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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Dollar strengthens after US beats forecasts with 254,000 new jobs in September – as it happened

United States United Nations US Dollar Huw Pill Bank of England United Kingdom
The intersection of Broadway and Wall Street in the Financial District in New York.
The intersection of Broadway and Wall Street in the Financial District in New York. Photograph: Peter Morgan/AP

Closing post

Time to wrap up, after a lively week.

American employers added 254,000 jobs last month in the penultimate jobs report before the US election, defying fears of a slowdown in the labor market.

Job creation unexpectedly accelerated in September, while the headline unemployment rate slipped to 4.1% from 4.2% in August.

Economists had forecast a non-farm payrolls reading of around 132,500 for September, after a cooler summer of employment growth.

Hiring instead rose sharply from recent months. In August employers added 159,000 jobs, and in July, they added 144,000.

Both estimates for July and August were revised higher by the Bureau of Labor Statistics on Friday – adding 72,000 more jobs than previously reported – highlighting the strength of the labor market.

The strong jobs report lifted shares on Wall Street, and sent the dollar flying to a seven week high, dragging down the pound.

Sterling is now firmly on track for its worst week since February 2023, having dropped by around 2% or two and a half-cents this week.

It had rallied, before the jobs report, after the Bank of England’s chief economist warned against cutting interest rates “too far or too fast”.

Huw Pill said there should be a gradual reduction in interest rates to make sure inflation remains near the Bank’s 2% target, a day after the governor, Andrew Bailey, said the central bank could move “more aggressively” to lower borrowing costs.

In a boost for the UK’s Labour government, the UK construction sector grew at its fastest pace in two-and-a-half years in September, as housebuilding strengthened.

Here’s the rest of today’s business news:

Today’s jobs report for September suggests the labor market remains strong, says the White House’s council of economic advisers, here:

The dollar is trading at a seven-week high after the jobs report, as traders conclude that a second ‘jumbo’ interest rate cut next month is now very unlikely.

The dollar index has reached 102.65, the highest since August 16, and is on track for its best weekly percentage gain since September 2022.

Last month’s surging in US jobs suggests the Fed needs to tread carefully, say analysts at ING.

In a research note, they explain:

The US jobs report was incredibly strong on every front possible – job creation, unemployment, wages and hours worked. Nonetheless, caution lingers given the lack of corroborating data.

While the inflation backdrop is allowing the Fed to start moving monetary policy back to neutral, we think it will be in 25bp incremements, not the 50bp we saw in September.

Back in the UK, the government has welcomed the pick-up in construction sector activity last month (see earlier post).

Chief Secretary to the Treasury Darren Jones says:

“We are focused on restoring economic stability and rebuilding Britain. This boost in business activity is clearly a positive sign, but there is more to be done as we drive towards growth as our number one mission.

“That’s why the Budget on 30 October will be about fixing the foundations of our economy so we can begin to deliver on the promise of change.”

The surge in homebuilding activity last month may be thanks to the government’s housing drive.

As Bloomberg puts it:

A gauge of housebuilding rose to its highest since March 2022, boosted by government plans to build 1.5 million new homes over the next five years to fix Britain’s housing crisis.

Joe Biden: Jobs report is good news for American families

President Joe Biden has welcomed today’s jobs report, saying:

Today, we received good news for American workers and families with more than 250,000 new jobs in September and unemployment back down at 4.1%. With today’s report, we’ve created 16 million jobs, unemployment remains low, and wages are growing faster than prices.

Under my Administration, unemployment has been the lowest in 50 years, a record 19 million new businesses have been created, and inflation and interest rates are falling.

And we’re seeing the power of collective bargaining to lift up workers’ wages—including the progress made by dockworkers on record wages with carriers, and port operators and the reopening of East Coast and Gulf ports.
Make no mistake: We have more to do to lower costs and expand opportunity. Congress should pass our plan to build millions of new homes, expand prescription drug price caps, empower workers and protect the right to organize, and cut taxes for hardworking families.

