UK markets declined this week, with the FTSE 100 falling 1.3% to trade at 10,660 points at the time of writing. Higher-than-expected inflation, rising government borrowing, and weakening consumer confidence dampened investor sentiment, creating a challenging backdrop for Chancellor, John Healey ahead of next week’s Budget.
UK inflation rose to 3.5% in September, up from 3.1% in August and its highest level in almost a year, according to the Office for National Statistics (ONS). The increase was higher than economists expected, raising concerns that the Bank of England may need to keep monetary policy tighter for longer, with the possibility of an interest rate rise next month attracting greater attention.
Services inflation, a closely watched measure of domestic price pressures, increased to 3.7% from 3.4%, while core inflation, which excludes energy, food, alcohol and tobacco, rose to 2.8%. Goods inflation also reached 3.2%, its highest level in three years, although food inflation remained relatively subdued at 1.3%. Higher energy prices linked to the Iran conflict have added to inflationary pressures, complicating the outlook for both households and businesses.
The public finances also deteriorated, with government borrowing reaching £24.5 billion in September, £1.9 billion above the Office for Budget Responsibility’s forecast. Debt interest payments climbed to £10.9 billion, the highest September figure on record after adjusting for inflation. Public debt was provisionally estimated to have exceeded £3 trillion for the first time. These figures underline the financial pressures facing the government ahead of the Budget, increasing the possibility of tax rises or spending restraint as the Chancellor seeks to balance support for households with the need to maintain fiscal discipline.
Elsewhere, labour market data offered a mixed picture. Unemployment fell to 4.7% in the three months to August, its lowest level in over a year. However, job vacancies declined by 21,000 to 691,000 in the three months to September, with smaller businesses citing rising employment costs as a factor behind reduced recruitment.
Consumer confidence weakened sharply in October, with the GfK index falling 11 points to minus 24. This was its largest monthly decline since the onset of the pandemic in 2020, reflecting concerns about energy prices, borrowing costs and the forthcoming Budget. Retail sales also fell by 0.4% in September, exceeding expectations for a 0.1% decline, suggesting households are becoming more cautious with their spending.
Commodity markets
In commodity markets, Brent crude futures traded around $114 per barrel on Friday, hovering at a five-month high, on worries over a possible escalation in the Middle East conflict as the US reportedly plans to resume strikes against Iran.
The US and Israeli militaries have drawn up specific plans for renewed strikes on Iran after next month’s midterm elections, US officials told the New York Times. President Donald Trump subsequently said the US is not negotiating with Iran. The US has also ordered non-emergency government employees and their families to leave Saudi Arabia. State Department spokesman, Tommy Piggott said the order applies only to Saudi Arabia, dismissing reports that the US had directed some staff in the wider Gulf region to leave. He pointed to escalating attacks by Iran-aligned Houthis on civilian targets in Saudi Arabia. Iran’s Islamic Revolution Guards Corps said on Thursday that four vessels had been struck and caught fire in the Persian Gulf, according to the Iranian state-affiliated Tasnim news agency, while a further three had struck mines in the Strait of Hormuz. Separately, Iran’s army chief was reported to have said the country’s military is fully prepared for asymmetric warfare after strengthening its capabilities.
Gold traded around $4,020 per ounce on Friday, falling to its lowest level in almost 3 months as a rally in oil prices heightened inflation worries, with the Federal Reserve due to deliver its policy decision next week.
Equity markets
US equity futures were little changed on Friday following a sharp sell-off in technology shares during the previous session, as concerns grew over the sustainability of investment in artificial intelligence (AI). In Thursday’s regular session, the Dow Jones Industrial Average edged up 0.02%, while the S&P 500 fell 1.21% and the Nasdaq Composite declined 2.60%. Investor sentiment has become increasingly sensitive to whether the substantial sums being invested in AI infrastructure will generate sufficient returns to justify current valuations. Economic data presented a mixed picture.
Initial claims for US unemployment benefits fell by 6,000 to 194,000 in the week ending 17 October, below economists’ expectations of 200,000. Claims have remained at or below 200,000 for six consecutive weeks, suggesting that employers continue to retain staff and that the labour market remains resilient. The latest reading was also close to the lowest level recorded since 1969, highlighting the relatively low level of redundancies across the economy. Economists attributed the strength of the labour market to robust domestic demand, healthy corporate profits and a smaller available workforce, partly reflecting retirements and tighter immigration policies under President Donald Trump.
Despite concerns about the economic impact of higher energy prices following the conflict involving the US, Israel and Iran, there has so far been little evidence of a significant increase in layoffs. The unemployment rate stood at 4.2% in September, suggesting that the labour market remains relatively tight, although current conditions have not necessarily translated into renewed inflationary pressure from employment. However, the outlook remains uncertain. A prolonged conflict in the Middle East could keep energy prices elevated, contributing to inflation and potentially delaying interest rate cuts or prompting tighter financial conditions. Higher borrowing costs could eventually weigh on business investment, hiring and economic growth, particularly if households and companies face sustained increases in financing costs.
Elsewhere, the US housing market continued to show signs of strain. Mortgage applications fell 5.3% in the week ending 16 October, marking a seventh consecutive weekly decline and reaching their lowest level since January 2025, according to the Mortgage Bankers Association. Although the average 30-year fixed mortgage rate edged lower during the week, it remained close to a three-year high, continuing to constrain affordability and demand.
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