UK markets advanced further this week, with the FTSE 100 Index rising by 2.9% to trade at 7,960 points at the time of writing. UK inflation fell more than forecast in February to 3.4%, from 4% in January, the lowest since 2021 and below the 3.5% figure predicted by economists in a Reuters poll.
The Bank of England predicted in February that inflation was set to drop to its 2% target in the second quarter this year, due to falling energy costs. Inflation figures released on Wednesday by the Office for National Statistics put it on track to reach that level as soon as April. The figures also showed that core inflation, which excludes food and energy, fell to 4.5% in February, from 5.1% in January. Analysts had predicted a reading of 4.6%.
Despite the recent inflation slowdown, high prices are still putting pressure on UK living standards. The latest forecasts from the Office for Budget Responsibility show that per-person real household disposable incomes will recover their pre-pandemic levels only by 2025-26.
The Bank of England kept UK interest rates on hold at 5.25% on Thursday, pushing sterling lower against the dollar, as it signalled it is edging closer to cutting borrowing costs. Investors are now pricing in three 0.25% cuts this year, which the market expects to begin in June.
“In recent weeks we’ve seen encouraging signs that inflation is coming down” said Bank of England Governor Andrew Bailey, adding, “We are not yet at the point where we can cut interest rates, but things are moving in the right direction.”
On the European continent, the Swiss National Bank unexpectedly cut its key rate on Thursday, while the European Central Bank has also suggested it will lower borrowing costs by June.
Elsewhere, retail sales in the UK remained unchanged in February 2024, following an upwardly revised 3.6% increase in January, beating analyst expectations of a 0.3% contraction, as growth in clothing purchases offset falling food sales.
Commodity markets
In the commodity markets, Brent crude futures traded around $85 per barrel on Friday, and are set to end the week unchanged, despite a surprise US crude stock drop.
Crude inventories in the United States, the world’s biggest oil consumer, fell for a second week, the US Energy Information Administration reported on Wednesday. Stockpiles unexpectedly declined by 2 million barrels to 445 million barrels in the week ended March 15th, as exports rose and refiners continued to increase activity. Analysts polled by Reuters had expected a 13,000 barrel rise.
Ukrainian attacks on Russian refineries have continued to support the oil price, shutting down 7%, or 370,500 barrels per day, of Russian refining capacity, according to Reuters calculations. Analysts say prolonged disruptions could force Russian producers to reduce supply if they are unable to export crude oil and face storage constraints.
Reports of a UN draft resolution calling for a ceasefire in Gaza, which could ease geopolitical concerns in the Middle East, helped to stabilise prices. US Secretary of State Antony Blinken met with Arab foreign ministers and Egypt’s President Abdel Fattah El-Sisi in Cairo, while negotiators in Qatar focused on brokering a six-week truce.
Gold traded around $2,170 an ounce on Friday, pulling back from record highs, but is set for a fourth weekly rise in five, following the US Federal Reserve’s announcement that it would continue with rate cuts in 2024, despite elevated inflation.
Equity markets
US equity futures were positive on Friday, after the Federal Reserve reaffirmed its intention of three interest rate cuts this year. In Thursday’s regular session, the Dow Jones Industrial Average rose 0.68%, the S&P 500 gained 0.68%, while the Nasdaq Composite advanced 0.20%.
US equity markets reached record highs again this week as Federal Reserve officials indicated that they still expect to cut interest rates by 0.75% this year. The market reaction followed the Federal Open Market Committee’s unanimous decision on Wednesday to maintain rates unchanged within their 23-year high range of 5.25% to 5.5%. The central bank also sharply raised its forecasts for US economic growth this year, while stating inflation would be slightly higher than expected.
The latest statement leaves the Federal Reserve on course to begin cutting rates as early as the summer, calling time on a mission to quell inflation that jumped as the US economy emerged from the Covid-19 pandemic. Officials predicted that US GDP will expand by 2.1% this year, compared with their previous forecast of 1.4%.
Elsewhere, further expansions in both manufacturing and service sector output in March helped to close off another quarter of likely robust GDP growth for the US economy. The headline S&P Global Flash US PMI Composite Output Index posted 52.2 in March, slightly down from the reading of 52.5 in February, but still signalling a solid monthly improvement in business activity at US companies. Output has now risen in each of the past 14 months. Moreover, the average rise indicated in the first quarter is the strongest seen since the second quarter of last year, broadly consistent with the economy growing at a 2% annual rate.
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