UK markets advanced this week, with the FTSE 100 Index rising 0.75% to trade at 7,550 points at the time of writing.
The Bank of England warned that interest rates are likely to need to remain around current levels, even as the full impact of the hikes is yet to filter through to UK households and smaller businesses. High interest rates and a slowdown in housebuilding have driven a contraction in UK construction activity for the third month in a row, according to data released on Wednesday.
The S&P Global/Cips UK construction purchasing managers’ index fell marginally to 45.5 in November from 45.6 the previous month. The figure was below economists’ expectations, indicating that most businesses have reported a decline in activity since August. A stagnation in construction output over the year to September has contributed to a lack of economic growth in the UK. The latest data suggested the sector had been squeezed during the autumn months as high borrowing costs hit demand.
Data from mortgage provider Halifax showed UK house prices rose by 0.5% between October and November, following a 1.2% increase in the previous month. A typical UK home now costs £283,615, 1% down from November last year but still around £44,000 more than in January 2020, before the pandemic.
Commodity markets
In the commodity markets, Brent crude futures traded around $76 per barrel on Friday and are set to end the week significantly lower, as investors remained concerned about sluggish demand in the United States and China.
Chinese customs data showed that crude oil imports in November fell 9% from a year earlier, as high inventory levels, weak economic indicators, and slowing orders from independent refiners weakened demand. While China’s total imports dropped on a monthly basis, exports grew for the first time in six months in November, suggesting the manufacturing sector may be beginning to benefit from an uptick in global trade flows.
Oil prices have fallen by about 10% since OPEC and its allies announced a combined 2.2 million barrels per day voluntary output cut for the first quarter next year. Russian President Vladimir Putin and Saudi Crown Prince, Mohammed Bin Salman met to discuss further oil price cooperation on Wednesday, which may strengthen the market’s confidence in the impact of output cuts.
Gold prices traded around $2,030 an ounce on Friday, after a volatile week of trading, which saw gold surge above $2,100 an ounce to an all-time high earlier this week. Gold initially rose on elevated bets for a rate cut by the US Federal Reserve but pulled back on uncertainty over the cut’s timing.
Equity markets
US equity futures held steady on Friday as investors look ahead to the highly anticipated jobs report to gauge the state of the US labour market and the future path of interest rates. In Thursday’s regular session, the Dow Jones Industrial Average gained 0.17%, the S&P 500 rose 0.8%, while the Nasdaq Composite advanced 1.37%. US job openings fell to their lowest level in more than two years in October, another sign of a cooling labour market that sparked a rally in government debt, as investors bet on less aggressive monetary policy from the Federal Reserve.
US businesses advertised 8.7 million vacancies in October, down from 9.6 million in September, according to the labour department’s Job Openings and Labor Turnover Survey released on Tuesday. This was the lowest level of openings since March 2021. The latest sign that demand across the US labour market is softening will be welcomed by the Federal Reserve, which is debating how much more to squeeze the economy to get inflation under control.
The US central bank is set to keep the federal funds rate steady at a 22-year high of 5.25%-5.5% when it meets later this month, a level that has been in place since July. Leading academic economists polled by the Financial Times suggest that the US central bank will hold off on interest rate cuts until at least July 2024 and deliver less relief than financial markets are currently expecting. The market is currently anticipating that the Federal Reserve will begin to cut as early as March, and will lower the federal funds rate to around 4% by the end of the year, more than a full percentage point below its current level.
Before the Federal Reserve considers interest rate cuts, it will need to be confident that inflation is moving back to its longstanding 2% target. This will require evidence that consumer price growth is moderating and further signs of labour market cooling.
The information provided in this communication is not advice or a personal recommendation, and you should not make any investment decisions on the basis of it. If you are unsure of whether an investment is right for you, please seek advice. If you choose to invest, your capital may be at risk and the value of an investment may fall as well as rise in value, so you could get back less than you originally invested.