The FTSE 100 fell on Friday, retreating from a series of record highs sparked by optimism about interest rates after a fresh assessment of the UK economy threw up the risks of the UK entering an environment of stagflation.
The S&P Global Flash UK PMI edged higher to 50.9, a three-month high, but sales pipeline and employment data revealed a slowing of activity. This, coupled with stubborn rates of inflation, points to stagflation and the curtailing of the Bank of England’s ability to cut interest rates.
“The first indicators of business conditions in 2025 add to the gloom about the UK economy, with companies cutting employment amid falling sales and concerns about business prospects. Inflation pressures have meanwhile reignited, pointing to a stagflationary environment which poses a growing policy quandary for the Bank of England,” explained Chris Williamson, Chief Business Economist at S&P Global Market Intelligence.
The concerns were evident in UK-focused sectors, including retailers, housebuilders and banks.
Just as markets were starting to enjoy an improvement in sentiment around the UK’s outlook, today’s data served as a reminder we’re not completely out of the woods.
Marks & Spencer shares fell 2%, while Taylor Wimpey gave up 1.5% as investors reacted to the possibility of rates staying higher for long while businesses consider cutting staff. The Labour government’s plans to hike national insurance are not helping matters.
Mining companies provided the counterbalance to weaker UK-centric stocks and helped contain losses on Friday.
“Miners were the talk of the town as base metal prices strengthened. Antofagasta, Glencore, Rio Tinto and Anglo American enjoyed decent share price gains, helping to prop up the resource-heavy FTSE 100 index,” said Russ Mould, investment director at AJ Bell.
“Copper, aluminium, lead, zinc and tin all saw higher prices amid a weaker dollar. Metals are typically priced in dollars and a decline in the US currency makes the commodities cheaper for buyers holding other currencies.
“Also putting a shine on metals prices was speculation that Donald Trump might not take the nuclear option regarding tariffs on China, potentially imposing a lower rate than has previously been suggested.”
JD Sports bucked the trend of softness in retailers following an encouraging update by Burberry, whose shares surged 13% on Friday.