Fears of US recession ease as job creation ticks up
A stronger performance for job creation in the United States appears to have eased financial market fears of a US recession.
Closely-watched employment data showed that 142,000 net new jobs were created in the world’s largest economy last month.
While that was below forecasts of 160,000, it represented a significant recovery on a downwardly revised total for July of just 89,000.
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A total of around 200,000 is typically considered healthy.
Other figures revealed a slight tick-up in wage growth, though the unemployment rate fell to 4.2% following four consecutive increases previously.
Anticipation of a stronger performance than witnessed in July, which sparked heavy stock market losses, was seen in values ahead of the data’s publication.
The dollar lost ground against most international currencies and was almost half a cent down versus the pound at $1.32.
That was explained by analysts as the data coming in below a level that could frighten the Federal Reserve away from its first interest rate cut, widely expected later this month.
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US stock markets pared expected losses at the open while the FTSE 100 was trading flat shortly after the report was released, having been 0.5% lower earlier in the session as some limited risk appetite returned.
That was also seen in the cost of oil, with Brent crude trading higher at $73.
Mining and energy stocks have suffered over the past week as prices have fallen amid a lack of evidence that the US economy could avoid a recession despite technically remaining in growth, albeit weak.
While most countries define such a downturn as following two consecutive quarters of negative growth, the US takes account of employment too.
As such, a recession can only be officially declared by a special committee of economists.
The weak hiring data of recent months had put pressure on the presidential election campaign of the Democrat candidate Kamala Harris.
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The update from the Labor Department was received as “mixed” by many analysts, though most saw enough evidence to suggest the downturn in job creation may have bottomed out, making the central bank’s interest rate decision easier.
Michael Brown, senior research strategist at Pepperstone, said of the report: “All of this does little to clear up the debate over the September Fed meeting.
“Doves will point to a cooling pace of headline payrolls growth as potential reasoning for a larger 50bp [basis point] cut.
“Hawks, meanwhile, will reasonably point towards the lack of further cooling compared to the July report, and hot-ish earnings growth, as reasons to kick-off the normalisation cycle with a more modest 25bp move.
“My base case remains for the latter, particularly given the risk the Fed run of sparking a market panic were a larger cut to be delivered.”
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UK interest rates an outlier after decision to hold but Bank of England forecasts inflation rise to 2.5%
There has been no change to the UK interest rate despite the US and European central banks all moving to cut in the last week.
The Bank of England has kept the interest rate at 5% as official figures this week showed some measures of price rises grew.
It follows the first cut in more than four years.
The rate set by the Bank impacts how much lenders charge to borrow money, so it affects how expensive mortgages or credit card bills are.
But there was no consensus on the decision. One of the nine rate decision-makers voted for a cut.
There were signals of the Bank’s direction of travel from governor Andrew Bailey.
Where to next?
If the economy continues to progress in line with its expectations “we should be able to reduce rates gradually over time”, he said.
But, he said, “we need to be careful not to cut too fast or by too much”.
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Market expectations are currently for a cut at the next meeting in November followed by a further one in December.
The latest forecasts from the Bank are for inflation to rise again, reaching 2.5% by the end of the year.
How did we get here?
Interest rates were brought to a high last seen during the 2008 global financial crash in an effort to bring down spiralling inflation.
More expensive borrowing can choke economic demand and slow price rises.
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Bank of England holds interest rates
The Bank is tasked with bringing inflation down to 2%. It currently stands at 2.2%.
The US central bank, the Federal Reserve, brought interest rates down by 0.5 percentage points to 4.75% to 5% on Wednesday and the European Central Bank (ECB) reduced borrowing costs last week to 3.5%.
Unlike the UK, the US interest rate is a range to guide lenders rather than a single percentage.
Reaction
Sterling strengthened, following the news and against a weakened dollar a pound bought $1.33, the highest amount in more than two years.
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Why Bank of England is in no rush to lower interest rates – even though some think decision to wait is dangerous
Slowly does it.
That’s the overarching message to take away from the Bank of England‘s latest monetary policy decision. Unlike the Federal Reserve, the US central bank, which decided yesterday to cut interest rates by half a percentage point – more than many had expected – the Bank wanted to signal today that it’s in no rush.
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Alongside the decision to leave borrowing costs on hold at 5%, the Bank’s governor also signalled that he and the rest of the Monetary Policy Committee were in no rush to cut them again. Provided there aren’t any inflation surprises, he said, “we should be able to reduce rates gradually over time”. He added: “But it’s vital that inflation stays low, so we need to be careful not to cut too fast or by too much.”
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The Bank of England has held the base interest rate at 5%
Even so, the Bank is expected to carry on cutting rates in the coming months. Indeed, economists think the Bank will cut rates in November by at least a quarter percentage point, followed by more cuts next year, taking borrowing costs down towards 3% by next summer.
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That’s largely because inflation is now considerably lower than in recent years, and because there is evidence that high interest rates are starting to weigh down economic activity. The longer those rates stay high, the bigger the depressive impact they have on the UK.
But that raises another issue. For some economists, the Bank of England’s gradualist approach is dangerous. They worry that higher rates, which deter companies and individuals from spending and investing, are causing unnecessary damage.
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That helps explain why one of the MPC members, Swati Dhingra, voted to reduce rates at this meeting.
But the rest of the committee was of one mind – no point in rushing.
Whether they are right is something we’ll find out in the coming months.
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