Weekly round up
UK markets suffered a slight pullback this week, with the FTSE 100 falling by 0.43% to trade at 7,485 points at the time of writing.
Financial markets are betting that the Bank of England will more than double interest rates by May next year, as concerns mount about further rises in UK inflation. The shift in expectations in the swap market now anticipates interest rates of 4% in May compared with 1.75% today, one of the biggest swings in recent history.
Britain’s 10-year gilt yield surged over 2.6%, to its highest level since 2014, as it is expected the Bank of England will have no other option than to continue its aggressive tightening despite the UK economy heading into recession.
The UK energy regulator Ofgem confirmed on Friday that it will increase the price cap by 80%. A typical UK household’s gas and electricity bill will rise to £3,549 a year from October, from £1,971 at present, as consumers grapple with a cost-of-living crisis driven by soaring energy costs. The latest industry forecasts suggest the price cap could rise to over £6,600 a year by the spring, a more than fivefold increase on the £1,277 price cap in October last year.
The UK government is now facing growing calls to provide additional support for households to avoid a deep recession. August PMI data showed that manufacturing activity in the UK unexpectedly contracted for the first time since May of 2020 and that UK services activity growth was the slowest in over a year.
In the commodity markets, Brent crude futures traded around $100 per barrel on Friday and were set to finish the week more than 3% higher, supported by a tightening supply outlook and signs of improvement in short-term fuel demand.
On the supply front, Saudi Arabia warned that OPEC+ could cut production to stabilise markets. Talks between Iran and the West to revive the Tehran nuclear deal continue to make progress, however there are concerns that the United States will not consider additional concessions to Iran in its response to a draft agreement.
Gold fell to around $1,752 an ounce on Friday morning as caution dominated sentiment ahead of US Federal Reserve Chair Jerome Powell’s speech later in the day.
Chair Powell is expected to reiterate the central bank’s aggressive stance against surging inflation, following hawkish remarks from several Federal Reserve officials. A final reading showed the US economy contracted at a more moderate pace in the second quarter supporting the case for further monetary tightening and keeping the pressure on bullion markets.
US equity futures fell on Friday as investors look ahead to the Federal Reserve Chair’s speech for further clues on the central bank’s rate hike path. Thursday’s regular trading ended on a positive note with the Dow Jones Industrial Average rising 0.98%, the S&P 500 Index gaining 1.41% and the tech heavy Nasdaq Composite rising by 1.67%.
Nevertheless, all three benchmarks are on track to end the week lower due to expectations that the Federal Reserve will continue to aggressively raise interest rates to stamp out inflation, despite escalating recessionary risks. The hawkish expectations pushed the yield on the 10-year US Treasury note back above the 3% mark to its highest level in nearly two months.
The US economy contracted an annualised 0.6% in the second quarter of 2022, less than a 0.9% fall in the initial estimate, due to upward revisions to consumer spending and inventories. However, the US economy is now technically in a recession following a 1.6% drop in the first quarter.
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