UK markets declined this week, with the FTSE 100 Index falling 0.88% to trade at 9,230 points at the time of writing. UK wage growth rose to 4.7% in the three months to July, according to official data that commits the government to an above-inflation increase in the state pension next year.
Ministers use the data published in September as the basis for calculating the state pension under the so-called triple lock arrangement, which ensures it goes up each year in line with whichever is highest out of wage growth, consumer price inflation or 2.5%. The 4.7% annual increase in average total weekly earnings, including bonuses, was up from 4.6% the previous month, the Office for National Statistics said. Excluding bonuses, wage growth slowed in line with analysts’ expectations to 4.8%, from 5% the previous month. Despite its escalating cost, ministers have stated that they remain committed to keeping the triple lock in place until the end of the decade, even though it puts the state pension on course to exceed the tax-free personal allowance, which is currently frozen in cash terms, until 2027.
UK inflation was unchanged at 3.8% in August on the back of higher food, restaurant and hotel prices, according to figures from the Office for National Statistics which were in line with the expectations of analysts surveyed by Reuters. Food and drink was again a key driver, with inflation running at 5.1%, up from 4.9% in July. Restaurant, hotel and petrol prices rose, while a steep drop in volatile airfares helped keep overall inflation steady for the month.
The Bank of England kept interest rates on hold at 4% on Thursday and slowed the pace of reductions to its balance sheet, as it blamed the UK’s Labour government for contributing to recent increases in inflation. The seven-to-two decision was in line with market expectations, as was the bank’s decision to dial back its quantitative tightening bond-selling programme from £100 billion to £70 billion to curb rising bond yields. The central bank’s Monetary Policy Committee also signalled it would not hurry to cut interest rates again, signalling concern about continuing inflationary pressures.
Commodity markets
In the commodity markets, Brent crude futures traded around $66.5 per barrel on Friday and are set to end the week little changed, as demand worries offset supply concerns. In Russia, the Finance Ministry announced a new measure to shield the state budget from oil price fluctuations and Western sanctions targeting Russian energy exports. Elsewhere in Russia, Ukraine said its drones struck a major oil-processing and petrochemical complex and an oil refinery in Russia, part of an intensifying campaign to disrupt Moscow’s oil and gas sector.
Exxon Mobil CEO Darren Woods told the Financial Times in an interview that the US oil major has no plans to resume operations in Russia. Anything that keeps Russian barrels out of the international oil market should be bullish for prices. Kuwait’s oil minister, Tariq Al-Roumi, said he anticipates an increase in oil demand following a US interest rate cut, with a particular rise expected from Asian markets.
Persistent oversupply and soft fuel demand in the US, the world’s biggest oil consumer, weighed on the market. US crude stockpiles fell sharply last week as net imports dropped to a record low, while exports jumped to a near two-year high, data from the Energy Information Administration showed on Wednesday. A rise in US distillate stockpiles by 4 million barrels, however, against market expectations of a gain of 1 million barrels raised worries about demand in the world’s top oil consumer and pressured prices.
Gold prices traded around $3,660 an ounce on Friday and are set to end the week higher, as markets assessed the Federal Reserve’s stance on further interest rate cuts.
Equity markets
US equity futures rose on Friday after all three major indexes closed at record highs in the prior session, supported by the Federal Reserve’s latest interest rate cut. In Thursday’s regular trading session, the Dow Jones Industrial Average rose 0.27%, the S&P 500 gained 0.48%, whilst the Nasdaq Composite advanced 0.94%.
The Federal Reserve cut interest rates for the first time this year on Wednesday, reducing borrowing costs by 0.25% and signalling further reductions ahead as the labour market weakens. The Federal Open Market Committee lowered the benchmark federal funds target range to 4%-4.25%, matching Wall Street expectations. Economic projections released alongside the Federal Reserve decision showed most of the central bank’s members anticipated at least two further 0.25% reductions by the end of this year, marking a dovish shift from the last set of forecasts in June. The rate cut was the first since December and came as the US central bank signalled it viewed a deteriorating labour market as a more immediate risk than a rise in inflation triggered by President Donald Trump’s tariffs.
The move to lower borrowing costs comes despite the rise in consumer price inflation from 2.7% in the year to July to 2.9% in August and the central bank’s preferred personal consumption expenditures price index running at 2.6%, above its 2% target. Most Federal Reserve rate setters said data showing fewer new jobs being created would help to contain wage growth and ensure any effect on inflation from tariffs would prove short lived.
US retail sales increased more than expected in August, as consumers bought a range of goods and dined out, but a weakening labour market and rising prices due to tariffs poses a downside risk to continued strength in spending. Retail sales rose by 0.6% last month, after an upwardly revised 0.6% advance in July, the Commerce Department’s Census Bureau said. Economists polled by Reuters had forecast that retail sales would rise by 0.2%. Although sales were partially boosted by higher prices, the broad increase underscores the economy’s continued resilience despite mounting headwinds.
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.