UK markets pulled back slightly this week, with the FTSE 100 Index falling 0.35% to trade at 7,635 points at the time of writing. The UK economy rebounded more than expected in November, driven by growth in the services sector, according to official figures, easing fears of a recession.
GDP grew 0.3% between October and November, following a 0.3% contraction between September and October, the Office for National Statistics said on Friday. The data was stronger than the 0.2% expansion forecast by economists polled by Reuters.
In November, output was no higher than at the start of the year and was only 0.2% up from the same month in 2022, highlighting the challenges for the Prime Minister, Rishi Sunak, to grow the economy ahead of the election. The Bank of England expects no growth in the final quarter of 2023 and that the economy will be broadly flat over the coming quarters. However, some economists are increasingly optimistic about the UK’s economic outlook as interest rate expectations have fallen on lower inflation.
British retailers had a disappointing December, as consumers held back from making big purchases during the festive period, according to data published on Tuesday. Retail sales grew by an annual rate of 1.7% in December, down from 2.7% the previous month, and below the 12-month average of 3.6%, figures from the British Retail Consortium showed.
The increase in sales lagged the 3.9% inflation rate for November, indicating that households bought fewer goods despite spending more in nominal terms. This trend has been in place since the second half of 2021. Discounting in the traditional post-Christmas sales was also unsuccessful in enticing spend in areas such as furniture and homeware, with households remaining cautious about making larger purchases.
Commodity markets
In the commodity markets, Brent crude futures traded around $79 per barrel on Friday and are set to end the week around 1% higher, after escalating tensions in the Middle East. Yemen-based Houthis mounted their largest attack yet on commercial shipping lanes in the Red Sea this week and Israeli strikes in southern and central Gaza also intensified.
In response the United States and the UK carried out military strikes against targets in Houthi controlled areas of Yemen.
“These targeted strikes are a clear message that the United States and our partners will not tolerate attacks on our personnel or allow hostile actors to imperil freedom of navigation in one of the world’s most critical commercial routes” US president Joe Biden said in a statement on Thursday evening.
The Houthis have been attacking vessels in the Red Sea, targeting global shipping vessels including those from the US and Israel, in retaliation for the war in Gaza that has so far killed nearly 23,000 people in the Palestinian enclave. An unexpected increase in US inflation and reports that China was seeking less Saudi imports kept a lid on prices.
Oil prices traded lower earlier in the week after a surprise jump in US crude stockpiles raised concerns over demand in the world’s largest oil market. US crude inventories rose by 1.3 million barrels to 432.4 million barrels in the week ended January 5th, the EIA said on Wednesday, against analyst expectations for a decline of 700,000 barrels.
Gold prices traded around $2,035 an ounce on Friday and are set for a weekly decline, amid a rebound in the Dollar, as strong economic data from the US dampened hopes for the start of monetary easing in March.
Equity markets
US equity futures were in a mixed state on Friday after higher-than-expected US inflation data for December drove concerns that interest rates could stay restrictive for longer, boosting the dollar and Treasury yields. In Thursday’s regular session, the Dow Jones Industrial Average rose 0.04%, the S&P 500 declined 0.07%, while the Nasdaq Composite was unchanged.
The latest consumer price inflation report showed that inflation in the US rose more than expected for the year to December, rising by 3.4%, reducing expectations that interest rates would fall as soon as March. Economists had expected a rise of 3.2%, up from 3.1% in November. Core consumer price inflation, which excludes volatile food and energy costs, was 3.9% for the year to December, slightly lower than the 4% figure for November, according to the data published by the Bureau of Labor Statistics. However, economists had expected 3.8%.
The number of Americans filing claims for unemployment benefits declined in the week ended 6th January, hitting their lowest level since October. Initial jobless claims fell by 1,000 from the previous week’s upwardly revised value to 202,000, well below consensus expectations for a reading of 210,000.
Additionally, continuing claims decline by 34,000 to reach 1.83 million, also below market expectations of 1.87 million. The data matched other recently released job gauges in underscoring the historical tightness of the US labour market, adding leeway for the Federal Reserve to prolong its hawkish stance into 2024, if necessary, to lower inflation.
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