UK markets were slightly negative this week with the FTSE 100 Index falling 0.26% to trade at 7,690 points at the time of writing. UK prices rose less than expected in August, with the annual rate of inflation falling to 6.7%.
The statistics released by the Office for National Statistics on Wednesday came as a surprise to economists, who had predicted a rise in inflation from 6.8% in July to 7% in August. Gilt yields and Sterling fell after the data release.
The figures were surprising as petrol and diesel prices rose in August on the back of higher crude oil costs. However, a decrease in restaurant prices in the month and much more moderate price rises this August in goods and services related to pets and recorded media helped contribute to the fall.
Core inflation, excluding food, energy, alcohol and tobacco, stood at 6.2% in August, down sharply from 6.9% the previous month. The price of services increased by 6.8% in August compared with a year earlier, a lower rate than 7.4% in July.
Although wage growth has been stronger than expected, the signs of moderation across most goods and services suggests that the rate rises since late 2021, from close to zero to 5.25%, might have done enough to restore price stability.
Following the better than expected inflation data, the Bank of England held interest rates at 5.25% on Thursday, after a highly anticipated vote that is likely to signal the peak of borrowing costs following almost two years of rate rises. The bank’s Monetary Policy Committee was split five to four in favour of leaving rates unchanged, with Bank of England Governor, Andrew Bailey, casting the final and decisive vote. Although the committee made little comment about its future actions, it suggested that rates were now high enough to succeed in restoring price stability.
Commodity markets
In the commodity markets, Brent crude futures traded around $93 per barrel on Friday, holding onto recent highs after Russia announced a ban on fuel exports, raising further concerns about tight supplies.
Russia temporarily banned exports of petrol and diesel to all countries outside a circle of four ex-Soviet states with immediate effect in order to stabilise the domestic fuel market. The shortfall will mean that Russia’s fuel buyers will have to shop elsewhere, prompting refiners to provide more of a dwindling crude supply to meet their demand.
A hawkish stance from the Federal Reserve led to the US dollar surging to its highest since early March this week, making oil and other commodities more expensive for buyers using other currencies, which may dampen overall economic growth and fuel demand. Gold traded around $1,925 an ounce on Friday and is set for a weekly decline, weighed down by the surge in the US dollar and US bond yields after the Federal Reserve hardened its hawkish posture on interest rates.
Equity markets
US equity futures were little changed on Friday as the Federal Reserve’s hawkish pause this week continued to weigh on sentiment. In Thursday’s regular trading session, The Dow Jones Industrial Average fell 1.08%, the S&P 500 Index declined 1.64%, while the Nasdaq Composite lost 1.82%.
Following its latest two-day meeting this week, the Federal Open Market Committee opted against an interest rate increase and voted unanimously to hold the federal funds rate between 5.25% and 5.5%. However, Federal Reserve officials signalled support for another rate rise this year and fewer cuts in 2024.
The Federal Reserve also released a new set of individual economic projections from its policymakers on Thursday which forecast stronger growth this year and a more benign inflation outlook compared with previous estimates released in June. The projections also signalled support for the funds rate to peak between 5.5% and 5.75%, translating to one more quarter point rate rise this year, while pencilling in fewer interest rate cuts for 2024 and 2025.
Following the statement, Federal Reserve Chair, Jerome Powell, said the decision to hold rates steady did not mean policymakers had concluded monetary policy was sufficiently restrictive to bring inflation under control.
Elsewhere, the number of Americans filing claims for unemployment benefits dropped to an eight-month low last week, indicating that the unemployed are having an easier time finding new work. Weekly jobless claims fell 20,000 to 201,000 and continuing claims dropped by 21,000 to 1.662 million. Though demand for labour is slowing, overall labour market conditions have remained tight, despite higher interest rates. This points to added resilience to the Federal Reserve’s aggressive tightening cycle and adds leeway for a potential rate hike in November.
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