UK markets were under pressure this week with the FTSE 100 Index falling by 3% to trade at 8,045 points at the time of writing.
Growth in average weekly earnings, excluding bonuses, rose to 5.2% from 4.9% in the three months to September, the Office for National Statistics said on Tuesday. This was above economists’ expectations of a 5% increase. The acceleration was driven by a 5.4% rise in private sector pay, well above the level the Bank of England believes is compatible with meeting its 2% inflation target, as companies are forced to raise prices to cover higher wage bills.
UK inflation increased slightly to 2.6% in November, highlighting the Bank of England’s challenge as it struggles with persistent price pressures and a stagnating economy. The rise in the consumer price index was above the 2.3% rate recorded in October, but in line with expectations. Higher prices for motor fuels and clothing helped push inflation higher, according to figures from the Office for National Statistics which were released on Wednesday.
The Bank of England kept interest rates on hold at 4.75% at its latest meeting as it seeks to contend with both stubborn inflation and lacklustre growth. Most members of the Monetary Policy Committee warned that recent increases in wages and prices had added to the risk of inflation persistence, damping hopes of rapid rate cuts in 2025.
Bank of England Governor, Andrew Bailey said ‘we think a gradual approach to future interest cuts remains right’ and added that ‘we can’t commit to when or how much we will cut rates in the coming year’ due to heightened uncertainty in the economy. Bailey emphasised the need for the UK central bank to meet its 2% inflation target on a sustained basis. The Bank of England now expects zero growth in the final quarter of this year, weaker than forecast in November.
Elsewhere, UK retail sales rose by 0.2% in November, rebounding from a 0.7% fall in October, as weakness in clothing sales offset stronger sales at supermarkets. However, the figure was below economists’ forecasts of a 0.5% rise, adding to a string of disappointing data for the UK economy.
Commodity markets
In the commodity markets, Brent crude futures traded around $72 per barrel on Friday and are set for a weekly fall, after the US Federal Reserve signalled it would slow the pace of interest rate cuts in 2025, a move that could dampen economic growth, reduce fuel demand and strengthen the dollar.
Chinese state-owned refiner, Sinopec said in its annual energy outlook, released on Thursday, that China’s imports could peak as soon as 2025, and that the country’s oil consumption would peak by 2027 as diesel and gasoline demand weaken. JP Morgan sees the oil market moving from a balance in 2024 to a surplus of 1.2 million barrels per day in 2025, as the bank forecasts non-OPEC+ growth increasing by 1.8 million barrels per day in 2025 and OPEC output remaining at current levels.
In a move that could reduce supply, G7 countries are considering ways to tighten the price cap on Russian oil, such as with an outright ban or by lowering the price threshold, Bloomberg reported on Thursday. Russia has evaded the $60 per barrel cap imposed in 2022, using its “shadow fleet” of ships, which the EU and Britain have targeted with further sanctions in recent days.
Gold prices traded around $2,600 an ounce on Friday and are set for a weekly fall, after the Federal Reserve’s verdict on its monetary policy easing cycle signalled a slowdown in rate cuts. Higher interest rates dull the appeal of non-yielding bullion.
Equity markets
US equity futures fell on Friday as investors prepare for the latest personal consumption expenditures price index report, the Federal Reserve’s preferred measure of inflation.
In Thursday’s regular session, the Dow Jones Industrial Average rose 0.04%, the S&P 500 lost 0.09%, while the Nasdaq Composite declined 0.10%. The Federal Reserve cut interest rates by 0.25% on Wednesday, reducing the benchmark rate to a range of 4.25%-4.5%, its third cut in a row. However, policymakers signalled a slower pace of easing next year, sending the Dollar to a two-year high and igniting a sell-off in US and international stocks.
Federal Reserve Officials’ projections for rates in 2025 pointed to fewer cuts than previously forecast, underscoring their concern with lingering inflation. In a sign of those worries, policymakers also raised their inflation estimates for next year. US stocks dropped sharply after the decision, with many of the biggest winners in a powerful 2024 equities rally pulling back. European and Asian stock markets fell on Thursday, following the trend set overnight. Following Wednesday’s move, Federal Reserve chair Jerome Powell said the central bank’s policy settings were “significantly less restrictive” and policymakers could be “more cautious” as they considered additional easing.
The goal of the Federal Reserve is to apply enough pressure on consumer demand and business activity to push inflation back to the 2% target without harming the jobs market or the economy more broadly. Concerns about inflation stalling above 2% contributed to Federal Reserve officials projecting 0.5% worth of cuts in 2025, which would bring the central bank’s main rate to a range of 3.75%-4%. Powell also noted that officials had begun to include assumptions about Trump’s planned policies in their forecasts. They also raised their forecasts for core inflation to 2.5% in 2025 and 2.2% in 2026 and predicted the unemployment rate would steady at 4.3% for the next three years.
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