UK markets
UK markets were little changed this week with the FTSE 100 Index falling by 0.1% to trade at 7,770 points at the time of writing. UK public sector borrowing more than doubled last month to hit the highest December figure on record, driven up by higher debt interest payments and the government’s measures to help households and businesses with soaring energy prices.
Public sector net borrowing hit £27.4 billion last month, up from a revised £10.7 billion in the same month in 2021 and the highest December borrowing since monthly records began in 1993, according to data published by the Office for National Statistics on Tuesday.
This will embolden Chancellor Jeremy Hunt to keep a tight grip on his finances in his Budget on March 15th. The public sector borrowing figure was much higher than the £17.7 billion forecast by economists polled by Reuters and well above the £17.6 billion forecast in November by the Office for Budget Responsibility.
The Bank of England is set to raise interest rates by 0.5% next week to 4%, to bring down double-digit inflation, which although falling, is still well above the central bank’s 2% target.
The risk of the UK slipping into a recession continued to weigh on sentiment after the latest PMI survey showed that UK business economic activity fell at its fastest rate in two years in January, amid rising interest rates, strikes and weak consumer demand due to the rising cost of living.
Commodity markets
In the commodity markets, Brent Crude futures traded around $88 per barrel on Friday, rising around 2% during the week as investors continued to assess the demand outlook, while bracing for tighter global oil supplies. The reopening of the Chinese economy has given markets reasons to be optimistic about a rebound in crude consumption this year, with authorities saying that the number of Covid-related deaths and severe cases in China is now 70% lower than peak levels in early January.
On the supply side, OPEC is expected to maintain current oil production levels when they next meet, keeping supply tight. Natural Gas prices fell around 20% this week, to levels not seen since September 2021, amid hopes of further imports from the US, while milder temperatures are expected to return to Europe next week and storage facilities are around 74% full.
Gold traded around $1,925 an ounce on Friday, weakening slightly as fourth quarter US GDP numbers indicated that the economy was more resilient than markets had anticipated. Investors are now looking ahead to US Personal Consumption Expenditure data, the Federal Reserve’s preferred inflation measure, an important statistic for deciding gold’s immediate direction.
US equity markets
US equity futures fell on Friday, after the major averages rose in Thursday’s regular session, as investors continued to look ahead to more economic data and earnings reports that could guide the outlook for growth and monetary policy. In Thursday’s regular trading session, the Dow Jones Industrial Average gained 0.61%, the S&P 500 Index rose 1.1% and the Nasdaq Composite rallied 1.76%, led by energy, consumer discretionary and technology.
The US economy recorded better than expected growth in the final quarter of 2022, even as the Federal Reserve’s aggressive campaign to raise borrowing costs began to weigh more heavily on business activity. It expanded 2.9% on an annualised basis between September and December, according to data published by the commerce department on Thursday, slightly higher than economists’ forecasts of a 2.6% increase. This was a slowdown from 3.2% growth in the third quarter, reflecting the steps the US central bank has taken so far to dampen demand.
Investors are now anticipating the Federal Reserve will deliver a 0.25% interest rate rise at its meeting next week as it determines how much more to unleash on the economy now inflation appears to have peaked. The GDP data shows the US economy has proved to be more resilient than expected in the face of substantially higher borrowing costs, while also showing that the Federal Reserve’s actions are beginning to have a more notable effect.
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