UK markets pulled back slightly this week, with the FTSE 100 Index falling 0.24% to trade at 7,440 points at the time of writing. The British Pound fell to a three-month low after Bank of England Governor, Andrew Bailey cast doubt on the need for further interest rate rises.
Sterling traded around $1.247 after Bailey told MPs that the UK economy was now ‘much nearer the top of the interest rate cycle’ on the basis of current evidence. However, he stressed that the Central Bank was still keeping its options open. The Bank of England’s Monetary Policy Committee will vote on September 21st whether to increase rates from their current 5.25% after 14 consecutive hikes. The outcome will have big implications for mortgage holders, savers and government borrowing costs when the country is still struggling with a cost of living crisis, and Rishi Sunak’s government is seeking to catch up in the polls ahead of an election.
UK businesses expect inflation and wage growth to ease, according to a monthly survey by the Bank of England, which will provide some relief to policymakers ahead of the interest rate decision later this month. Output prices are expected to increase by 4.9% over the next 12 months, according to August’s Decision Maker Panel, a survey of UK chief financial officers, published on Thursday. The figure represents a fall of 0.5% from July and well below the peak of 6.6% in September last year. The outlook for wage growth also fell to an average of 5.1%, continuing a downward trend from a high of 6% at the end of 2022. The findings reflect Andrew Bailey’s comments that a further interest rate rise may not be necessary.
Commodity markets
In the commodity markets, Brent crude futures traded around $90 per barrel on Friday to trade near the highest level in 10 months, after Saudi Arabia and Russia, the world’s top two oil exporters, extended voluntary supply cuts to the end of the year. These were on top of the April cuts agreed by several OPEC+ producers running to the end of 2024.
Market participants also digested mixed data from China. Overall exports from China fell 8.8% in August year-on-year and imports contracted 7.3%. However crude imports surged 30.9%. There were some encouraging signs for the Chinese economy, with the government introducing a series of policy steps to boost financial and real estate markets. Although it is still too early to judge the pace of China’s demand recovery.
Concerns about rising oil output from Iran and Venezuela, which could balance out a portion on cuts from Saudia Arabia and Russia helped to keep a lid on prices. Helping to support prices, US crude oil inventories were projected to have fallen by 5.5 million barrels in the week ending September 1st, according to market sources citing American Petroleum Institute figures. Gold traded around $1,920 an ounce on Friday and is set for a weekly fall, facing pressure from a rallying US dollar as stronger than expected US services sector data raised inflationary and rate hike concerns.
Equity markets
US equity futures displayed wild volatility on Friday morning, with the NASDAQ hovering between 15,260 and 15,340 in pre-market trading, as renewed concerns about the Federal Reserve’s interest rate policy path weighed on sentiment. In Thursday’s regular trading session, The Dow Jones Industrial Average rose 0.17%, the S&P 500 Index lost 0.32%, while the Nasdaq Composite fell 0.89%.
The number of Americans applying for unemployment benefits fell last week to the lowest level in seven months, with the labour market seemingly resistant to the higher interest rates put in place to slow the economy. US applications for jobless claims fell by 13,000 to 216,000 for the week ending September 2nd, the Labor Department reported on Thursday, while second-quarter labour costs rose more than anticipated.
Combined with the recent uptick in energy prices, a strong jobs market will boost the need for the Federal Reserve to act and potentially approve more rate hikes. While 93% of traders are pricing in a rate pause at September’s Federal Open Market Committee meeting, future hikes are not off the table. Expectations for an additional increase in November have risen to 45%, according to the CME Fed Watch tool. The yield on the US 10-year Treasury note approached 4.3% in the first week of September as investors begin to price in the prospect of the Federal Reserve keeping interest rates high for a longer period.
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