UK markets declined this week, with the FTSE 100 Index falling by 1.55% to trade at 8,310 points at the time of writing. UK inflation dropped to 2.3% in April, less than the 2.1% forecast by the Bank of England and economists polled by Reuters.
The consumer price index figures released on Wednesday by the Office for National Statistics dented hopes that the Bank of England would be ready to cut interest rates next month. Investors had been evenly split on the chance of a June rate cut, but now place the likelihood at about 15%. The Bank of England’s policymakers had forecast a steep fall in inflation owing to a reduction in the regulatory cap on household energy bills last month. Lower utility bills, coupled with easing food inflation, helped pull the headline rate lower.
However, the bank’s Monetary Policy Committee members want to see wider evidence that price pressures are receding before cutting rates. Year-on-year services price growth was 6.9% in April, only marginally below the 6% reading for March, and above the 5.5% expected by economists and the BoE.
Core inflation, which strips out volatile food and fuel prices, also fell less sharply than anticipated, coming in at 3.9%, down from 4.2% the previous month and above forecasts of 3.6%. In a further disappointment for the government, separate official data on Wednesday showed the UK public finances were in worse shape than expected in April.
Public sector borrowing was £20.5 billion last month, more than the £19.3 billion forecast by the Office for Budget responsibility. The Prime Minister, Rishi Sunak and Chancellor, Jeremy Hunt hope that the return to what they call “normal” levels of inflation will allow them to reset the economic debate ahead of an election which has been scheduled for the 4th July 2024.
Elsewhere, British retail sales fell 2.3% between March and April, much more than expected, as wet weather discouraged shoppers from the high street, with fewer purchases in clothing and furniture stores.
Commodity markets
In the commodity markets, Brent crude futures traded around $81 per barrel on Friday and are set for a weekly fall as investors digest the latest comments from the Federal Reserve on interest rates amid sticky inflation, while signs of firming seasonal US fuel demand lent support.
Weak demand sentiment and the possibility of higher-for-longer rates weighed significantly on the oil price, which traded at its weakest point since January. Higher rates could slow economic growth and reduce fuel demand. Meanwhile, strengthening US gasoline demand is helping to stabilise prices ahead of the Memorial Day holiday weekend, which is considered to be the start of the US summer driving season.
Gasoline demand in the US reached its highest level since November, the Energy Information Administration said on Wednesday. This helped support the market as US drivers account for around a tenth of global oil demand. All eyes are now on the OPEC+ meeting set for 1st June, where the members are expected to discuss whether to extend voluntary oil output cuts of 2.2 million barrels per day.
Gold traded around $2,340 an ounce on Friday and is set for a weekly fall, as investors took profits after minutes from the Federal Reserve’s latest meeting indicated that interest rates would stay higher for longer. The market has also been concerned that high gold prices could affect purchases by central banks, as well as demand from Chinese investors.
Equity markets
US equity futures rose on Friday, as stronger than anticipated US economic data reduced bets for Federal Reserve interest rate cuts this year. The major averages came under heavy selling pressure in Thursday’s regular session, with the Dow Jones Industrial Average losing 1.53%, the S&P 500 falling 0.74%, while the Nasdaq Composite shed 0.39%.
Minutes released on Wednesday from the Federal Reserve’s latest policy meeting at the start of May showed policymakers questioning whether current interest rates are high enough to tame stubborn inflation. Some officials signalled they would be prepared to raise interest rates further if inflation became more aggressive. The prospects of a rate rise have fallen since the meeting, after fresh inflation data for the past month came in cooler than expected. However, the minutes capture the extent of concerns among central bank officials at the persistence of inflation in the world’s biggest economy.
According to the minutes, participants discussed maintaining the current restrictive policy stance for longer, should inflation not show signs of moving sustainably towards 2%, or reducing policy restraint in the event of an unexpected weakening in labour market conditions. Markets are currently pricing in between one and two rate cuts by the end of 2024 and expectations did not change after the publication of the minutes.
Elsewhere, US business activity accelerated to the highest level in just over two years in May, suggesting that economic growth picked up halfway through the second quarter. S&P global said on Thursday that its flash US Composite PMI Output Index, which tracks the manufacturing and services sectors, jumped to 54.4 this month. This was the highest level since April 2022, well above forecasts of 51.1 and followed a final reading of 51.3 in April. A reading above 50 indicates expansion in the private sector.
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