UK markets declined this week, with the FTSE 100 Index falling 1.7% to 10,630 points at the time of writing. The decline came despite evidence that the UK economy began the third quarter on a stronger footing than expected, with GDP expanding by 0.4% in July.
The figure exceeded the zero-growth forecast of economists polled by Reuters and followed 0.3% growth in June, providing some encouragement for new Prime Minister Andy Burnham and Chancellor John Healey ahead of the government’s first Budget on October 28th. The services sector drove July’s growth, expanding by 0.4%. Within services, IT and consultancy was the strongest contributor, with businesses involved in artificial intelligence and related technologies providing a notable boost.
According to the Office for National Statistics, output from IT and consultancy increased by 4.4% in the three months to July, highlighting the growing contribution of AI-related activity to the UK economy. Over the three months to July, a less volatile measure of economic activity, GDP grew by 0.4%, matching the pace recorded in the second quarter but slowing from 0.6% in the first quarter.
The stronger-than-expected start to the third quarter offers some relief for the Chancellor, particularly as the government faces higher oil prices and rising borrowing costs ahead of the Budget. The Bank of England had forecast at the end of July that the economy would grow by just 0.1% in the third quarter. There were also tentative signs of improvement in the UK labour market.
Hiring by UK recruiters increased in August for the first time in four years, according to the KPMG and Recruitment & Employment Confederation index of permanent job placements. The index edged into positive territory, rising to 50.5 from 50.0 in July and reaching its highest level since September 2022. Temporary staff billings also increased, with the corresponding index rising to 52.4, its second-strongest reading since April 2023. A reading above 50 indicates that more recruitment agencies reported an increase in placements than a decline.
Despite these encouraging signs, the broader labour market remains subdued. Payroll employment has been broadly flat or falling for almost two years, while job vacancies continue to decline. Nevertheless, the REC survey suggests private-sector demand for labour may be stabilising, although public-sector vacancies continued to fall in August.
A separate Bank of England survey also indicated that businesses expect to increase headcount over the coming year, following a period of significant workforce reductions. Overall, the data points to an economy showing greater resilience than expected, although significant challenges remain ahead of the Budget.
Commodity markets
In the commodity markets, Brent crude futures traded around $105 per barrel on Friday and are on track for a weekly rise, as the market braces for a prolonged Iran war. Fighting between the US and Iran escalated sharply this week, as the war drags on into its seventh month with no end in sight.
Tensions between Washington and Tehran erupted this month after a period of relative calm in August. Iran has tried to attack American warships over the past several days while the US military has destroyed eight Iranian tankers since Saturday in retaliation. Iran’s Houthi allies in Yemen struck several energy facilities and other targets in Saudi Arabia this week, injuring more than 70 civilians and raising concerns that the war was broadening.
The escalation in the US-Iran conflict is raising the risk of oil prices surging above $120 a barrel as attacks on shipping intensify, said Daan Struyven, co-head of global commodities research at Goldman Sachs.
The physical market may be tightened even more by a further decline in transit volumes, broader escalation or threats to energy infrastructure, extending the upward move in oil prices. Oil has completely unwound its selloff between early June and July, with Brent prices now well above those seen in early June.
Gold prices traded around $4,350 an ounce on Friday and are set for a weekly decline, as investors increased their bets on a Federal Reserve rate hike next week following stronger than expected producer price data.
Equity markets
US equity markets rose on Friday after the major averages declined in the previous session, as investors awaited the August consumer price index report. In Thursday’s regular session, the Dow Jones Industrial Average fell 0.60%, the S&P 500 lost 0.58%, and the Nasdaq Composite declined 0.65%.
US wholesale prices rose in August, according to a report on Thursday that could play a key role in the Federal Reserve’s upcoming interest rate decision. The Producer Price Index (PPI), a measure of final demand costs for goods and services, increased a seasonally adjusted 0.4% for the month, in line with the Dow Jones consensus, the Bureau of Labour Statistics reported. On an annual basis, that put the PPI at 5.4%, still well above the Federal Reserve’s 2% inflation target and 0.1% higher than expected. The PPI rose 0.1% in July, a slight upward revision from the original estimate of no change.
Excluding food and energy, the core PPI accelerated by 0.2%, against the forecast for a 0.3% increase. Energy prices, in particular goods prices overall were responsible for most of the PPI increase. Final demand energy prices rose 4.2%, pushed largely by soaring diesel, which surged 24.1%. Goods prices broadly increased by 1.1%. US government bond yields rose to their highest in almost three years after Treasury secretary Scott Bessent’s $6 billion buyback plan disappointed investors in the world’s most important debt market.
The Treasury department said on Wednesday that it would purchase $6 billion in government debt in the first buyback operation since Bessent unveiled the expanded scheme last month to tackle a rise in borrowing costs. The new figures is a step-up compared with the Treasury’s vow to at least double its purchases of long-term bonds to $4 billion, refashioning the existing programme to bolster prices in the $32 trillion US treasury market.
However, it is lower than estimates of $8 billion and $10 billion circulated by Wall Street Analysts this week. The buyback intervention marks the latest test for Bessent, who has been repeatedly deployed by President Donald Trump to calm market nerves. Bessent hopes the expanded buybacks will halt the recent sell-off in long-term US debt, which he has insisted does not “reflect the underlying market fundamentals”.
Higher long-dated bond yields raise borrowing costs for US consumers, notably on mortgages, as well as for companies seeking to raise cash. US yields are also a benchmark for trillions of dollars in assets worldwide.
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