UK markets rose this week, with the FTSE 100 Index gaining 0.56% to trade at 9,165 points at the time of writing. The UK economy grew by 0.3% in the second quarter, surpassing expectations but underlining the challenges facing Chancellor, Rachel Reeves as she attempts to boost growth and repair the public finances.
The GDP figure for the April to June period was above the 0.1% expansion forecast by economists but marked a sharp slowdown from the 0.7% expansion in the first three months of the year. The services, construction and manufacturing sectors underpinned growth in the second quarter, according to the Office for National Statistics, with the economy expanding 0.4% in June, following declines in April and May.
Businesses are contending with the higher taxes announced in Rachel Reeves’ first October Budget and the uncertainty unleashed by Donald Trump’s trade war. Economists said that growth in the second quarter was powered by a 1.2% increase in government spending.
UK payroll employment fell for a sixth straight month in July but wage growth held steady, highlighting the challenge facing the Bank of England as it considers when next to cut interest rates. Employers cut headcount by 8,000 last month, according to preliminary figures from the Office for National Statistics on Tuesday. Payrolls dropped by 26,000 in June, a smaller decline than the 41,000 previously reported. Separate figures showed wage growth, excluding bonuses, was unchanged at 5% in the three months to June, in a sign of the persistent price pressures in the economy.
Economists have said that the slower pace of job losses in June and July will go some way to calming concerns that the labour market is facing a severe deterioration. The UK unemployment rate held steady at 4.7% in the three months to June, according to the Office for National Statistics. The number of job vacancies fell by 44,000 on the quarter to 718,000. Vacancies fell in 16 out of the 18 industry sectors tracked with the largest percentage decrease coming in arts, entertainment and recreation, which recorded a 17.6% drop from the previous quarter. The still-sluggish jobs market intensifies the pressure on the Chancellor as she prepares for another tough Budget in the autumn.
Businesses have blamed tax increases in Reeves’ October 2024 Budget for the pullback in hiring. A £25 billion increase in national insurance contributions, announced in the Budget, took effect in April, along with a rise in the minimum wage.
Commodity markets
In the commodity markets, Brent crude futures traded around $66 per barrel on Friday and are set to end the week little changed, after US President Donald Trump warned of “consequences” if Russia blocked a Ukraine peace deal, injecting concerns about supply. The US President did not specify what the consequences could be, but he has warned of economic sanctions if the meeting in Alaska on Friday proves fruitless.
A continued conflict between Russia and Ukraine supports oil markets by limiting the supply of Russian oil. Sentiment was also boosted by strong economic data out of Japan, which is among the largest global crude importers. Oil prices were kept in check on Wednesday as crude oil inventories in the US unexpectedly rose by 3 million barrels in the week ending August 8th, according to the Energy Information Administration.
Gold prices traded around $3,340 an ounce on Friday and are set for a weekly fall, as hotter than expected US Producer Price Index inflation reduced hopes for a 0.5% Federal Reserve rate cut in September.
Equity markets
US equity futures were mixed on Friday as the latest economic data dimmed large Federal Reserve rate cut hopes.
In Thursday’s regular trading session, the Dow Jones Industrial Average fell 0.02%, the S&P 500 gained 0.03%, whilst the Nasdaq Composite declined 0.01%. US consumer price inflation was unchanged at 2.7% in July, despite Donald Trump’s aggressive tariffs, and below expectations of 2.8% among analysts surveyed by Bloomberg.
The figure was dragged lower by weaker fuel prices, with the index for petrol down 9.5% over the past 12 months. Core inflation, which strips out volatile food and energy prices, rose to 3.1%, surpassing expectations of a smaller rise to 3%, from June’s 2.9% rate.
President Donald Trump has sought to use tariffs to reshape the US’s trading relationship with the world, prompting warnings of a jump in domestic prices. The impact of the duties has so far been slow to trickle through to consumers, with businesses in some cases absorbing the cost increases. However, there are increasing signs the burden will be shifted in the months ahead.
The Producer Price Index, which tracks what domestic US producers charge for their goods and services, rose 3.3% in July from a year earlier, the biggest jump since February.
The reading from the Bureau of Labor Statistics was well above June’s 2.4% annual gain and the 2.5% rise expected by economists polled by Bloomberg.
The figures suggest that despite muted inflation to date in consumer prices, the tariffs that have been imposed on US trading partners are driving an increase in prices further up the supply chain. Tariffs are causing businesses to raise the prices they charge each other, which will likely show up in higher consumer prices over time.
The probability of a 0.25% cut at next month’s Federal Reserve meeting, which was fully priced in by swaps markets before the Producer Price Index figures, fell slightly to about 92%.
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