UK markets declined this week, with the FTSE 100 Index falling by 0.64% to trade at 7,900 points at the time of writing.
Manufacturing activity in the UK has returned to growth for the first time in nearly two years, on the back of better domestic demand, according to the S&P Global UK Manufacturing Purchasing Managers’ (PMI) Index, which rose to a 20-month high of 50.3 in March, up from 47.5 in February. This was the first time the PMI has posted above the 50.0 mark, that separates expansion from contraction, since July 2022.
The data adds to evidence that the UK economy is recovering from the technical recession it entered at the end of last year. The UK PMI data was much stronger than the 46.1 reading for the Eurozone, suggesting that British factories are recovering faster than those on the continent.
In the first quarter of the year, business optimism rose to its highest level since April last year. Fifty-eight percent of manufacturers stated they expected their level of production to increase in the next 12 months. The improved sentiment reflects stronger demand, new product launches, a better trading environment, hopes of a normalisation in costs and less disruption to supply chains.
UK mortgage approvals for house purchases rose above expectations, to 60,400 in February, from 56,100 in January, according to figures from the Bank of England. The figure exceeded the 56,500 forecast by economists in a Reuters poll and marked the highest level since September 2022.
The effective interest rate on newly drawn mortgages, representing the actual interest rate paid, fell 0.29% to 4.9% in February, according to the UK central bank, marking lowest rate since August 2023. Despite this, inconsistencies in the housing market recovery have emerged, with average house prices falling by 1% in March, following five months of consecutive increases, according to the lender Halifax.
Shop price annual inflation eased to 1.3% in March, down from 2.5% in February, according to data published by the British Retail Consortium. This was the lowest level since December 2021 and a sign that the surge in prices over the past two years is coming to an end. The slowing price growth supports hopes that consumer spending will rebound this year, helping the economy to recover from last year’s recession.
Commodity markets
In the commodity markets, Brent crude futures traded around $90 per barrel on Friday and are set for a weekly rise, driven by concerns of lower supply and signs of stronger economic growth in the US, the world’s largest oil consumer.
The oil market is anticipated to slip into a deficit of 450,000 barrels per day in the second quarter, as demand grows while global inventories fall, with OPEC+ members voluntarily reducing production. On Wednesday, an OPEC+ committee recommended maintaining the group’s current production policy, with some members voluntarily slashing 2.2 million barrels per day.
Wars in Eastern Europe and the Middle East have also raised renewed fears about supply disruptions. The third-largest OPEC producer, Iran, vowed revenge against Israel for an attack on Iran’s embassy compound in Syria on Monday, resulting in the deaths high-ranking Iranian military personnel. Additionally, a NATO official commented that the ongoing Ukrainian drone attacks on refineries in Russia may have disrupted more than 15% of Russian capacity, impacting the country’s fuel output.
Gold traded around $2,290 an ounce on Friday, after hitting another record high this week, as growing tensions in the Middle East and US interest rate cut hopes continued to push investors to the safe-haven asset. Strong central bank buying and safe-haven inflows amid escalating geopolitical risks have fuelled a 10% gain in bullion so far this year.
Equity markets
US equity futures rose on Friday as investors look ahead to a key US monthly jobs report to gauge the strength of the labour market. In Thursday’s regular session, the Dow Jones Industrial Average lost 1.35%, the S&P 500 declined 1.23%, while the Nasdaq Composite dropped 1.40%.
Federal Reserve Chair Jerome Powell, speaking at Stanford University’s Business School on Wednesday, emphasised that the US central bank’s task of bringing down inflation was “not yet done” and that it needed “greater confidence” that price pressures were easing before considering interest rate cuts. Powell’s comments struck a cautious tone on any quick changes to monetary policy, after the latest projections from Federal Reserve officials in March indicated an expected 0.75% rate cut this year. Strong data on the labour market and signs of stubbornly high inflation have begun to cast doubt on these forecasts.
The US manufacturing sector expanded for the first time in a year and a half in March, as companies increased production and demand rebounded. The Institute for Supply Management said its index tracking factory activity rose to 50.3 last month, from 47.8 in February, surpassing economists’ expectations of 48.4. A reading above 50 indicates the sector is expanding, it was the first time the index has moved into expansion territory since September 2022. Although demand remains in the early stages of recovery, there are clear signs of improving conditions in production compared to January and February.
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