UK markets declined this week, with the FTSE 100 Index falling by 0.68% to trade at 10,375 points at the time of writing. Andy Burnham has secured an overwhelming victory in the Makerfield by-election, turbocharging his campaign to topple Sir Keir Starmer and become Britain’s seventh prime minister in the past decade. The result saw Burnham win comfortably with more than half of all votes cast, securing 24,927 votes ahead of Reform’s Robert Kenyon on 15,696 and Restore’s Rebecca Shepherd on 3,111. At 58.7%, turnout was unusually high for a by-election, following an intense Labour campaign. UK bond yields rose in early trading, as investors digested Burnham’s by-election victory as well as higher than expected government borrowing numbers and retail sales figures.
UK inflation unexpectedly held steady at 2.8% in May, figures from the Office for National Statistics showed, below the 3% predicted by analysts polled by Reuters and in line with April’s figure. The Office for National Statistics said continued pressure from higher petrol prices and an upswing in airfares had been offset by an easing in food inflation and a fall in the cost of domestic heating oil. This week’s deal between the US and Iran to reopen the Strait of Hormuz has raised hopes that price pressures will ease in the coming months.
The decline in oil prices triggered by the deal between Washington and Tehran has already encouraged traders to temper their expectations for Bank of England interest rate rises, with the first quarter-point rise now not fully priced in until December. Services inflation, often seen as a gauge of underlying price pressures in the economy, increased to 3.7% from 3.2% in April, but this was largely owing to more volatile prices for transport services. Core inflation, which excludes food and energy, edged up to 2.6% in May from 2.5% in April. The annual rate of price increases eased in almost all categories, including for furniture and other household goods, clothing, restaurants and hotels, and recreation and culture. However, inflation is still likely to rise over the months ahead, as a delayed increase in regulated household energy bills takes effect in July.
The Bank of England held interest rates at 3.75% at its June meeting after a deal between the US and Iran pushed oil prices down and eased the inflationary risks to the UK economy from the war in the Middle East. The Monetary Policy Committee voted seven to two to leave rates unchanged at its latest meeting. Chief Economist Huw Pill and external member Megan Greene dissented from the decision, calling for a 0.25% increase to mitigate the risk of elevated energy prices feeding into wages and corporate prices.
UK private sector wage growth slowed to its lowest rate in more than five years in the three months to April, with annual growth in private sector weekly earnings, excluding bonuses, slowing to 2.9%, down from 3.1% in the three months to March, data from the Office for National Statistics showed. Regular pay growth across the economy as a whole remained steady at 3.4% and was stronger than the 3.2% analysts had expected. The slowdown came against a backdrop of weak hiring, with payroll employment in April down by 0.5%, or 138,000, from a year earlier. Provisional figures for May suggested payroll employment was broadly unchanged from April.
Commodity markets
In the commodity markets, Brent crude futures traded around $79 per barrel on Friday following a sharp selloff this week, after US President Donald Trump signed a deal with his Iranian counterpart Masoud Pezeshkian to end the war in the Middle East, while the International Energy Agency flagged a supply glut next year. However, follow up talks between the US and Iran in Switzerland scheduled to take place at Bürgenstock on Friday were called off, underscoring lingering uncertainty over efforts to turn an interim agreement into a lasting peace settlement.
The International Energy Agency expects a lasting resolution to the conflict will result in significantly higher supply volumes and spark a major oil overhang next year. Global supply is now expected to drop by 3.9 million barrels per day on average in 2026 to 102.4 million barrels per day, before recovering to 110.3 million barrels per day next year, according to its latest monthly oil market report. While lower oil prices may reduce chances of energy prices leading to a broader inflation problem, oil remains above pre-conflict levels, shipping normalisation will take time, and inventories and strategic reserves still need to be replenished.
Gold prices traded around $4,155 an ounce on Friday and are set for a weekly fall, pressured by hawkish policy signals from the Federal Reserve and a stronger dollar, while the US-Iran ceasefire deal dialled back inflation concerns.
Equity markets
US equity futures pulled back slightly on Friday after a positive week, as strength in technology companies and optimism over the US-Iran peace deal offset concerns over a hawkish Federal Reserve. In Thursday’s regular trading session, the Dow Jones Industrial Average rose 0.14%, the S&P 500 gained 1.08%, whilst the Nasdaq Composite advanced 1.91%.
The Federal Reserve held interest rates steady in the 3.50%-3.75% range at its meeting this week, but policymakers expect a hike in borrowing costs later this year amid growing concerns about inflation remaining above the US central bank’s 2% target. Nine of the central bank’s 19 policymakers now believe they will need to raise rates this year, according to the new quarterly projections.
Federal Reserve Chair Kevin Warsh vowed during his debut press conference following a meeting on Wednesday that the central bank “will deliver price stability” to contain an inflationary surge fuelled by Donald Trump’s Iran war. The Federal Reserve also delivered an unexpectedly hawkish slate of projections, showing that nine of 18 officials who submitted estimates expect higher rates by the end of 2026, a powerful shift from March when no officials anticipated rises.
Warsh, who had said he objects to the projections before becoming Federal Reserve Chair, declined to provide his own forecasts. Warsh’s focus on inflation, combined with other officials’ forecasts, ignited a sell-off in the prices of short-term US government debt, which reflects markets’ bets on what will happen to interest rates. The two-year Treasury yield rose to around 4.2%, the highest in 16 months, as markets priced in a rate rise in October. Investors were expecting rate cuts this year before the Iran war began.
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