23rd May 2025

UK markets advanced this week, with the FTSE 100 Index rising 1.21% to trade at 8,770 points at the time of writing.

UK inflation rose more than expected to a 15 month high of 3.5% in April, after higher utility bills and tax rises kicked in, prompting investors to price in just one interest rate cut over the next year. The figure, which was released on Wednesday by the Office for National Statistics, was both higher than the 3.3% predicted by analysts polled by Reuters and March’s 2.6%. The rise was driven by higher energy costs after regulators raised the household price cap, as well as jumps in water bills, road tax and higher airfares, the Office for National Statistics said.

However, household energy bills are set to fall in the summer after regulator Ofgem lowered the price cap for July to September by 7%. Services inflation, a key measure of underlying price pressures for Bank of England interest rate setters, climbed to 5.4% in April, well above the 4.8% expected by analysts and March’s figure of 4.7%. Following the announcement, the Pound climbed to its highest level against the Dollar since early 2022 at $1.347.

The UK’s consumer price inflation rate was well above readings in Germany and France, as well as the EU level. The Bank of England has predicted that inflation will reach 3.7% later this year, before falling back to its target of 2% in 2027.

UK government borrowing unexpectedly rose in April to £20.2 bn, up from a shortfall of £19.1 billion on the back of increased public spending, figures from the Office for National Statistics showed.

Economists polled by Reuters had forecast that the difference between public sector spending and income would fall to £17.9 billion last month. April’s overshoot was led by an increase in spending on public services and benefits. The spending jump of £6.6 billion year-on-year overshadowed a rise in receipts of £5.6bn, which was partly driven by higher employer national insurance contributions, announced by the Chancellor, Rachel Reeves in the October Budget. The overspend raises the chances that if the Chancellor wants to stick to her fiscal rules, more tax hikes in the Autumn budget will be required.

Elsewhere, British retail sales rose 1.2% in April, significantly beating the expectations of Economists polled by Reuters, who had expected the volume of goods sold to rise 0.2%. Friday’s monthly data from the Office for National Statistics showed that sales in food stores grew 3.9%, which retailers attributed to good weather.

Commodity markets

In the commodity markets, Brent crude futures traded around $64 per barrel on Friday and are set to end the week lower, weighed down by the possibility that OPEC+ will further increase its crude oil output. A Bloomberg News report suggesting that OPEC+ was considering another large production increase at a meeting on June 1st pushed oil prices lower.

Increasing output by 411,000 barrels a day for July was among the options discussed, but no final agreement has yet been reached, the report said, citing delegates. A large crude oil build in the US earlier in the week also weighed on oil prices. US crude oil storage demand has surged in recent weeks to levels similar to the Covid-19 pandemic, according to data from storage broker The Tank Tiger, as traders brace for a flood of increased supply in the coming months from OPEC and its allies.

Gold prices traded around $3,330 an ounce on Friday and are set for a weekly rise as mounting concerns over the deteriorating fiscal outlook for the US economy boosted bullion’s safe haven appeal.

Equity markets

US equity futures rose on Friday as investors digested the implications of President Donald Trump’s recently passed tax and spending package on the nation’s already sizable fiscal deficit. In Thursday’s regular trading session, the Dow Jones Industrial Average was unchanged, the S&P 500 lost 0.04%, whilst the Nasdaq Composite gained 0.28%.

The US House of Representatives has passed Donald Trump’s showpiece tax bill by a single vote after days of arguing between disparate factions of his Republican party, paving the way for the first big legislative success of his second term. The Republican-controlled House voted just before 7am on Thursday in Washington by 215-214 to approve the more than 1,000 page legislation, which will slash taxes, reduce social spending and increase federal debt.

The non-partisan Committee for Responsible Federal Budget estimates that the legislation will increase US national debt by more than $3.3 trillion over the next decade, increasing federal government debt held by the public from about 98% of GDP to a record 125%. Investors have closely watched the bill amid concerns about the US’s growing fiscal deficit, which led Moody’s to strip the US of its AAA credit rating last week and pushed up bond yields, which move inversely to prices.

The bill will make permanent tax provisions from Trump’s first administration, including individual income tax cuts, that would otherwise expire at the end of this year. It will also slash taxes on tips and overtime pay, following Trump’s pledges during his successful presidential campaign and increase spending on border security. Republicans have sought to reduce the price tag of the bill by slashing nearly $800 billion from Medicaid, the US healthcare scheme for those on low incomes and hundreds of billions more from the food stamp programme and clean energy tax credits.

Elsewhere, the S&P Global Flash US Manufacturing Purchasing Managers’ Index unexpectedly rose to 52.3 in May 2025, the highest in three months, compared to 50.2 in April and beating forecasts of 50.1. The reading signalled the strongest improvement in business conditions since June 2022 as factory production moved back into expansion territory after two months of decline, and new order growth hit a 15-month high. However, employment fell for a second successive month and manufacturers’ selling prices posted the largest monthly increase since September 2022, with input costs rising at the sharpest rate since August 2022.