UK markets declined this week with the FTSE 100 Index falling by 1.3% to trade at 8,165 points at the time of writing. The Pound hit a one year high against the Dollar on Wednesday after UK consumer price inflation figures came in slightly above expectations at 2% for June.
The data was above analysts’ forecasts of 1.9% and prompted investors to reduce their bets that the Bank of England will lower interest rates from their current 16-year high next month. However, the inflation figure released by the Office for National Statistics remained at the Bank of England’s target level of 2%, which it hit in May for the first time in three years. Investors now put the probability of a 0.25% interest rate cut next month at just over a third, having previously been 50/50.
The Bank of England’s Monetary Policy Committee has signalled it is getting closer to lowering rates from their current 5.25%. However, members still want to be confident that underlying price pressures are fully under control. A key concern has been services price growth, which is seen as an important gauge of underlying inflation.
The latest figures showed services inflation holding steady at 5.7% in June, ahead of analysts’ expectations for a decline to 5.6%. Annual growth in average weekly earnings, including bonuses, slowed to 5.7% in the three months to May, down from 5.9% in the three months to April, according to figures released by the Office for National Statistics on Thursday.
Excluding bonuses, annual wage growth also slowed to 5.7%, down from 6% in the three months to April and in line with analysts’ expectations. This means regular earnings have grown 2.5% after adjusting for inflation over the same period. Although the modest easing in wage growth was encouraging, it remains strong, reinforcing doubts over the pace at which the Bank of England will cut interest rates.
Elsewhere, figures from the Office for National Statistics released on Friday showed British retail sales fell by 1.2% in June, higher than the 0.4% decline forecast by economists, as cautious households reined in their spending amid poor weather, election uncertainty and the cost-of-living crisis.
Commodity markets
In the commodity markets, Brent crude futures traded around $85 per barrel on Friday and are set for a weekly fall, as mixed economic signals weighed on investor sentiment and boosted the Dollar. The US Dollar rose for the second consecutive session after stronger than expected data on the US labour market and manufacturing earlier in the week.
Meanwhile, a lack of concrete stimulus measures from top oil importer China has also weighed on commodity prices. China’s economy grew at a slower than expected 4.7% pace in the second quarter, official data showed, sparking concerns about the country’s oil demand. Elsewhere, Japan’s core inflation perked up in June, leaving the door open for an interest rate hike in the major oil market.
Oil prices found some support in the prior two sessions after the US government reported a bigger than expected weekly decline in oil stockpiles. However, broader inventory trends look more bearish than expected this month. Crude stocks have drawn at a slower than usual pace for this time of year and global fuel stocks rose last week. Meanwhile, the OPEC+ producer group is unlikely to recommend changing the group’s output policy, including a plan to start unwinding one layer of oil output cuts from October.
Gold Prices traded around $2,420 an ounce on Friday, retreating from record highs set earlier this week, as the Dollar rebounded on robust economic data, although bets for a US interest rate cut in September remained intact. Decreasing rates and US elections are two immediate factors likely to push gold higher, as the metal tends to benefit from economic and geopolitical uncertainty.
Equity markets
US equity futures fell on Friday as businesses across the world, from airlines to financial services and media groups, were hit by a global IT outage on Friday, causing massive disruption to a wide range of services and operations.
In Thursday’s regular session, the Dow Jones Industrial Average fell 1.29%, the S&P 500 lost 0.78%, while the Nasdaq Composite declined 0.70%.
Initial claims for US state unemployment benefits increased by 20,000 to a seasonally adjusted 243,000 for the week ended July 13th, the Labor Department said on Thursday. Economists polled by Reuters had forecast 230,000 claims for the last week, although the data was not considered to be a notable shift in the labour market due to seasonal factors.
The latest Philadelphia Fed manufacturing index remained in positive territory for a sixth straight month, as manufacturing activity expanded overall, according to firms responding to the July Manufacturing Business Outlook Survey. The survey’s indicator for general activity rose, and the indexes for shipments and new orders turned positive. Most future activity indicators rose, suggesting more widespread expectations for overall growth in the next six months. Markets are now pricing in a 100% chance of a US rate cut in September, according to the CME FedWatch tool.
However, Donald Trump has warned Jerome Powell not to cut US interest rates before November’s presidential vote. The Republican nominee acknowledged in an interview with Bloomberg News that the Federal Reserve would “maybe” cut interest rates before the election on November 5th, but added that “it’s something they know they shouldn’t be doing”.
The information provided in this communication is not advice or a personal recommendation, and you should not make any investment decisions on the basis of it. If you are unsure of whether an investment is right for you, please seek advice. If you choose to invest, your capital may be at risk and the value of an investment may fall as well as rise in value, so you could get back less than you originally invested.