UK markets pulled back slightly this week, with the FTSE 100 Index falling by 0.45% to trade at 8,300 points at the time of writing.
UK private sector activity grew more than expected in August, with the S&P Global Flash UK PMI composite output index, a measure of the health of the manufacturing and services sectors, rising to 53.4, from 52.8 in July, helped by easing price pressures. A reading above 50 indicates many businesses reporting an expansion from the previous month. This represented the fastest pace of growth in four months, sending the Pound to a 13-month high against the Dollar and pointing to solid economic growth in the summer.
The figures point to easing inflationary pressures across the private sector and suggest further GDP growth for the third quarter. As well as reporting that input costs rose at the slowest pace since January 2021 in August, the PMI survey showed inflationary pressures moderated sharply in the services sector, an area of concern for the Bank of England.
The UK central bank cut its benchmark rate by 0.25% in August, the first reduction in four years and markets are now pricing in a 70% probability that it will hold rates at its next meeting in September. Job creation hit its fastest level for 14 months, with higher staffing in both the public and private sectors. The pick up in employment growth was boosted by more optimistic sentiment about the near-term business outlook.
The UK government borrowed more than expected in July, with the difference between public sector spending and income coming in at £3.1 billion – this was £1.8 billion more than July 2023 and the highest July level since 2021, the Office for National Statistics reported on Wednesday. The data highlights the budget challenges facing Labour Chancellor, Rachel Reeves and was much higher than the £0.1 billion forecast by the Office for Budget Responsibility and the £1.5 billion predicted by economists polled by Reuters.
Commodity markets
In the commodity markets, Brent crude futures traded around $77 per barrel on Friday and are set for a decline this week, after expectations of a rate cut by the Federal Reserve offset weak economic data from the world’s two largest economies, the United States and China.
The Federal Reserve appears to be on track for an interest rate cut in September after the majority of officials said such action was likely, according to minutes of the US central bank’s July 30-31st meeting. The prospect of lower interest rates reduces the cost of borrowing, which can boost economic activity and demand for oil. Geopolitical risks also remained at the forefront of investors’ focus.
US President Joe Biden, in a phone call with Israeli Prime Minister, Benjamin Netanyahu, stressed the urgent need to conclude a Gaza ceasefire for hostages deal and pointed to the upcoming Cairo talks as crucial. However, US Secretary of State Antony Blinken’s trip to the Middle East earlier in the week ended without an agreement between Israel and Hamas militants on a truce in the Palestinian enclave.
Gold Prices traded around $2,500 an ounce on Friday and are set for a weekly rise, supported by haven demand and hopes that the Federal Reserve will begin cutting interest rates in September.
Equity markets
US equity futures rose on Friday as investors position themselves for Federal Reserve Chair, Jerome Powell’s speech at the Jackson Hole symposium for insights into the anticipated September rate cut. In Thursday’s regular session, the Dow Jones Industrial Average lost 0.43%, the S&P 500 fell 0.89%, while the Nasdaq Composite gained declined 1.67%.
The number of Americans filing new applications for unemployment benefits rose 4,000 to a seasonally adjusted 232,000 for the week ended August 17th, the Labor Department said on Thursday, above economists’ expectations of 230,000. In a separate report on Wednesday, the Labour Department stated that US employers added far fewer jobs than originally reported in the year through March, underscoring the growing concerns the Federal Reserve has about the health of the labour market as it gears up to start cutting interest rates in September.
The department’s estimate for total payroll employment for the period from April 2023 to March 2024 was lowered by 818,000. The revision represented a total downward change of around 0.5% and means that monthly job gains during the period averaged roughly 174,000, compared with the previously reported figure of 242,000. The figure echoes the view of some economists that data-gathering issues mean the strong job gains previously reported have been systematically overestimated.
Federal Reserve policymakers could factor in the indication that the job market was softer than previously thought, as they assess the pace of rate reductions after the first cut, which is widely expected at their September 17-18th policy meeting. With inflation now in touching distance of the 2% target rate, attention has turned to making sure that the lagged effects of a prolonged period of higher borrowing costs does not derail a labour market which has been seen as gradually cooling.
Elsewhere, the S&P Global US Manufacturing PMI fell to 48 in August of 2024, down from 49.6 in the previous month, firmly below market expectations of 49.6 to mark the second consecutive contraction in US factory activity.
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