UK markets retreated this week, with the FTSE 100 Index falling by 1.9% to trade at 7,470 points at the time of writing. UK retail inflation declined to the lowest level in a year in September, as food price growth eased sharply to an annual rate of 6.2%, down from 6.9% in August, according to figures published by trade body the British Retail Consortium.
The drop in retail inflation is good news for the economy. With household income boosted by record wage growth, lower price rises could help increase consumer spending and business activity. Households benefited from price cuts for school uniforms and other essentials, with non-food inflation falling to 4.4% in September, its lowest since December 2022 and down from 4.7% in August. The data showed that annual food inflation dropped to 9.9% in September, hitting single digits for the first time since August last year after falling for five consecutive months, and down from an all-time peak of 15.7% in April.
A sharp rise in global interest rates is likely to lead to lower valuations of private assets, the UK’s top financial regulator warned on Wednesday, as it confirmed it was looking into the build-up of risks in sectors such as real estate. UK construction activity posted its biggest monthly slide since May 2020 as a steep downturn in housebuilding led to a greater than expected fall in September.
The S&P Global/CIPS UK Construction Purchasing Managers’ Index dropped to 45, down sharply from 50.8 in August and well below 49.9 economists polled by Reuters forecast. A reading below 50 indicates most businesses have reported that activity has contracted. The data provided additional evidence that higher interest rates are weighing on demand in the UK economy, as intended by the Bank of England in its fight against high inflation.
Equity markets
US equity futures were little changed on Friday, as markets highly anticipate the US non-farm payrolls report, which could influence the interest rate outlook.
In Thursday’s regular trading session, The Dow Jones Industrial Average fell 0.03%, the S&P 500 Index lost 0.13%, while the Nasdaq Composite declined 0.12%.
US non-farm payrolls likely increased by 170,000 last month, down from 187,000 in August, marking the fourth consecutive month with job gains falling below the 200,000 mark. However, job gains would still remain well above the 70,000-100,000 needed per month to keep up with growth in the working age population, signalling that the labour market is gradually easing but remains resilient, despite the Federal Reserve’s tightening campaign.
The unemployment rate is forecast to edge lower to 3.7% from 3.8% which was the highest since February 2022. Wages are likely to have risen by 0.3% compared to 0.2% in August, which would keep the annual growth rate steady at 4.3%.
Thanks to growth and the resilient American consumer, listed US companies remain on average incredibly profitable, but the rising cost of debt is starting to become a small but noticeable drag on earnings. Goldman Sachs has estimated that returns on equity for the S&P 500, ex financials, has shrunk by 0.69% this year to 23.4%, with 0.31% of the contraction due to higher interest payments. While this is not a huge deal, and the return on equity of the largest US companies remains at the 97th percentile since 1975, it is a sign that the main drivers of US corporate profitability and stock market valuations over the past three decades are fading.
Commodity markets
In the commodity markets, Brent crude futures traded around $84 per barrel on Friday as an uncertain demand outlook overshadowed an OPEC+ panel meeting, which decided to maintain oil output cuts to keep supply tight.
Economic uncertainty is currently at the forefront of thinking and is the main price driver of oil. The strong dollar, sluggish equity markets and rising bond yields are souring investors’ sentiment in energy. Oil lost more than $5 alone on Wednesday, its biggest drop in over a year, as a bleaker macroeconomic outlook and fuel demand destruction came into focus following a meeting of an OPEC+ panel.
The OPEC+ ministerial panel made no changes to the group’s oil output policy, and Saudi Arabia said it would continue with a voluntary cut of 1 million barrels per day until the end of 2023, while Russia would keep a 300,000 barrels per day voluntary export curb until December.
Data this week also showed a sharp decline in US gasoline demand. Finished motor gasoline supplied, a proxy for demand, fell last week to its lowest since the start of this year, the Energy Information Administration reported. Gold stabilised around $1,820 an ounce on Friday, after a nine-day losing streak, as US data indicating tight labour market conditions raised worries about the Federal Reserve keeping interest rates higher for longer.
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