UK markets saw a moderate decline this week, with the FTSE 100 Index falling by 0.2% to trade at 7,690 points at the time of writing.
New analysis this week revealed that the Chancellor, Jeremy Hunt lacks the fiscal firepower to prevent the UK’s taxes climbing to a record high as a share of national income regardless of what he announces in next week’s budget. Tax revenues, which accounted for about 33% of national income on the eve of the pandemic, are set to climb to 37.7% by 2028-29, the highest since the end of the Second World War, according to research from the Institute for Fiscal Studies think-tank.
UK public spending is currently forecast to decline from 44.8% of national income today to 42.7% in 2028-29. However, this will still be more than 3% higher than in 2019, the Institute for Fiscal Studies said on Tuesday.
The rise in the tax burden reflects the 2021 increase in the rate of corporation tax and the multi-year freeze in most personal tax thresholds, as well as changes in the underlying economy that have boosted the tax take, only partly offset by the recent cut in the rate of national insurance contributions.
UK mortgage approvals rose much more than expected in January, reaching their highest level since October 2022, as borrowing costs fell, according to data from the Bank of England that points to a recovery in the property market.
Net mortgage approvals for house purchases rose from 51,500 in December to 55,200 in January, the highest in 15 months and above the 52,000 figure forecast by economists polled by Reuters. The data suggests the residential market is recovering, as the squeeze from higher borrowing costs seen over the past two years eased.
The Bank of England also released figures that showed consumer credit rose more than expected to £1.9 billion in January, from £1.3 billion in December, adding to signs of a revival in spending. The improved data should help a wider economic recovery after the UK fell into a recession at the end of last year.
Commodity markets
In the commodity markets, Brent crude futures traded around $82 per barrel on Friday, and are set for a weekly fall, after a larger than expected build up in US crude stockpiles stoked worries about slow demand. US crude oil stockpiles rose while gasoline and distillate inventories fell last week, as refiners ran at below seasonal lows due to planned and unplanned outages, the Energy Information Administration said on Wednesday.
However, crude oil futures are still headed for a second consecutive monthly gain, as OPEC+ is expected to extend its production cuts through at least the second quarter and possibly keep the cuts in place for the rest of the year. OPCE+ agreed in November to cut 2.2 million barrels per day in the first quarter of 2024 as the US, Canada, Guyana and Brazil pumped crude at a rapid pace, putting pressure on oil prices late last year.
Prices have also risen as the conflict in the Middle East continues, with tensions rising on the Israel-Lebanon border and Houthi militants continuing their attacks on shipping in the Red Sea. The conflict has not disrupted crude production in the region so far, although analysts have warned that there is a risk of direct confrontation between Iran and the US that would impact the oil market.
Gold traded around $2,050 an ounce on Friday, hitting a one-month high, as the Dollar slipped after inflation data came in line with expectations, with investors’ attention turning to further commentary from Federal Reserve officials for cues on interest rate cuts.
Equity markets
US equity futures were little changed on Friday, after the major averages posted their fourth consecutive month of gains. In Thursday’s regular session, the Dow Jones Industrial Average gained 0.12%, the S&P 500 rose 0.52%, while the Nasdaq Composite advanced 0.90%. Personal Consumption Expenditure (PCE) inflation, the Federal Reserve’s preferred gauge of price pressures, fell to 2.4% in the year to January, matching expectations in a Bloomberg survey.
The fall from December’s rate of 2.6% supports expectations that the US central bank will cut rates from their current 23-year highs around the middle of this year. The PCE figures were the lowest for almost three years, compared with a peak of 7.1% for the metric in June 2022. The core rate, which excludes changes in food and energy prices also came in line with expectations of 2.8%.
The figures released on Thursday came from the Bureau of Economic Analysis and are separate to the US’s consumer price index, which rose 3.1% in the year to January. The leading indicators for inflation suggest that disinflation will continue over the coming months, and it is possible that PCE inflation will be broadly back to the Federal Reserve’s target by June, when it could begin lowering rates.
Elsewhere, first-time claims for US unemployment benefits rose by more than expected in the week ending February 24th, according to a report released by the Labor Department on Thursday. Initial claims rose to 215,000, an increase of 13,000 from the previous week’s revised level of 202,000, firmly above economists’ expectations of 210,000.
Despite remaining at historically tight levels, the results favoured the view that the US labour market is undergoing some softening following the prolonged period of restrictive monetary policy from the Federal Reserve.
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