UK markets
UK markets were in positive territory this week, with the FSTE 100 Index rising by 1.45% to trade at 7,835 points at the time of writing. The Bank of England raised interest rates by 0.5% to a 15-year high of 4% on Thursday, but suggested rates may have peaked. It is now anticipating a milder recession this year than previously thought and said further rate rises would only be necessary if there were new signs that inflation was going to stay too high for too long.
More dovish language from the Bank’s Monetary Policy Committee caused the pound to fall against the dollar, as markets predicted interest rates would now peak at 4.5% in the summer, after members predicted a shallower recession than previously forecast. As a result of falling energy prices, the Monetary Policy Committee now believes GDP will fall only 0.5% this year, compared with the 1.5% decline in its previous forecast.
The Bank of England’s new central inflation forecast shows it thinks price rises will ease quickly from December’s 10.5% annual rate to a level under 4% by the end of the year. Inflation is forecast to drop well below the Bank of England’s 2% target in 2024, although the central bank believes UK economic performance will be weak for some time. The Bank of England’s downgrades to GDP imply it expects UK economic output to be no higher at the start of 2026 than it was just before the pandemic at the end of 2019.
Commodity markets
In the commodity markets, Brent Crude futures traded around $82 per barrel on Friday, and are on track to fall around 6% this week, amid lingering uncertainties about a recovery in demand from China and as US stockpiles continue to rise. The boost to commodities from China’s reopening started to fade as the timing and degree of the country’s economic recovery remains highly uncertain, although analysts are confident that Asia’s largest economy will bounce back this year.
US oil inventories rose to their highest levels since June 2021 last week, the Energy Information Administration reported, as demand remained weak. Crude inventories climbed 4.1 million barrels in the week ended January 27th to 452.7 million barrels, much steeper than the 0.4 million barrels rise that analyst had forecast. It was the sixth straight weekly build, as refining utilisation declined and net imports climbed.
Meanwhile an OPEC+ committee recommended keeping crude production steady earlier in the week, citing uncertainty about the impact of China’s economic reopening and the latest sanctions on Russian supply. Gold traded around $1,910 an ounce on Friday, after a sharp sell off on Thursday, as investors reassessed the outlook for inflation, growth, and monetary policy worldwide. The metal dropped nearly 2% on Thursday from nine-month highs, following a rally driven by expectations of less aggressive central bank policy tightening.
US equity markets
US equity futures fell on Friday, after disappointing earnings reports from major technology firms weighed on sentiment, prompting investors to reassess the sustainability of the recent market rally.
In regular trading on Thursday, The Dow Jones Industrial Average fell 0.11%, while the S&P 500 Index and the Nasdaq Composite rallied 1.47% and 3.25%, respectively.
The market movements followed the Federal Reserve’s interest rate decision which delivered a more modest 0.25% rate hike on Wednesday. Federal Reserve Chair Jerome Powell said the US central bank had made progress in the battle against inflation but warned that ongoing increases in interest rates were appropriate to attain a stance of monetary policy that is sufficiently restrictive to return inflation to the 2% target.
Investors are now looking ahead to the monthly US jobs report for clues about the state of the economy. The US economy likely added 185,000 jobs in January of 2023 which would mark a sixth straight month of slowing job growth, and the weakest reading since December 2020. The unemployment rate is seen edging higher to 3.6% from near 50-year lows of 3.5%. Wages are expected to rise 0.3%, the same as in December, but the annual pay growth rate likely softened to 4.3%, the lowest since August of 2021 from 4.6% in December.
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