UK markets were volatile this week, but ended little changed, with the FTSE 100 Index falling 0.04% to trade at 10,310 points at the time of writing.
The UK economy unexpectedly failed to grow in January as the dominant services sector struggled in a lacklustre start to the year even before the Middle East war sparked a global energy shock. The zero-growth registered in the month was below the 0.2% expansion forecast by economists in a Reuters poll and December’s 0.1% reading. Friday’s figure underlines the hurdles facing Chancellor Rachel Reeves as she attempts to revive an economy in which businesses and households are now contending with a surge in oil and gas prices.
The services sector failed to grow in January, according to the data from the Office for National Statistics, while production contracted 0.1%. Weakness among recruiters and employment agencies meant the employment activities sector was the biggest drag on growth in January. Output in food and beverage services, which includes pubs and restaurants, was also down in the month. The figure complicates the challenge facing the Bank of England, which is expected to hold interest rates at 3.75% when its Monetary Policy Committee meets next week.
David Miles, the top economist at the Office for Budget Responsibility, the UK’s fiscal watchdog, warned this week that inflation could end the year at about 3%, rather than easing, if energy prices remained at their current levels. The outlook for UK house prices deteriorated sharply in February, as the rise in oil and gas prices worsened expectations for mortgage rates.
The Royal Institution of Chartered Surveyors said its index of forecasted prices over the next three months fell to minus 18 in February, from minus 6 in January. The index measures the difference between the share of estate agents expecting rising and falling prices. The decline reversed the recovery in sentiment from the uncertainty caused by November’s Budget, which had been preceded by months of speculation over potential property tax changes.
The recent rise in energy prices caused by the war in the Middle East has triggered concerns about higher inflation and increased the likelihood that mortgage rates will remain higher for longer. The average two-year fixed residential mortgage rate rose to 5.01% on Wednesday, compared with 4.83% on February 27th, before the US attack on Iran, according to Moneyfacts. The price of oil and natural gas has surged since the start of the war, fuelling concerns that higher inflation will give the Bank of England less scope to cut interest rates this year.
Commodity markets
In the commodity markets, Brent crude futures traded around $99 per barrel on Friday, surging again this week, after Iran’s new supreme leader Mojtaba Khamenei said the Strait of Hormuz must remain closed to pressure the US, in the latest sign the oil market may face prolonged supply disruption. Mojtaba is the son of Ayatollah Ali Khamenei, who was killed by the US and Israel in the opening strikes of the war. His comments come as attacks on commercial vessels in the Persian Gulf continue.
US Energy Secretary Chris Wright said on Thursday that the US Navy was not ready to escort tankers through the Strait of Hormuz yet. US military assets in the region are focused on destroying Iran’s offensive capabilities, Wright said. Roughly a fifth of global oil supply passes through the Strait, which links the Persian Gulf to global markets.
The International Energy Agency has launched the largest release of strategic oil reserves in its history in an attempt to quell the turmoil in energy markets unleashed by the Middle East war. The agency on Wednesday said it would release 400 million barrels in a step that dwarfs the 182 million it released in two phases in 2022 following Russia’s full-scale invasion of Ukraine. The US will draw down 172 million barrels from its oil reserves as part of the international release. The moves underscore the fears over the threat to the global economy from the US-Israel war against Iran.
Gold prices traded around $5,090 an ounce on Friday and are set to end the week little changed as rising energy prices dimmed prospects for near-term US interest rate cuts.
Equity markets
US equity futures rose on Friday, after suffering heavy losses in the prior session, as investors prepared for the release of January’s Personal Consumption Expenditures price index inflation figures, the Federal Reserve’s preferred inflation gauge. In Thursday’s regular trading session, the Dow Jones Industrial Average fell 1.56%, the S&P 500 lost 1.52%, whilst the Nasdaq Composite declined 1.78%.
US consumer price inflation was unchanged at 2.4% in February, matching economists’ expectations, although the data was set to be overshadowed by the energy shock unleashed by the war in the Middle East. Core inflation, stripping out volatile food and energy prices, was also flat at 2.5%, in line with Wall Street forecasts. The period covered by the release was before energy prices surged over the past two weeks in the fallout from the Iran war, which is expected to push up inflation when March data is released. Increasing oil prices have pushed up petrol prices in the US for 11 days straight.
The US energy department forecast this week that prices at petrol stations were unlikely to return to prewar levels before the end of next year. The inflation data release this week comes ahead of a meeting of the Federal Reserve next week, when the central bank is expected to hold interest rates in a range of 3.5% to 3.75%. The surge in energy prices has prompted investors to scale back their expectations for rate cuts from the Federal Reserve, with investors now anticipating one or two 0.25% rate cuts compared with the two or three that were anticipated before the war.
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