UK markets rose this week with the FTSE 100 Index gaining 1.45% to trade at 7,600 points at the time of writing. UK economic activity increased at the fastest pace for seven months in January, despite the crisis in the Red Sea adding to manufacturing price pressures, according to a closely watched survey.
The S&P Global flash UK composite output index rose to 52.5 in January from 52.1 in December, marginally higher than the 52.2 forecast by economists polled by Reuters. The figure was the highest reading since June and well above the 50 mark which indicates that most businesses are reporting rising activity.
The data indicates that the economy is recovering from last year’s stagnation, as price pressures ease and markets expect the Bank of England to cut interest rates. However, the surprisingly strong growth, combined with concerns over sticky inflation, could fuel caution among Bank of England policymakers as they prepare for the next interest rate decision on February 1st.
UK retail sales took a significant hit in January, declining at the fastest pace in three years, according to figures from the Confederation of British Industry. Demand conditions in the sector are likely to remain challenging as higher interest rates continue to feed through to mortgage payments and household incomes.
UK consumer confidence reached a two year high in January, according to research company GfK, in the latest positive sign for the economy. Economists said the findings suggested that January’s cut in national insurance, falling mortgage rates and rising real wages were helping consumer sentiment, despite the cost-of-living crisis still hurting household budgets.
Commodity markets
In the commodity markets, Brent crude futures traded around $82 per barrel on Friday, to trade near a two-month high, as expectations rose on strong US economic growth and stimulus in China, while the supply tightened on falling crude inventories due to winter storms.
On Wednesday, China promised to reduce the amount of liquidity its banks are required to keep on hand to boost the country’s faltering economy. The looser reserve requirements will free up $139.8 billion in long-term capital, according to China’s central bank. This, combined with a strong US economy, means the two largest oil consumers in the world could likely see stronger demand this year.
Meanwhile, the supply side has grown tighter, with commercial crude stockpiles in the US declining by 9.2 million barrels during the week ended January 19th, according to the Energy Information Administration (EIA). US production declined by one million barrels per day to 12.3 million barrels per day last week, according to estimates from the EIA.
North Dakota, the third largest crude producing state in the US, was hit particularly hard by the winter weather, with production falling 700,000 barrels per day at the worst point last week. Tensions also remain high in the Middle East as Houthi militants attacked a US-flagged container ship in the Gulf of Aden on Wednesday.
The US launched airstrikes against the Houthis in Yemen and Iran-allied militants in Iraq this week. Investors are monitoring the situation closely for signs that the conflict might disrupt crude supplies.
Gold prices traded around $2,020 an ounce on Friday and are set to end the week little changed, as investors cautiously await a key US inflation reading that could influence the outlook for Federal Reserve monetary policy.
Equity markets
US equity futures fell on Friday after a disappointing update from the semiconductor industry. In Thursday’s regular session, the Dow Jones Industrial Average gained 0.64%, the S&P 500 rose 0.53%, while the Nasdaq Composite advanced 0.18%.
The US economy grew at a 3.3% annualised rate during the final quarter of last year, capping off a strong 2023 that defied recession fears.The figures suggest the economy’s remarkable resilience in the face of the Federal Reserve’s sustained campaign to reduce inflation with higher interest rates. This has encouraged investors who believe the central bank will cut rates in the coming months. For the year, the US economy expanded by 3.1%, confirming it was the world’s fastest growing advanced economy in 2023.
Separate data released on Thursday showed consumer prices rose at an annual rate of 1.7% in the fourth quarter, down from 2.6% three months earlier. The figures suggest that the US economy is headed for a soft landing, in which inflation is reduced without triggering a recession.
Thursday’s data comes as other central banks decide when to cut interest rates this year, as inflation begins to return to their 2% target. The European Central Bank said on Thursday that it would hold Eurozone rates steady at a record high of 4%, but noted inflation was falling in line with expectations, despite a rise in December. In the press conference following the decision, the European Central Bank president Christine Lagarde said the rise in European inflation in December had been “weaker than expected” and forecast that price pressures would “ease further over the course of the year”.
The information provided in this communication is not advice or a personal recommendation, and you should not make any investment decisions on the basis of it. If you are unsure of whether an investment is right for you, please seek advice. If you choose to invest, your capital may be at risk and the value of an investment may fall as well as rise in value, so you could get back less than you originally invested.