UK markets pulled back slightly this week, with the FTSE 100 Index falling by 0.5% to trade at 9,685 points at the time of writing.
Chancellor Rachel Reeves opened the door for a manifesto breaking income tax rise on Tuesday, when she said the “national interest” would trump political expediency in this month’s budget. Reeves used a speech in Downing Street to warn the public and Labour MPs that she would use her Budget to tackle debt and that she was determined to put the country on a more sustainable footing. When asked if she was prepared to break the manifesto promise to not raise income tax, even if that might cost Labour the next election, Reeves said “We have got to do the right thing”.
Labour officials insist no final decision has been taken to raise income tax and that Reeves is still weighing up whether a fiscal hole estimated at about £30 billion can be filled without breaking a key manifesto promise. Reeves’ message was partly aimed at the public, but also served as an economics lecture to Labour MPs, as she sought to explain why she needed to tame debt to cut government borrowing costs. She said the aim was to free up money for key public services and ultimately tax cuts.
Reeves noted that one pound in every 10 of taxpayers’ money was spent on servicing the UK’s debt.
The Bank of England kept its key interest rate unchanged at 4% on Thursday but signalled a possible cut as soon as next month, if wage growth and inflation continue to ease. The Monetary Policy Committee voted by five to four to keep borrowing costs steady, after cutting rates five times since 2024. The Monetary Policy Committee said UK inflation had now peaked, and that if progress continued, interest rates would “continue on a gradual downwards path”. Bank of England Governor Andrew Bailey was among the rate-setters voting to keep policy unchanged, while the minority backed an immediate rate cut.
Elsewhere, UK services activity expanded in October at a stronger pace than initially estimated as demand strengthened, easing concerns about the upcoming Budget’s effect on the economy. The S&P Global UK Services PMI Business Activity index rose to 52.3 in October, up from an earlier flash reading of 51.1 and well above the five-month low of 50.8 recorded in September.
The latest survey offers some positive signals for the UK service economy, with a number of firms noting resilient customer demand, especially in domestic markets, despite elevated business uncertainty and delayed decision making on major spending ahead of the Budget. Output growth expectations rebounded to a 12-month high in October, with lower borrowing costs and planned investments in new technologies cited as factors supporting positive sentiment.
Commodity markets
In the commodity markets, Brent crude futures traded around $64 per barrel on Friday and are set to end the week unchanged, as concerns about a potential oversupply eased, with sanctions on Russia beginning to take effect.
The latest sanctions on Russia’s biggest oil companies two weeks ago are sparking some concerns about supply disruptions, despite rising output from OPEC and its allies. Lukoil’s operations at its foreign businesses are struggling in the face of the sanctions, Reuters reported this week. Global oil prices fell for a third straight month in October on fears of oversupply as OPEC+ increased output while production from non-OPEC producers is also still growing. The OPEC+ group’s plan to pause further production increases in the first quarter of next year has eased some worries about oversupply. Demand weakness, however, remains in focus. In the year to November 4th, global oil demand had risen by 850,000, below the 900,000 barrels per day projected previously by JP Morgan, the bank said in a client note. Saudi Arabia, the world’s top oil exporter, sharply reduced the prices of its crude for Asian buyers in December, responding to a well-supplied market as OPEC+ producers boost output.
Gold prices traded around $4,010 an ounce on Friday and are set to end the week little changed, as the Dollar slid after US private sector job reports signalled weakness in the country’s labour market and lifted expectations of another US interest rate cut, while a prolonged government shutdown boosted safe haven demand.
Equity markets
US equity futures rose on Friday after a sharp selloff in the previous session, as renewed pressure on technology and artificial intelligence linked shares dragged Wall Street lower. In Thursday’s regular trading session, the Dow Jones Industrial Average lost 0.84%, the S&P 500 fell 1.12%, whilst the Nasdaq Composite declined 1.9%.
The US economy shed jobs in October amid losses in the government and retail sectors, while cost-cutting and the adoption of artificial intelligence by businesses led to a surge in announced layoffs, data showed on Thursday. The reports, including an estimate from the Chicago Federal Reserve that the unemployment rate edged up last month from September, suggest a deterioration in labour market conditions. However, a shutdown of the US government, the longest on record, and the accompanying official economic data blackout have made it impossible to gauge the labour market status. The shutdown, now in its second month, has delayed the release of the Labor Department’s closely watched employment report for September. October’s report that was due on Friday will also not be published, and doubts are mounting on whether it will be released when the government eventually reopens.
Privately produced employment reports are, however, increasingly painting a dim picture of the labour market. Data from workforce analytics company Revelio Labs showed 9,100 jobs were lost in October, with government payrolls declining by 22,200 positions. Retailers shed 8,500 jobs, data showed. There were, however, moderate gains in the education and health services sector, which added 22,000 jobs. Announced layoffs jumped 37% to 43,600 last month, Revelio Labs said. Separately, the Chicago Federal Reserve estimated the unemployment rate climbed to 4.36% last month, from an estimated 4.35% in September. A third report from global outplacement firm Challenger, Gray & Christmas showed planned layoffs soared 183% to 153,074 in October, the highest for the month in 22 years.
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