Summary: US jobs weakness prompts investors to bet on Federal Reserve rate cuts
The rise in US unemployment to a three-year high and the lower-than-expected number of new jobs have prompted investors to ramp up their bets on Federal Reserve interest rate cuts.
The shift in financial market bets on the Federal Reserve cutting interest rates is visible when comparing CME’s FedWatch tool before and after the jobs data.
Before the data, it was still showing a near certainty of rate cuts, but the chance of 0.5 percentage points (or two standard cuts) was put at 28.5%. That market-implied probability has now jumped to 58.5% after jobs numbers.
Investors have piled into safe haven bonds and dumped US stocks, fearing that a recession may be on the way, and that the Federal Reserve may be “behind the curve” in supporting the economy. The Nasdaq composite index fell into technical “correction” territory, down 10% from its recent peak.
Among investors and economists, the question is whether the Federal Reserve has made a fabled “policy mistake” by cutting interest rates too late. Bear in mind that this is a US election year: a recession and high unemployment would be bad news for Kamala Harris, running against Donald Trump for US president.
Ronald Temple, chief market strategist at Lazard, an investment bank, said:
The question is no longer whether the Fed will cut in September – it’s whether the Fed should cut more aggressively than by 25 basis points in September. Today’s job report suggests that the easing of tightness in US labor markets is threatening to turn into weakness.
The Fed was late to recognise the inflation problem. Let’s hope it doesn’t make the same mistake in the opposite direction.
Keeping rates on hold this week was indeed a mistake, said Ian Shepherdson, chief economist at Pantheon Macroeconomics, a consultancy. He said:
July’s poor employment report leaves the Fed looking woefully behind the curve with its decision to hold rates this week, and suggests that the outcome of September’s meeting now is finely balanced between 25bp and 50bp easings.
Looking ahead, we expect the trend in job growth to continue to deteriorate. [Surveyed] hiring intentions remain consistent with a further slowdown in growth in private payrolls, even though it has recovered a bit since the spring. In addition, jobless claims have picked up over recent weeks, job openings are back to pre-Covid norms, and households have become more fearful that unemployment will rise.
The real interest rate for corporate borrowing now is so high that an intense round of cost-cutting, including layoffs, likely lies ahead. Meanwhile, growth in state and local government revenues has petered out, signalling a stalling in government hiring.
In other news today from the world of business and economics:
Iberdrola, the owner of Scottish Power, has struck a deal to buy a major stake of Electricity North West which values the power grid operator at approximately £4.25bn (€5bn).
Bank of England chief economist Huw Pill has said the battle against inflation is not over as he laid out the case against further interest rate cuts.
Ryanair has revealed it cancelled 650 flights in July because of air traffic delays, while rival Wizz Air said the global technology outage that hit Windows computers directly disrupted about 1% of its flights.
Jet engine maker Rolls-Royce is giving each of its employees shares worth £700 after revealing bumper financial results.
You can continue to follow our live coverage from around the world:
In UK politics, police brace for more far-right riots as minister warns people about rallies in wake of Southport attack
In US politics, Kamala Harris’s campaign raises $310m, far outpacing Trump’s funding
In our coverage of the Russia-US prisoner swap, the Kremlin confirms hitman Vadim Krasikov worked for FSB security service
In our coverage of the Middle East crisis, assassinated Hamas leader Ismail Haniyeh buried in Qatar
And there is always the joy of our Olympics coverage to see you into the weekend:
Team GB wins equestrian gold, while Ireland’s double sculls have defended their title
And Morocco are beating the USA in the football quarter finals
Thanks for following the business live blog on a turbulent week. Please do join the Graeme Wearden on Monday as he returns to the hotseat. JJ
Electricity North West valued at £4.25bn in Iberdrola takeover
The owner of Scottish Power has struck a deal to buy a major stake of Electricity North West which values the power grid operator at approximately £4.25bn (€5bn).
Spanish energy giant Iberdrola has agreed to buy an 88% stake in Electricity North West (ENW), which runs the electricity network connecting 5m customers across the North West of England, for an equity value of £2.1bn.
The 60,000 kilometre power network lies between the two existing networks license areas owned by Scottish Power in central and southern Scotland and Merseyside and North Wales which it runs alongside its energy supply business and one of Britain’s largest renewable energy portfolios.
Ignacio Galán, Iberdrola’s executive chairman, said the deal underlines its strategy to invest significantly in electricity networks “which are a critical component for supporting the electrification and decarbonisation of the economy”.
The network was reportedly put up for sale by its owners, Japan’s Kepco and investment fund Equitix, last autumn in a sale which attracted interest from French energy group Engie, Canadian investor CDPQ and a consortium including private equity firm KKR with Dutch pension fund APG.
The deal has emerged almost one week after Australian infrastructure investor Macquarie agreed to take full control of Britain’s core gas transmission network in a roughly £700m deal.
Macquarie was already the network’s majority owner but agreed to buy the final fifth of the gas network from National Grid despite the UK’s ongoing efforts to shift away from fossil fuels in the future.
