- US jobs numbers had markets betting the Fed will begin a round of rate cuts in May
- Latest grim UK data shows another month of decline for services sector
- This left traders pricing in two Bank of England rate cuts from August.
Investors yesterday increased their bets that interest rates will be cut next year as storm clouds gather over the global economy.
The worse-than-expected U.S. jobs numbers left markets betting that the U.S. central bank will begin a round of rate cuts in May.
And the latest gloomy data from the UK, showing another month of decline for the services sector, left traders pricing in two Bank of England (BoE) rate cuts from August.
Figures showing a drop in Germany’s exports added to the state of lethargy and the feeling that a global cycle of rate increases is over.
US markets took advantage of the positives: bond yields – a benchmark for global borrowing costs – fell and Wall Street indices rose.
Go-low: Officials are signaling rates will stay ‘high for longer’ with inflation still above target
In London, the FTSE 100 was down on the day, but enjoyed its best week since September.
And the pound rose sharply on the prospect of the US starting to raise interest rates before the Bank of England.
Sterling completed its best week since July, rising almost two cents to just under $1.24.
Carsten Brzeski, chief economist at ING Bank, said signs of a slowdown mean major central banks “will eventually realize that their job of raising rates is done.”
Officials are signaling that rates will stay “high for longer” with inflation still above target, especially in the UK, where it has only fallen to 6.7 per cent. “However, it could easily happen that this ‘longer’ period is shorter than that of interest rate hikes,” Breski said. “There appear to be early signs that central bankers are preparing for rate cuts even if inflation falls short of target again.”
Traders yesterday focused on the important US nonfarm payrolls report, which showed 150,000 jobs were added in October, less than the 180,000 expected.
Meanwhile, unemployment rose from 3.8 percent to 3.9 percent, its highest level since January 2022. Janet Mui, head of market analysis at RBC Brewin Dolphin, said: “The US labor market is progressively cooling. It suggests that higher interest rates are working and that the economy is managing.
“Overall, this report creates even more conviction in the markets that the Federal Reserve will abandon the plan (as indicated in its September forecasts) for a further hike in December.”
In the UK, the latest Purchasing Managers’ Index (PMI) figures for October showed that the services sector, which accounts for four-fifths of economic output, contracted for the third month in a row.
This added to the gloomy GDP outlook outlined by the Bank of England a day earlier. Inflation is believed to have fallen below 5 per cent in October – ahead of figures due to be published later this month – and the economy has already entered an 18-month period of stagnation that will extend into next year. .
Although Bank of England Governor Andrew Bailey insists it is “too early” to think about interest cuts, markets take a different view.
Meanwhile, traders see the European Central Bank cutting rates by up to half a percent by July next year. The likelihood of cuts increased after German exports fell a bigger-than-expected 2.4 percent in September.