UK markets ended another volatile week in negative territory, with the FTSE 100 Index falling by 0.53% to trade at 8,240 points at the time of writing.
The Bank of England cut interest rates for the first time in over four years on Thursday, with the Monetary Policy Committee voting five to four to reduce the bank’s key rate by 0.25% to 5%. The decision comes after inflation returned to the bank’s 2% target in May, and remained there in June, despite stubbornly high services inflation.
However, Bank of England governor Andrew Bailey cautioned that further reductions would only come if the Monetary Policy Committee was sure inflationary pressures had been quashed. Investors are now expecting one or two further reductions in borrowing costs by the end of the year. Following the announcement, the pound fell to a four-week low against the dollar, and two-year gilt yields dropped. The rate cut aids Chancellor Rachel Reeves in her efforts to stimulate economic growth and address a £22 billion public finance shortfall.
On Thursday, the Bank of England projected headline inflation to rise from 2% to 2.7% this year, before easing. It expects consumer price inflation to fall to 1.7% by 2026 and 1.5% by 2027.
The UK central bank raised its GDP growth forecast for this year to 1.25% from 0.5%, and anticipates 1% growth in 2025. Minutes from Thursday’s meeting reveal significant division within the Monetary Policy Committee over the interest rate cut.
The cut faced opposition from rate-setters like chief economist Huw Pill, who cautioned about persistent domestic inflation. The rate cut has boosted optimism in the property market, with home-buying activity expected to increase this autumn.
Commodity markets
In the commodity markets, Brent crude futures traded around $80 per barrel on Friday and are set for a weekly fall, as signs of disappointing global fuel demand outweighed fears of supply disruptions in the key Middle East production region.
Surveys on Thursday showed weaker manufacturing activity last moth across the US, Europe and Asia, raising the risk of an underpowered global economic recovery that would weigh on oil consumption. Disappointing economic data from top oil importer China this week, particularly falling manufacturing activity, weighed on prices, adding to concerns about demand growth there after import and refinery activity data for June was lower than last year.
In July, Asia’s crude imports fell to a two-year low due to weak demand in China and India, according to LSEG Oil Research. Additionally, oil investors are wary of potential disruptions from escalating Middle East tensions, following the killing of senior leaders from Iran-aligned groups Hamas and Hezbollah.
Gold Prices traded around $2,460 an ounce on Friday and are set for a weekly gain, amid expectations of a Federal Reserve interest rate cut in September and rising Middle East tensions. Gold is viewed as a safe-haven asset in times of geopolitical and economic uncertainty, and lower interest rates diminish the opportunity cost of holding non-yielding bullion.
Equity markets
US equity futures fell on Friday as disappointing quarterly results from big tech companies dampened market sentiment, while investors awaited the July payrolls report. In Thursday’s regular session, the Dow Jones Industrial Average fell 1.21%, the S&P 500 lost 1.37%, while the Nasdaq Composite plunged 2.30%.
Meanwhile, yields on the benchmark US 10-year Treasury, a crucial barometer of expectations on the US economy, fell below 4% for the first time in six months. Stocks and bonds reacted as expectations shifted, with yields rising on hopes of an imminent Federal Reserve rate cut, while equities suffered.
The Federal Reserve indicated on Wednesday that it might lower interest rates as early as September after maintaining borrowing costs at a 23-year high for the eighth consecutive meeting. Federal Reserve Chair Jerome Powell mentioned a potential rate cut in the next meeting and noted a “real discussion” about it within the Federal Open Market Committee.
Powell’s remarks signal a possible policy shift more than two years after the Federal Reserve intensified its anti-inflation measures. Despite a slowing labour market and rising unemployment to 4.1%, Powell suggested the Federal Reserve feels confident about managing inflation, with easing wage pressures also noted.
Jobless claims in the US rose to an 11-month high last week, as small businesses have been cutting hiring plans, and many consumer-facing companies have recently recorded earnings misses. Investors are now pricing in two or three cuts this year, with the first coming in September, but increased the odds of three cuts by December, putting the chances at 96%.
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