UK markets declined this week with the FTSE 100 Index falling 0.42% to trade at 7,600 points at the time of writing. The January S&P Global UK Services PMI data released this week signalled a solid increase in business activity across the UK service economy, which extended the current period of expansion to three months.
Higher levels of output were supported by a sustained rise in new orders. Survey respondents typically commented on improved confidence among clients, due to strengthening economic conditions and expected interest rate cuts.
The Bank of England’s chief economist Huw Pill announced this week that it was a question of when and not if the central bank would start reducing interest rates, as inflation continues to decline. Pill said there were some early signs of improvement across a range of inflation indicators, although this information was still too tentative for the Bank of England to act. He added the UK central bank did not need to see underlying inflation fall to 2% before it cuts its key rate because policy would still be restrictive, even after a slight reduction in borrowing costs.
The Organisation for Economic Co-operation and Development said on Monday that the UK faces the highest rate of inflation in the G7, this year and next, forecasting UK inflation would be 2.8% in 2024 and 2.4% in 2025, adding that it expected the Bank of England to be able to lower interest rates in the third quarter of this year.
The UK jobs market slowed and growth in salaries slipped to a three-year low in January, according to a report published on Thursday by KPMG and the Recruitment and Employment Confederation. Recruiters responding to the data said that for the 11th month running there were more candidates available to fill vacant posts, with many of them linking this to redundancies as well as slower hiring. Starting salaries for permanent joiners are still rising but the pace of growth is now at the softest seen in 34 months, and below the historical average.
Commodity markets
In the commodity markets, Brent crude futures traded around $82 per barrel on Friday and are set for a weekly rise, after on-going tensions in the Middle East after Israel rejected a ceasefire proposal from Hamas.
US Secretary of State Antony Blinken is on a diplomatic tour of the region this week, to secure an extended humanitarian pause in Gaza in exchange for the release of hostages by Hamas. Blinken met Israel’s Prime Minister Benjamin Netanyahu on Wednesday to discuss a counterproposal from Hamas that demands a permanent end to the fighting. Netanyahu rejected Hamas’ proposal, vowing to press on to the southern city of Rafah on the border with Egypt and achieve “total victory” in Gaza. A Hamas delegation arrived in Cairo on Thursday to continue ceasefire talks with mediators Egypt and Quatar. Meanwhile, the US killed a senior leader of the militant group Kata’ib Hezbollah on Wednesday in a drone strike in Baghdad, in response to attacks on American troops, according to US central Command.
Prices also found support this week after the US Energy Department forecast domestic crude production would grow slower than originally expected this year, easing worries among traders that the global market is oversupplied.
Gold traded around $2,030 an ounce on Friday and are set for a weekly fall, as the dollar and US Treasury yields rose, with investors awaiting more cues on the timing of the US Federal Reserve’s first interest rate cut this year.
Equity markets
US equity futures were little changed on Friday as investors digested the latest economic data and a fresh round of corporate earnings.
In Thursday’s regular session, the Dow Jones Industrial Average gained 0.13%, the S&P 500 rose 0.06%, while the Nasdaq Composite advanced 0.24%. The S&P 500 index touched the milestone of 5,000 for the first time on Thursday, as a narrow group of companies continued to drive the benchmark upwards.
Higher interest rates tend to weigh on stock prices by reducing the relative appeal of risky assets and driving up borrowing costs for companies. However, the mega cap companies with heavy index weightings have strong cash positions and have been relatively insulated from the moves in interest rates. Despite the moves, only half the stocks in the S&P 500 have risen this year and less than a third have outperformed the index.
The US’s budget deficit is set to soar by almost two-thirds over the next 10 years, from $1.6 trillion to $2.6 trillion, the Congressional Budget Office warned on Wednesday, as higher interest rates weigh on the government’s finances. The deficit’s share as a proportion of GDP would increase from 5.6% in 2024 to 6.1% in 10 years’ time, due to the debt servicing costs, remaining well above the average of 3.7% over the past 50 years.
The projections highlight the mounting fiscal challenges facing governments around the world that spent heavily to prop up economies during the Covid-19 pandemic but are now contending with much higher interest rates as they repay their debts.
Elsewhere, the number of Americans filing new claims for unemployment benefits fell slightly more than expected last week, dropping by 9,000 to 218,000, pointing to underlying labour market strength despite a recent surge in layoffs, mostly in the technology industry.
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