UK markets declined this week, with the FTSE 100 Index falling by 0.4% to trade at 7,360 points at the time of writing.
UK business activity contracted for the third consecutive month in October, according to a closely watched Purchasing Managers Index survey, indicating that high interest rates and prices are continuing to weigh on the economy.
Lower output was seen in both the manufacturing and service sectors, with the former posting the sharper rate of decline. The latest survey also pointed to modest reductions in new order volumes and staffing numbers at private sector firms.
Concerns about the outlook for businesses and consumer spending meant that output growth expectations for the year ahead were the lowest since December 2022. The readings supported views that a mild recession is potentially under way and that the Bank of England will leave interest rates unchanged at 5.25% when it meets on November 2nd. The latest survey from the Confederation of British Industry showed that retail sales volumes fell in October, as higher interest rates and cost of living pressures continued to weigh heavily. Elsewhere, a series of concerning earnings results underscored the impact that higher borrowing costs are having on companies’ profitability, with some disappointing results from the banking sector.
The European Central Bank held interest rates at 4% on Thursday, bringing an end to its streak of 10 consecutive increases in borrowing costs, amid rising concerns over Eurozone growth. The decision was expected by analysts in the wake of Eurozone inflation more than halving from its peak and the economy showing signs of weakening. The European Central Bank’s pause comes ahead of decisions by the US Federal Reserve and the Bank of England next week, in which they are also expected to hold rates steady as inflation eases.
Commodity markets
In the commodity markets, Brent crude futures traded around $90 per barrel on Friday, and are set for a weekly fall, as concerns grew about how macroeconomic headwinds could impact energy demand. The geopolitical premium built on fears that the Israel-Gaza conflict could involve more countries in the Middle East and disrupt oil supply also began to ease. Analysts pointed to ongoing diplomatic efforts to delay an expected ground invasion of Gaza by Israeli forces.
Signs of weakening demand in the US, the world’s top oil consumer, also weighed on prices.
On the supply side, voluntary cuts by Saudi Arabia and Russia, which will be in place until the end of the year, are tightening markets globally and supporting prices.
Gold traded around $1,985 an ounce on Friday, holding near a three month peak, as the Middle East conflict kept investors drawn towards the safety of bullion, despite a higher for longer US interest rate backdrop. Gold has gained about 9% as investors sought refuge from the potential fallout of the Israel-Hamas war that escalated earlier this month. However the lingering prospects of higher US interest rates have kept prices below the $2,000 ceiling last breached in May.
Equity markets
US equity futures rose on Friday, after selling off in the past two sessions, as investors continued to assess mixed earnings results and strong economic data. In Thursday’s regular trading session, The Dow Jones Industrial Average fell 0.76%, the S&P 500 Index lost 1.18%, while the Nasdaq Composite tumbled 1.76%.
The US economy expanded faster than expected in the third quarter, growing at its quickest pace in almost two years in the latest sign of the country’s economic resilience in the face of high interest rates.
Strong consumer spending drove a 4.9% annualised increase in GDP, according to preliminary figures from the commerce department’s Bureau of Economic Analysis. This marked an increase from a 2.1% rate in the second quarter, and the strongest figure since the fourth quarter of 2021. On average, economists had predicted a rate of 4.3%. Consumer spending rose at an annualised rate of 4%, up from just 0.8% in the second quarter, with solid growth across both goods and service sectors.
Business spending on inventories, federal government spending, housing investment and exports also grew compared with the previous quarter. The data comes as the Federal Reserve prepares for a meeting next week to decide interest rates.
However, the GDP figures are unlikely to drastically influence next week’s decision, as they are backward-looking compared with monthly data such as inflation and payrolls. The Federal Reserve is widely expected to hold rates steady, to give policymakers more time to assess the effect of their previous rate increases and recent events such as a sharp sell-off in bond markets. Nevertheless, the data yet again points to the resilience of the US economy and supports expectations that rates will stay elevated for an extended period of time.
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