UK markets advanced this week, with the FTSE 100 Index rising 2.7% to trade at 9,570 points at the time of writing.
UK inflation unexpectedly held steady at 3.8% in September, increasing investor bets that the Bank of England will cut interest rates again this year to boost lacklustre economic growth. The figure from the Office for National Statistics was below the 4% expected by the Bank of England and economists polled by Reuters.
Price pressures were constrained by lower prices for food and non-alcoholic beverages, as well as decreases in live music prices. The data was released as the Bank of England’s Monetary Policy Committee attempts to bring inflation back towards 2% without having adverse effects on growth. Economists suggested that September’s reading might signal a peak for inflation, following a recent resurgence led by higher food prices as well as the effect of an increase in employer national insurance contributions.
The Office for National Statistics report also showed services inflation, which is closely watched by the Bank of England’s rate setters as a measure of underlying price pressures in the economy, held steady at 4.7% in September, below the 5% rate predicted by the Bank of England. The softer than expected inflation figures prompted sharp falls in government borrowing costs, with the yield on a two-year gilt falling to its lowest level for more than a year, alleviating some of the pressure on the public finances ahead of the November Budget.
Some analysts are speaking of potential savings of between £2 and £3 billion or more from moves over recent days. The UK borrowed almost £100 billion in the first half of the financial year, the highest amount since the pandemic despite some favourable revisions, underlining chancellor Rachel Reeves’ challenges ahead of a tough budget next month.
The £99.8 billion total for April to September was £7.2 billion above the Office for Budget Responsibility’s March forecast and £11.5 billion higher than the same period in 2024. It was the second-highest April – September total since records began in 1993, exceeded only during the 2020 pandemic, despite a downward revision to borrowing estimates for the first five months.
The Institute for Fiscal Studies said the overshoot was striking, since the economy had grown faster than expected and inflation had overshot the Office for Budget Responsibility’s March forecasts, which would usually boost tax revenues.
Elsewhere, UK retail sales unexpectedly rose by 0.5% in September, the fourth consecutive monthly increase, despite persistent inflation and a weakening jobs market.
Commodity markets
In the commodity markets, Brent crude futures traded around $66 per barrel on Friday and are set for a weekly rise, after the Trump administration imposed further sanctions on Russia’s two largest crude companies, Rosneft and Lukoil, citing Moscow’s “lack of serious commitment to a peace process to end the war in Ukraine”.
The US Treasury Department said the new sanctions will harm the Kremlin’s ability to raise revenue to fund its war against Ukraine. A senior White House official said that the new sanctions are related to plans for a meeting between President Donald Trump and Russian President Vladimir Putin in Budapest falling through. Trump has also been trying to pressure India to stop purchasing Russian oil. New Delhi is one of the biggest purchasers of Russian crude exports.
Gold prices traded around $4,070 an ounce on Friday, as the metal stabilised following a healthy technical pullback, while US sanctions against Russia and possible new export controls on China added to geopolitical risks, maintaining the demand for safe-haven assets.
Equity markets
US equity futures rose on Friday as investors awaited the consumer price inflation report that could shape the outlook for the economy and interest rates. In Thursday’s regular trading session, the Dow Jones Industrial Average gained 0.31%, the S&P 500 rose 0.58%, whilst the Nasdaq Composite advanced 0.89%.
The annual inflation rate in the US is expected to have accelerated for a second consecutive month to 3.1% in September, up from 2.9% in August, which would mark the highest level since May 2024. The rise is expected to reflect higher prices for food, and tariff-affected goods, as well as a slower than expected easing of service sector inflation.
Analysis by the Treasury has found the Trump administration’s economic policies have put the US on track to narrow its deficit using a mix of spending cuts and tariff revenue to improve the fiscal outlook. The estimate shows that in the three months to June, the first full quarter of Trump’s second term, government outlays increased by 0.2% compared with a year earlier. The rise is much smaller than in the previous four quarters, when spending was up between 7.1% and 28.5%. In the third quarter this year, US government spending was down 2.5% compared with a year earlier.
The Treasury estimated that President Trump’s trade tariffs, one of his key economic policies, will raise $300 billion this year and about $400 billion next year based on current monthly revenues. The Congressional Budget Office expects tariffs to reduce the deficit by $4 trillion over the next decade, while projecting that Trump’s spending legislation will add $4.1 trillion. The Treasury said this underestimates the impact of tax cuts and other growth-boosting measures.
The US has run a federal deficit of around 6% of GDP in recent years, despite unemployment being at historically low levels. US Treasury secretary Scott Bessent has targeted a 3% deficit by the end of Trump’s second term. Meanwhile, the International Monetary Fund does not expect the US to make any progress in lowering its deficit from current levels.
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