UK markets advanced further this week, with the FTSE 100 Index rising 1.95% to trade at 7,705 points at the time of writing. UK inflation slowed sharply in November to 3.9%, triggering a slide in the Pound, a rise in stocks, and increased expectations of an interest-rate cut early next year.
The inflation number released on Wednesday was well below the 4.4% year-on-year increase in consumer prices predicted by economists in a Reuters poll. The drop was driven by falls in the cost of petrol, which was down 4.1p per litre month on month, and food, with food inflation down slightly from 10.1% to 9.2% over 12 months. The 3.9% figure was also the lowest inflation rate since September 2021, according to data from the Office for National Statistics, which fuelled speculation about when the Bank of England will reduce interest rates from their 15-year high.
UK public sector borrowing was higher than expected in November, leaving little room for Chancellor, Jeremy Hunt to make tax cuts in the run-up to the general election. According to data published by the Office for National Statistics on Thursday, public sector borrowing was £14.3 billion last month, £0.9 billion less than in the same month in 2022 but higher than the £12.9 billion forecast by economists polled by Reuters. The fall was triggered by lower spending on government energy support schemes, but these reductions in spending were offset by other inflation-related costs, such as increased benefit payments.
Central government receipts, mostly from taxes, were £77.6 billion in November, £3.6 billion more than in the same month last year, and the highest for November since monthly records began in 1993. High inflation has helped boost tax receipts as it pushes earners into higher tax brackets, particularly with the strong wage growth over the past year.
The UK economy shrank slightly in the third quarter, according to revised figures that highlight the country’s struggle to shake off its low growth performance. GDP fell by 0.1% in the three months to September, according to data released by the Office for National Statistics on Friday, a downward revision from previous estimates of zero growth. With the Bank of England projections suggesting there is little immediate prospect of a recovery, this puts the UK economy on the brink of a recession.
Commodity markets
In the commodity markets, Brent crude futures traded around $80 per barrel on Friday and are set for a weekly rise as investors balanced higher inventories and record output in the United States with jitters over global trade disruptions in the Red Sea.
More maritime carriers are avoiding the Red Sea due to vessel attacks carried out in support of Palestinians by Yemini Houthi militant group, causing global trade disruptions through the Suez Canal, which handles about 12% of worldwide trade. The US on Tuesday launched a multi-national operation to safeguard commerce in the Red Sea, but the Houthis said they would continue to carry on attacks. Analysts say the impact on oil supply so far has been limited, as the bulk of Middle East crude is exported via the Strait of Hormuz.
Oil prices pulled back slightly on Thursday after Angola announced it is leaving OPEC, with Angola’s oil minister, Diamantino Azevedo, saying the country’s membership in OPEC was not serving its interests. At a meeting in November, Angola had protested a decision by OPEC to cut its production quota for 2024. Angola’s oil production is around 1.1 million barrels per day.
Gold prices traded around $2,050 an ounce on Friday rising slightly this week, as US Treasury yields retreated after economic data fuelled expectations that the Federal Reserve would likely cut interest rates next year.
Equity markets
US equity futures fell on Friday as investors looked to the November core personal consumption expenditure price index report, the Federal Reserve’s preferred measure of underlying inflation, for more clarity on the US interest rate outlook. In Thursday’s regular session, the Dow Jones Industrial Average gained 0.87%, the S&P 500 rose 1.03%, while the Nasdaq Composite advanced 1.26%.
The latest economic data showed US GDP increased at a 4.9% annualised rate in the third quarter, revised down from the previously reported 5.2% pace, while weekly jobless claims increased slightly. Markets are now pricing in an 85% chance of a Federal Reserve rate cut by March, compared with 79% before the data, according to the CME Fed Watch tool. The number of Americans filing for unemployment benefits edged higher by 2,000 to 205,000 on the week ending December 16th, holding close to a two month low, and well below market expectations of 215,000. The result underscored the relative tightness in the US labour market and added leeway for the Federal Reserve to hold its terminal rate for longer, should inflation remain stubborn.
Elsewhere, the average rate on a 30-year fixed mortgage in the US was 6.67% as of December 21st, the lowest since June, dropping for the eighth consecutive week. The drop mirrored the sustained decline in long-dated Treasury security yields in recent weeks, aligned with expectations of multiple rate cuts by the Federal Reserve in 2024.
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