UK markets changed little this week with the FTSE 100 Index trading flat at 7,770 points at the time of writing.
UK unemployment is beginning to creep up as the number of people not working due to tong term sickness rose to a new record and vacancies continued to decline, in an early sign that the labour market is cooling. The jobless rate rose by 0.2% to reach 3.9%, up from a low of 3.7% in the first three months of the year.
The Bank of England Governor, Andrew Bailey, has acknowledged for the first time that the UK central bank is dealing with a UK wage price spiral, as he pledged to raise interest rates as far as necessary to get inflation back to the 2% target.
Throughout 2022 and into this year, the Bank of England has repeatedly said it was trying to stop the risk of high energy and food costs affecting domestic wages and prices. It has now admitted it failed in that task.
UK water companies apologised for dumping billions of litres of sewage this week and pledged to invest £10 billion to reduce waste outflows, in an announcement that has been dismissed by environmental campaigners.
UK consumer confidence continued to recover in May despite record high food prices, with the GfK consumer confidence index rising three points from April. Consumer sentiment about personal finances and willingness to make expensive purchases all rose, while the gauge for savings intentions was unchanged.
Commodity markets
In the commodity markets, Brent Crude futures traded around $76 per barrel on Friday and are set to end the week slightly higher, underpinned by a solid demand outlook and various supply-side disruptions.
Oil managed to rebound from a sell-off earlier in the week after a sharp fall in US gasoline inventories, due to demand surging to the highest levels since 2021. Global demand is expected to exceed supply by 2 million barrels per day in the second part of 2023, with China accounting for a substantial part of the increase, according to a recent projection by the International Energy Agency. On the supply-side, wildfires in major oil-producing regions in Canada and the seizure of oil tankers by Iran threatened to disrupt flows.
Gold traded around $1,965 an ounce on Friday, suffering heavy selling pressure this week as the US dollar pushed to a nearly two month high, weighing heavily on the gold price. Optimism over the potential lifting of the US debt ceiling remains supportive of elevated US treasury bond yields, acting as a tailwind for the US dollar, increasing the opportunity cost of holding non-yielding bullion.
US Equity Markets
US equity futures rose on Friday as investors assessed the latest corporate earnings results and the debt ceiling negotiations. In Thursday’s regular trading session The Dow Jones Industrial Average rose 0.34%, while the S&P 500 Index gained 0.94% and the Nasdaq Composite soared 1.51%. Recession fears were again on investors’ minds this week after April’s US retail sales came in lower than expected, with a disappointing 1.6% growth, down from 2.4% a month earlier.
The Department of Labor’s latest report revealed the number of Americans filing for unemployment benefits fell to 242,000 in the week ending 13th May, down from an 18-month high of 264,000 and below market expectations of 254,000. The latest reading indicates the labour market in the US remains relatively tight, potentially leading to upward pressure on wages, and provides the Federal Reserve with an opportunity to implement further interest rate hikes in its efforts to combat inflation. Investors are now pricing in around a 20% chance that the Federal Reserve will raise rates at its June meeting, whereas a month ago, they were pricing in around a 20% chance of a rate cut.
President Joe Biden and top US congressional Republican, Kevin McCarthy, underscored their determination to reach a deal to raise the federal government’s $31.4 trillion debt ceiling on Wednesday to avoid an economically catastrophic default. McCarthy said a bill to raise the US debt ceiling could be put to a vote as early as next week, offering hope that the White House and Congress will strike a deal to avert default ahead of the June 1st deadline.
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