UK markets rose this week, with the FTSE 100 Index gaining 1.2% to trade at 8,410 points at the time of
writing.
UK shop prices have entered deflation for the first time in almost three years, with The British Retail
Consortium announcing on Tuesday that shop prices fell by an annual rate of 0.3% in August, down from a
0.2% rise in July, marking the first deflation since October 2021.
The trend was driven by non-food costs declining further, with retailers discounting heavily to shift summer stock, particularly in fashion and household goods. Discounting followed a difficult summer of trading caused by poor weather and the continued cost of living crisis impacting many families.
The Prime Minister, Sir Keir Starmer, warned this week that the Autumn budget is “going to be painful” in his strongest hint yet that the Labour government will raise taxes in October. Starmer has already spelt out a handful of tax reforms, including axing the non-dom status and levying VAT on private school fees.
However, he has pledged not to increase income tax, national insurance or VAT, which account for two-thirds of government revenues. Given those constraints, economists expect the Chancellor, Rachel Reeves to seek to raise at least £20 billion of extra tax revenue on October 30 through measures targeting the wealthy, businesses and pension savers.
This points towards capital gains tax as the key way of boosting Treasury income in order to fill what Labour has characterised as a £22 billion “black hole” in the public finances.
Economists, including the leading Institute for Fiscal Studies think-tank, estimate that the Treasury could add high single-digit billions of pounds a year by aligning CGT rates with those of income tax. Another £1.5 billion or so could be raised by cutting some of the reliefs against inheritance tax, such as on business assets.
Elsewhere, the UK recorded the fastest annual house price growth in August since late 2022, according to Nationwide’s house price index, which rose by 2.4% year on year, as cheaper mortgages continued to power a gradual recovery in the property market.
Commodity markets
In the commodity markets, Brent crude futures traded around $79 per barrel on Friday and are set for a weekly rise, as Libya confirmed major disruptions in its oil output. Production in Libya has fallen by 1.5 million barrels over the past three days for a total loss of $120 million, according to the OPEC member’s National Oil Corporation.
The consulting firm, Rapidan Energy, has estimated production disruptions in Libya would total between 900,000 and one million barrels per day for several weeks. Libya’s July production was around 1.18 million barrels per day. Rival governments in Libya are locked in a political dispute. The eastern government in Benghazi, which is not internationally recognised, has threatened to shut down all oil production and exports as the UN backed western government in Tripoli seeks to replace the OPEC member’s central bank head. The length of the supply disruption could have a spillover effect on OPEC+ production plans in October, which in turn could push up oil prices if supply does not ease as expected.
Meanwhile, Iraq plans to reduce oil output from 4.25 million barrels per day in July to about 3.9 million barrels per day in September, according to Reuters.
Gold prices traded around $2,525 an ounce on Friday and are set for a weekly rise, on expectations that the Federal Reserve will begin interest rate cuts next month and underpinned by ongoing tensions in the Middle East.
Equity markets
US equity futures rose on Friday as investors prepared for the latest personal consumption expenditures price
index report, which is the Federal Reserve’s preferred inflation measure.
In Thursday’s regular session, the Dow Jones Industrial Average gained 0.59%, the S&P 500 was unchanged, while the Nasdaq Composite lost 0.23%.
The number of Americans filing new applications for jobless benefits fell by 2,000 to a seasonally adjusted 231,000 last week, but re-employment opportunities for laid-off workers are becoming scarcer, a sign that the unemployment rate probably remained elevated in August. Although the US labour market is slowing, it is doing so in an orderly fashion that is keeping the economic expansion on track.
Revised estimates from the Bureau of Economic Analysis revealed that the US economy grew faster than initially thought in the second quarter, expanding at an annual rate of 3%, more than double the 1.4% growth in the first quarter.
This surpassed economists’ expectations who had anticipated no change from the initial 2.8% growth estimate.
Growth was powered by consumer spending while corporate profits also rebounded last quarter, helping to
further dispel fears of a recession. While the labour market slow-down positions the Federal Reserve to start
cutting interest rates next month, the data argues against a significant 0.5% reduction in borrowing costs.
Financial markets are currently expecting the US central bank to begin its easing cycle next month with a
0.25% reduction in its benchmark overnight interest rate.
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