UK markets declined this week with the FTSE 100 Index losing 1.94% to trade at 7,820 points at the time of
writing.
UK inflation slowed less than expected in March with consumer prices rising at an annual rate of 3.2%, down from 3.4% in February, the Office for National Statistics said on Wednesday. The figure was slightly higher than the 3.1% forecasts by economists polled by Reuters and the Bank of England. This made investors and economists more cautious about the likely pace of interest rate cuts, despite the rate of price increases falling below the US level for the first time in two years.
Investors are now betting that the Bank of England will begin reducing its benchmark rate from a 16-year high of 5.25% in either September or November, having fully priced in a cut for September before the figures were released. However, the data still marked the lowest UK inflation rate since 2021, driven by a fall in food prices.
The International Monetary Fund said on Tuesday that it expects UK inflation to drop from 7.3% last year to 2.5% in 2024 and 2% next year. Speaking at a conference hosted by the Institute of International Finance in Washington DC, Bank of England Governor, Andrew Bailey, struck an upbeat note about the central bank’s efforts to quell inflation, insisting that the latest data shows the UK is “pretty much on track” with its forecasts. He also added that the UK is in the midst of a “pronounced period” of disinflation.
UK wage growth was 5.6% higher in the three months to February than a year earlier, above analysts’ expectations of a 5.5% rise, according to figures released on Tuesday by the Office for National Statistics. However, the figures were accompanied by a sharp rise in unemployment, which averaged 4.2% in the three months to February, up 0.3% from the previous three-month period. The combination of persistently high wage growth and a weaker jobs market will send mixed signals to policymakers at the Bank of England trying to gauge how far inflationary pressures in the economy are easing.
Elsewhere, British retail sales unexpectedly stagnated in March, as a contraction in food and online purchases offset growth at clothing stores and petrol stations. The zero growth was lower than a 0.3% expansion forecast by economists polled by Reuters.
Commodity markets
In the commodity markets, Brent crude futures traded around $87 per barrel on Friday and are set for a weekly decline, despite Israel carrying out a strike on Iran, triggering fears of an expanding war in the Middle East. Israel carried out a limited military strike against Iran in the early hours of Friday morning local time.
Oil prices initially jumped around 3% on the news of explosions in Iran, before paring gains, as Israel assessed the
strikes effectiveness and damage caused. Iran’s air defences shot at incoming targets and explosions were reported near the cities of Isfahan, in central Iran, and Tabriz in the north-west. Iranian state media played down the damage from the attacks and Iran lifted flight restrictions overnight.
Israel notified the US of its intention to carry out strikes on Iran on Thursday evening, giving its closest ally a few hour official notice, an Israeli official said. Israel on Sunday vowed to “exact a price” from Iran in response to the weekend’s large-scale aerial assault on the Jewish state. A day earlier, Iran struck military targets inside Israel, launching more
than 300 missiles and drones in retaliation for an Israeli strike on its embassy compound in Damascus, Syria.
With the two countries exchanging airstrikes, we now have a direct nation-on-nation hot war. While the US has pledged an “ironclad” commitment to Israel, President Joe Biden told Israeli Prime Minister, Benjamin Netanyahu the US will not join any offensive operations against Iran.
Oil prices also fell on a 10 million barrel build in US petroleum inventories last week.
Gold traded around $2,380 an ounce on Friday, retreating from an all-time high of $2,431.29 last week. Nevertheless, gold remains firmly in bullish territory as news of Israel’s attacks on Iran drove gold price attention on the Middle East. Chinese gold reserve accumulation is also acting as a major catalyst.
Equity markets
US equity futures fell on Friday, following reports of an escalating conflict in the Middle East. In Thursday’s regular session, the Dow Jones Industrial Average gained 0.06%, the S&P 500 fell 0.22%, while the Nasdaq Composite lost 0.52%.
US Federal Reserve chair Jerome Powell has said it is likely to take “longer than expected” for inflation to return to the central bank’s 2% target and justify cuts to interest rates. He added that the Federal Reserve Open Market committee will need “greater confidence that inflation is moving sustainably towards 2% before it would be appropriate to ease policy”.
Powell spoke after global markets reined in their expectations for rate cuts, sparking a heavy sell-off on Wall Street on Monday. The fallout spread around the world on Tuesday, when European markets suffered their worst day in nine months and Asian currencies weakened against the Dollar. The Federal reserve previously indicated that it intended to cut rates from their 23-year high of the 5.25% to 5.5% range this year. However, the timing of the first move is now being debated, amid signs of persistent strength in the US economy, and higher than anticipated inflation.
Powells remarks highlight the widening gap between rate expectations for the Federal Reserve and other big
central banks, with the European Central Bank widely expected to cut rates in June.
Elsewhere, the International Monetary Fund (IMF) has warned the US that its massive fiscal deficits have stoked inflation and pose “significant risks” for the global economy. The IMF said in its benchmark Fiscal Monitor that it expected the US to record a fiscal deficit of 7.1% next year, more than three times the 2% average for other advanced
economies.
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