UK markets made modest gains this week with the FTSE 100 Index rising 0.12% to trade at 7,655 points at the time of writing. The Bank of England held interest rates at 5.25% at its latest meeting on Thursday but said inflation could fall to its 2% target within a few months.
After the Monetary Policy Committee meeting, the Bank of England signalled that it was ready to consider cutting rates for the first time since inflation surged following the coronavirus pandemic. With headline inflation now at 4%, compared with its 2022 peak of more than 11%, the UK central bank has ditched its previous warnings that further tightening of monetary policy might be needed.
Instead, it said it would “keep under review” how long rates should be held at current levels. The meeting marked a pivot more than two years after the Bank of England embarked on an aggressive rate-rising campaign that took borrowing costs to their highest level in 15 years. Despite inflation declining significantly over the past few months, Bank of England governor Andrew Bailey cautioned that “we need to see more evidence that inflation is set to fall all the way to the 2% target, and stay there, before we can lower interest rates”.
The outlook is being closely watched by chancellor Jeremy Hunt since a fall in borrowing costs could increase his scope for cutting taxes ahead of his March 6th budget. The Bank of England also upgraded its forecast for 2024 growth, which it now says will be 0.25%, up from its previous prediction of zero growth, and estimated 0.75% growth for 2025.
Elsewhere, UK house prices rose more than expected, increasing 0.7% between December and January, the fastest pace since October, according to mortgage provider Nationwide. The figure was much higher than the 0.1% increase forecast by Reuters and took the average house price to £257,656. The data offers further signs that the UK property market is improving, as mortgage rates ease on expectations that the Bank of England will cut interest rates this year.
Commodity markets
In the commodity markets, Brent crude futures traded around $79 per barrel on Friday, as the market digested the outcome of an OPEC committee meeting and the Federal Reserve’s decision on interest rates. The OPEC committee said on Thursday that the group’s members were adhering to production cuts after reviewing data from November and December of 2023.
The committee proposed no change to OPEC’s decision to slash 2.2 million barrels per day from the market this quarter. Oil posted its first monthly gain since September in January on stronger than expected economic growth in the US, a disruption to US output due to winter storms, and stimulus in China.
The US and Iran are also on the brink of a more direct confrontation in the Middle East after a drone strike by militants allied with Tehran killed three US troops in Jordan last weekend. Anxiety about China’s economy has weighed on the oil market over the past several months, but JPMorgan is forecasting growth of 4.9% this year as Beijing ramps up stimulus.
There are few signs that China’s oil demand is slowing, according to Natasha Kaneva, head of global commodities strategy at the investment bank.
Gold prices traded around $2,050 an ounce on Friday and are set to end the week higher, as the dollar and treasury yields retreated on firm US interest rate cut expectations for this year.
Equity markets
US equity futures rose on Friday as investors digested the latest batch of corporate earnings reports. In Thursday’s regular session, the Dow Jones Industrial Average rose 0.97%, the S&P 500 gained 1.25%, while the Nasdaq Composite advanced 1.30%.
The Federal Reserve held the benchmark federal funds rate at a 23 year high of between 5.25% and 5.5% on Wednesday, and while the bias towards further rises has gone, it is not ready to cut rates just yet. Wednesday’s official statement made no mention of further rate rises if the Federal Reserve deemed it appropriate. Instead, there came a hint of triumph, with the US central bank noting that risks to full employment and low inflation were now moving into better balance.
Federal Reserve chair Jerome Powell cooled speculation that the central bank would begin cutting interest rates as soon as March, saying that was not the “base case” as it moves towards easing monetary policy this year. Falling inflation in recent months had fuelled bets that the Federal Reserve could begin cutting rates at its next meeting in March. However, Powell said the central bank still needed greater confidence that inflation was sustainably lower.
The US economy and labour market have remained stronger than many economists predicted, defying forecasts that the Federal Reserve’s campaign to snuff out rampant inflation with steep rises in interest rates would eventually end in recession and job losses. Investors also digested recent economic data this week that showed the US labour market eased once again during the previous week, following several months of considerable tightness.
According to the US Department of Labour, in seasonally adjusted terms, the number of initial unemployment claims rose by 9,000 to 224,000 over the week ending 27th January, above forecasts of 212,000. This still leaves claims at an extremely low level by historical standards, but the increase will be clearly visible after months of readings at 200,000 to 220,000, raising fears of a meaningful shift in labour market conditions.
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