UK markets continued their momentum this week, with the FTSE 100 Index trading mostly flat to 8,830 points at the time of writing.
UK unemployment rose to a four-year high in the run-up to April’s steep increases in payroll taxes and the minimum wage as pay growth cooled, underlining the mounting strains in the labour market. Employers cut the number of payrolled staff by 55,000 between March and April, according to figures from the Office for National Statistics, leaving headcount 0.4% lower than in April 2024. In a further sign of the slowing jobs market, the number of vacancies fell and the number of people claiming jobless benefit rose.
Provisional figures for May, although likely to be revised upwards, showed a drop in payrolls of 115,000. Businesses are grappling with the higher national insurance contributions introduced in Chancellor Rachel Reeves’ October Budget and the rise in the minimum wage, both of which came into effect in April.
The unemployment rate, as measured by the Office for National Statistics labour force survey, edged up to a four-year high of 4.6%, in line with economists’ expectations and up from 4.5% in the three months to March. Annual growth in average weekly wages, excluding bonuses, slowed to 5.2% in the period, below analysts’ expectations of 5.3% and down from 5.5% in the three months to March.
Growth in total earnings, including bonuses, was 5.3%. Following the release of the data, investors increased their bets that the Bank of England’s Monetary Policy Committee would cut interest rates by 0.25% at its September meeting, compared with a previous expectation of the next cut coming in November.
The value of UK retail sales increased at an annual rate of 1% in May and well below the average of 2.5% between January and May, according to figures published by the British Retail Consortium.
The figure also lagged behind the April inflation rate of 3.4%, suggesting a fall in real-terms spending. Consumers pulled back their spending, especially on non-food items such as fashion and full price big-ticket purchases, which were held back by lower consumer confidence.However, food sales remained steady, helped by several major football tournaments, whilst gaming also performed well because of popular new releases.
UK Chancellor, Rachel Reeves delivered a spending review this week which she said would put Britain on a path to “national renewal”, with the NHS receiving a £29 billion annual boost and a £113 billion borrowing-fuelled spree on capital projects. However, departments facing real term cuts in their day-to-day budgets include the Home Office, Foreign Office and the Department of Culture, Media and Sport.
Commodity markets
In the commodity markets, Brent crude futures surged to around $72.60 per barrel on Friday, hitting its highest level since January, driven by fears of supply disruptions after Israel launched a pre-emptive strike against Iran.
Israel declared a special situation, suggesting Iran could soon retaliate, fuelling potential disruptions to the Strait of Hormuz, a key route for 20% of global oil flows. Prices have been further supported as Energy Information Agency (EIA) data showed US crude stocks fell more than expected, signalling stronger demand. For the week, oil is on track for its best performance since February 2022.
Gold rose more than 1% this week to around $3,415 an ounce on Friday as investors sought out safety in a geo-political landscape which is consistently escalating in tension.
As well as the pre-emptive strike by Israel, there is growing uncertainty over US trade policy, with President Trump threatening to impose unilateral tariffs on trading partners, while Treasury Secretary Scott Bessent suggested the current 90-day pause could be extended. Softer than expected US consumer and producer inflation this week increased expectations for additional Federal Reserve rate cuts this year, providing further support for gold.
Equity markets
US equity futures dropped on Friday on the back over Israel’s pre-emptive strike on Iran. In Thursday’s regular trading session, the Dow Jones Industrial Average rose 0.75%, the S&P 500 gained 0.56%, whilst the Nasdaq Composite picked-up 0.37%.
US inflation rose less than expected to 2.4% in May, signalling Donald Trump’s tariffs are so far putting only modest pressure on consumer prices. The consumer price index figure was below the 2.5% predicted by analysts surveyed by Bloomberg, but above the 2.3% recorded in April. The core measure, which strips out changes in food and energy prices, remained flat at 2.8%, against expectations of a slight rise. Inflation is expected to increase further in the coming months as the impact of Trump’s tariffs, which were unveiled in April, are passed onto consumers and businesses in the world’s largest economy.
The US and China have agreed to a framework that restores a truce in their trade war this week after two days of negotiations in London. The agreement following a pact in Geneva last month aimed at easing trade tensions between the world’s two economic superpowers, which have faltered over differences regarding Chinese rare earth exports and US export controls. While not providing further details, the US team said the topic of rare earth minerals and magnets will be resolved in the framework. It added that export restrictions applied by the US when the rare earths were not coming would also be lifted in a balanced way.
Kevin Hassett, Director of the White House National Economic Council, said Donald Trump would ease restrictions on selling chips to China if Beijing agreed to speed up the export of rare earths on Monday. This would mark a significant departure from Joe Biden’s administration, which introduced sweeping export controls designed to make it harder for China to obtain advanced US chip technology that could help its military. Both countries agreed in Geneva last month to slash their respective tariffs by 115% and provide a 90-day window to resolve the trade war.
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