industrial Average fell 0.84%, the S&P 500 Index slipped 0.77%, while the Nasdaq Composite lost 1.17%.
The 10-year US Treasury yield reached its highest point since October 2022 on Thursday, after the Federal Reserve’s July minutes, released on Wednesday, showed that the central bank remains concerned about upside risk to inflation. Despite policymakers continuing to fret about the risks of elevated inflation, the minutes showed growing unease among some officials about how much more the Federal Reserve should squeeze the economy.
A few participants indicated a preference to hold rates steady at the July meeting, given expectations that consumer spending will soon slow more notably, the labour market is cooling, and tighter credit conditions are beginning to bite. However, most officials still saw significant upside risks to inflation, which they warned could require further tightening of monetary policy. The minutes also noted that officials need further evidence that price pressures are subsiding in order to become more confident that inflation is clearly on a path back to the 2% target.
Stocks have been suffering through a rocky August, with the major averages headed towards another losing week and in negative territory for the month. Growth stocks have been hit particularly hard, as they are typically far more attractive to investors when interest rates are low, but quickly lose their allure when investors are able to obtain higher yields in lower-risk bonds or money market funds.
Commodity markets
In the commodity markets, Brent crude futures traded around $84 per barrel on Friday and are set for a weekly fall, as economic concerns regarding the Chinese debt crisis, and the possibility of further interest rate hikes in the US weighed on the demand outlook in the world’s two biggest oil consumers.
Investors worried that higher borrowing costs could impede economic growth and in turn reduce overall demand, including for oil. However, prices began to rise again towards the end of the week after China’s central bank said it would keep liquidity reasonably ample and maintain “peaceful and forceful” policy to support economic recovery against headwinds. Data on Wednesday showed that US crude oil inventories fell by nearly 6 million barrels last week on strong exports and refining run rates.
Gold traded around $1,890 an ounce on Friday, slipping to a five-month low as factors such as rising Treasury yields, a firm US dollar and a hawkish view on interest rates from Federal Reserve officials weighed on investor sentiment.
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