UK markets were unchanged this week, with the FTSE 100 Index trading at 10,765 points at the time of writing.
UK inflation rose to 2.9% in July, up from 2.6% in June, as higher energy prices pushed the headline rate further above the Bank of England’s 2% target. The reading, published by the Office for National Statistics, matched economists’ expectations in a Reuters poll.
Energy remains the key driver of inflation, with gas costs posting their sharpest monthly rise since 2022, following Ofgem’s 13% increase in household energy price cap from July. Ongoing disruption to gas linked to conflict in the Middle East, combined with strong European demand and production outages in Norway, has kept upward pressure on prices.
Ofgem is due to announce the price cap covering October to December next week, a figure investors will watch closely for signs of energy-driven inflation and its persistence into year-end. Underlying pressures look more contained.
Services inflation, a key gauge for the Bank of England, eased to 3.4% from 3.6%. Core inflation, which excludes energy, food, alcohol and tobacco, remain at 2.6%, just above the 2.5% forecast, while food inflation slowed markedly to 1.3% from 1.7%, a welcome sign for household budgets. Labour market data reinforces a softening picture.
Separate figures released this week showed payrolled employment fell by 13,000 in June, a steeper decline than initially reported, with a further fall of 13,000 provisionally recorded for July.
Unemployment rose to 4.9%, slightly above forecasts, and job vacancies fell to 707,000, their lowest level outside the pandemic since 2014. Hiring has been particularly weak in consumer-facing sectors such as retail and hospitality, with younger workers most exposed.
A recent S&P Global survey found UK household sentiment on job security is at its weakest in more than three years. Private sector wage growth is also cooling, with regular pay growth slowing to 2.8%, the lowest since October 2020, while public sector pay growth remained elevated at 6.2%.
Real wages still rose 0.7% on the year. With the labour market loosening, and underlying inflation pressures relatively contained, the Bank of England has room to hold rates at 3.75% for now, even as energy costs add near-term noise to the headline figure.
Commodity markets
In the commodity markets, Brent crude futures were trading around $93 per barrel on Friday and are set for a weekly rise, after US President Donald Trump vowed “economic warfare” on Iran and financial penalties for its supporters, as the United Arab Emirates said it was suspending trade with Tehran.
In a Truth Social post, Trump said he had provided the Islamic Republic with an opportunity to make a deal. “Tragically, for them, they have failed to take it,” he said. Trump proceeded to say he was announcing “the most crushing economic operation ever taken against any country!” and threatened “tremendous economic consequences” against any country providing a lifeline to Iran.
The threat covers cash transfers, currency swaps and shipping registries, President Trump said. The oil price rise came after the UAE said on Wednesday it was halting all trade and financial transactions with Iran, following what the Gulf state said was an attack by the Islamic Republic on Tuesday.
The UAE, one of Iran’s key commercial partners, said two ballistic missiles had been launched toward its territory from Iran. Iran’s foreign ministry spokesperson Esmail Baghaei denied the strikes. The move heaps further pressure on Iran, which is already facing economic sanctions from the US, and pushes the prospect of any renewed ceasefire agreement further from view.
Spot gold traded around $4,540 an ounce on Friday and is on track for a third consecutive weekly gain, supported by a weaker dollar and by the US Treasury Department’s announcement on Wednesday that it would double the size of buybacks on longer-dated securities over the next quarter to at least $4 billion per operation.
Equity markets
US equity markets were set to open higher on Friday after selling pressure in the previous session, when Treasury yields rebounded amid concerns that the government’s plan to lower borrowing costs may offer only a temporary solution. In Thursday’s regular trading session, the Dow Jones Industrial Average fell 1.32%, the S&P 500 declined 0.87%, whilst the Nasdaq Composite lost 1.00%.
The US national debt has hit a record $40 trillion as borrowing rose at a historic pace, fuelling investor concerns about the state of America’s public finances despite President Trump’s vow to bring spending under control. Gross federal debt crossed the threshold on Tuesday, according to Treasury Department data released on Wednesday. It has grown by $3 trillion over the past year, its fastest-ever pace outside the pandemic era, calculations from the Financial Times showed.
America’s national debt has surged over the past two decades, rising from less than $6 trillion at the turn of the century as vast public spending during the financial crisis and Covid-19 pandemic exacerbated growing budget deficits. In the past 10 years alone, the overall debt burden has doubled.
Debt held by the public, a key metric monitored by the markets that excludes intragovernmental holdings, now exceeds $32 trillion, roughly equal to the size of the US economy. The Congressional Budget Office, a non-partisan watchdog, expects the debt held by the public to exceed the high of 106% of GDP reached in the aftermath of the Second World War by the end of the decade and hit 120% by 2036.
As the debt has swollen, investors have demanded a rising premium to hold US bonds. This has pushed up borrowing costs, so that the cost of servicing the debt now exceeds federal spending on national defence, causing unease in Washington. Before the release of the debt data on Wednesday, the Treasury said it would double purchases of long-term government debt in a bid to contain a recent sell-off.
Elsewhere, minutes from the Federal Reserve’s latest meeting released this week showed that many US central bankers are concerned that persistently high inflation will lead to rapid price rises becoming embedded in the world’s largest economy. The minutes said that “many” members of the Federal Reserve’s policy-setting panel “highlighted the possibility that, after several years of inflation above 2 percent, continued elevated inflation rates could begin to affect inflation expectations and wage- and price-setting decisions”.
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