UK markets pulled back this week, with the FTSE 100 Index falling by 0.4% to trade at 8,265 points at the time of writing.
Bank of England Deputy Governor Clare Lombardelli warned this week that the UK cannot yet declare victory over inflation, as she emphasised that the labour market remains tight. She expressed concerns that despite the fall in inflation in the past two years, pay increases were not slowing as quickly as the bank hoped, which could delay further interest rate cuts.
The UK central bank cut interest rates by 0.25% this month, but cautioned that it was in no rush to lower rates again. Bank of England governor Andrew Bailey said last week that the bank needed time to assess risks, including large increases in employer national insurance contributions in October’s budget. Inflation has fallen from its recent peak of 11.1% in October 2022, but jumped to 2.3% last month, up from 1.7% in October and compares with the target of 2%.
Lombardelli also said this week that US President-elect Donald Trump’s proposed trade tariffs would pose a risk to economic growth to countries including the UK. She said the uncertainties about US trade policies could weigh on growth in the short term and that increased trade frictions would dent productivity in the longer term. The economic impact would depend both on the details of the policies and the reaction of America’s partners, she said, adding that what the measures would mean for inflation was less clear.
UK Chancellor, Rachel Reeves told sceptical corporate leaders this week there would be no more tax increases on British businesses, as she insisted there was no alternative to the £40 billion increase in taxes in last month’s budget. Speaking at the CBI annual conference, she said that she had no regrets about her fiscal decisions, even as some executives warned they were reconsidering investment plans because of her actions.
Elsewhere, net mortgage approvals for house purchases in the UK increased by 2,200 to 68,303 in October 2024, the highest level since August 2022, indicating that the fading drag from higher interest rates appears to be supporting the housing market.
Commodity markets
In the commodity markets, Brent crude futures traded around $72 per barrel on Friday and are set for a weekly fall, as tensions in the Middle East eased briefly, with a ceasefire between Israel and Hezbollah. However, as early as Thursday, Israel and Hezbollah began trading accusations over alleged violations of their ceasefire, which came into effect on Wednesday. The deal had at first appeared to alleviate the potential for supply disruption from a broader conflict that had led to a risk premium for oil.
Also on Thursday, Russia struck Ukrainian energy facilities for the second time this month risking retaliation that could affect Russian oil supplies. The Organisation of the Petroleum Exporting Countries and allies including Russia has delayed its next policy meeting to December 5th from December 1st. The meeting is expected to further extend OPEC+ production cuts.
Iran told a UN nuclear watchdog it would install more than 6,000 additional uranium-enriching centrifuges at its enrichment plants, a confidential report by the watchdog said on Thursday. Analysts at Goldman Sachs have said Iranian supply could drop by as much as 1 million barrels per day in the first half of next year if western powers tighten sanctions enforcement on its crude oil output.
Gold traded around $2,660 an ounce on Friday, helped by a slight dip in the US dollar and growing geopolitical tensions, but remains on track for a weekly decline as markets await key US data for further insights into the Federal Reserve’s monetary policy direction.
Equity markets
US equity futures rose on Friday as the market prepared to reopen for a shortened trading session, with most investors still on holiday for Thanksgiving.
In Wednesday’s regular session, the Dow Jones Industrial Average dropped 0.31%, the S&P 500 lost 0.38%, while the Nasdaq Composite declined 0.59%. Minutes from the Federal Reserve’s November meeting, released on Tuesday, suggest that the US central bank officials no longer see an urgent need to rapidly reach a ‘neutral’ rates level that does not hamper growth, following the bumper 0.5% cut in September. Fading concerns about the health of the labour market and stronger than expected US economic growth helped to alleviate concerns about a potential recession.
Federal Reserve Chair, Jerome Powell said earlier this month that a solid US economy meant the central bank did not need to be in a hurry to lower rates. Inflation, while sharply lower than its 2022 peak, still remains above the central bank’s 2% target. Central bank officials noted that inflation was easing, according to the minutes, but some warned that it could take longer than expected given the underlying strength of the economy and the possibility that geopolitical risks and supply chain disruptions could slow the decline.
The latest consumer price index report showed inflation increasing to 2.6%, following a 0.2% month-over-month increase. Donald Trump proposed a 25% tariff on all imports from Mexico and Canada this week, accusing the US’s closest neighbours of failing to tackle illegal immigration and drug trafficking. Canada’s oil industry, which supplies more than half of US crude imports, would be among the industries hit hardest. Producers warned that US consumers would feel the repercussions should imports slide and prices rise. Trump’s proposals also included an extra 10% levy on Chinese goods. His threats hit global markets and sent shockwaves through US trading partners.
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