UK markets rebounded this week, with the FTSE 100 Index rising by 3% to trade at 10,470 points at the time of writing. UK inflation fell more than expected to 2.8% in April, down from 3.3% in March and below economists’ forecasts of 3%. The fall was mainly due to a reduction in household energy bills under Ofgem’s price cap, reflecting lower wholesale energy prices before the recent escalation of conflict in the Middle East.
Services inflation, closely watched by the Bank of England, also dropped sharply from 4.5% to 3.2%. Economists warned that this decline is likely to be temporary. Rising oil and gas prices caused by disruption in the Strait of Hormuz are expected to push inflation higher again in the coming months.
Petrol prices rose 23% in April, with the average cost of fuel increasing by 16.6 pence per litre. Clothing and footwear prices also added to inflationary pressures. The Bank of England is facing a difficult decision. It must balance the risk of rising inflation against signs that the UK economy is slowing. Interest rates were kept at 3.75% last month, although some policymakers, including chief economist Huw Pill, support raising rates to control inflation. Financial markets still expect two low-rate rises later this year.
At the same time, labour market data showed growing weakness in the economy. Job vacancies fell to 705,000, the lowest level since the Covid-19 pandemic, while payroll employment declined. Provisional figures for April showed a steeper month-on-month fall of 0.3%, or 100,000. Wage growth also slowed. Excluding bonuses, average weekly earnings increased by 3.4%, while private sector wage growth fell to 3%, meaning wages were only just keeping pace with inflation. Economists believe this weaker labour market may reduce the need for rapid interest rate increases because lower wage growth limits domestic inflation pressures. Other economic indicators also pointed to financial strain.
Retail sales fell by 1.3% in April as households cut spending in response to higher energy and fuel costs. Government borrowing reached £24.3 billion, marking the worst start to a financial year since 2020 and increasing pressure on public finances. Overall, the figures suggest the UK economy is under pressure from rising energy costs, slowing growth, weaker consumer spending, and a weakening labour market, even as inflation temporarily eased in April.
Commodity markets
In the commodity markets, Brent crude futures traded around $105 per barrel on Friday and are set for a weekly fall, as investors weighed mixed messaging on Iran peace deal negotiations. The US and Iran have signalled progress in talks to end the war, but the warring sides remain at loggerheads over Tehran’s enriched Uranium stockpile and tolls on the strategically vital Strait of Hormuz.
Iran’s Supreme Leader Ayatollah Mojtaba Khamenei issued a directive that near-weapons-grade Uranium in the country should not be sent abroad, complicating ongoing peace negotiations as dismantling Tehran’s nuclear programme remains a central US demand. Iran is also reportedly working with Oman on a framework for a permanent toll system that would formalise its control over maritime traffic through the Strait of Hormuz. However, President Donald Trump rejected the proposal, insisting that the waterway should remain open, free, and without tolls.
US Secretary of State Marco Rubio said there were “some encouraging signs” surrounding a possible deal with Iran, adding that Pakistani mediators are expected to visit Tehran as Iranian officials review Washington’s latest proposal. Worries over oil supplies continue to linger, with the International Energy Agency warning that, as travel demand grows during the summer season, oil markets could enter a “red zone” as soon as global stocks deplete. Gold prices traded around $4,535 an ounce on Friday and are set to end the week little changed, as conflicting signals surrounding US-Iran peace negotiations kept investors cautious over inflation risks and the outlook for interest rates.
Equity markets
US equity futures were mixed on Friday after the major averages climbed for two straight sessions, on renewed hopes for a potential US-Iran agreement to end the conflict. In Thursday’s regular trading session, the Dow Jones Industrial Average rose 0.55%, the S&P 500 gained 0.17%, whilst the Nasdaq Composite advanced 0.09%. Minutes from the latest Federal Reserve Open Market Committee meeting highlight growing concerns about rising inflation sparked by the Iran war. Many top Federal Reserve officials wanted the US central bank to drop language signalling its next move would be to lower borrowing costs at its April meeting, highlighting mounting concerns over the Middle East conflict.
The minutes also showed that a majority of participants said rate rises would probably become appropriate if inflation were to continue to run persistently above the central bank’s 2% goal. The chorus of policymakers calling for a removal of the so-called easing bias highlights the growing sense of unease about President Trump’s war in Iran. It highlights how Kevin Warsh will inherit a deeply divided Federal Reserve when he succeeds Jerome Powell as chair at the end of this week.
A surge in petrol and diesel prices triggered by the conflict has sent the Federal Reserve’s preferred headline Personal Consumption Expenditures price index inflation measure rising to 3.5%, its highest level since 2023. Ahead of the Iran war, investors had expected the central bank to cut borrowing costs by 0.25% twice this year. However, markets have already begun anticipating a hawkish shift from the Federal Reserve, with trading in federal funds futures pointing to 50% odds that it raises rates by the end of 2026.
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