Congressional Republicans have a different plan—more giant tax cuts for billionaires and big corporations, ending the Affordable Care Act, undermining workers by cutting overtime and making it harder to organize, and imposing a national sales tax that would raise costs by nearly $4,000 per year. While they put billionaires first, we’ll keep fighting to grow the middle class.

Financial stocks are among the top risers on the Dow Jones industrial average, with JP Morgan Chase up 2.2%, American Express rising 1.8% and Goldman Sachs up 1%.

High interest rates have been good for bank profits (despite leading to a rise in bad debts), and today’s strong jobs report suggests they may not fall as quickly as expected.

Amazon (+1.8%) and Caterpillar (+1.55%) are also among the risers.

Wall Street rallies after strong jobs report

Stocks have jumped on Wall Street at the start of trading, as investors hail today’s stronger-than-expected US jobs report.

The Dow Jones industrial average gained 233 points at the open, up 0.55% to 42,244 points.

The broader S&P 500 index gained 0.75%, while the tech-focused Nasdaq is up 1.2%.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, says hopes are rising for a “goldilocks scenario” for the US economy, explaining:

“The US jobs market appears to have been infused with confidence in September, with new hirings shooting past expectations and the unemployment rate edging down. Fed policymakers had been worried about the potential for the jobs market to rapidly cool off, which is why they opted for a super-size rate cut last month. These latest numbers will help assuage those worries and add to a picture of a resilient US economy, which appears to be heading for a soft landing.

Financial markets are pricing in the chances of a cut in November at 93%, but are putting bets on a more usual 0.25% reduction. As expectations have retreated for a bigger rate cut, it’s helped push the dollar to a seven-week high, and Wall Street looks set to end the week on an upbeat note.

September’s strong jobs report should calm fears about the state of the US jobs market, says Janet Mui, head of market analysis at wealth manager RBC Brewin Dolphin:

“September’s non-farm payroll report, particularly the fall in the unemployment rate, should remove any near-term concerns on the state of the US labour market.

The combination of strong job creation and wage growth (both nominal and adjusted for inflation) is supportive to US consumption. With inflation heading in the right direction and ongoing expansion in the US economy, this should increase confidence that a soft-landing is coming to realisation, barring any shock.

While low inflation will allow the Fed to keep cutting rates, this strong set of results should reduce the likelihood of another outsized rate cut by the Federal Reserve in November.”

The surging dollar has now dragged the pound down to a new three-week low of $1.3070.

The chances of the Federal Reserve making another jumbo cut to interest rates next month have collapsed.

According to CME Fedwatch, the odds of a half-point cut by the Fed in November are just 10%, down from over 30% before September’s strong jobs report was released.

A smaller, quarter-point cut is now 90% likely.

US jobs report beats forecasts: What the experts say

Neil Birrell, chief investment officer at Premier Miton Investors, says:

“That was quite some jump in US payrolls in September, almost off the scale relative to expectations, and earnings were up more than anticipated as well. This is without question a strong jobs report.

“US employment data has been the focal point for bond and equity markets for the last two months and that will continue to be the case as everyone tries to second guess Fed policy. As it stands, a 0.5% cut must now be off the cards at their next meeting, although we do have one more jobs report before then – guess what we’ll all be looking at!”

Richard Flynn, managing director at Charles Schwab UK, agrees that the jobs report is stronger than expected:

“Today’s jobs figures have exceeded expectations, indicating a high level of demand in the labour market, reversing a recent trend. At the last Fed meeting, Jerome Powell emphasised that the slowdown in job growth was the key factor behind the decision to kick off the easing cycle with a larger-than-normal rate cut. Powell indicated that the “balance of risks” to the US economy has shifted—implying that supporting the job market has taken precedence over fighting inflation.

Today’s jobs figures suggest the Fed’s action is working well to support its full-employment mandate. With high inflation largely in the rearview mirror, this could be less good news for markets, as it may slow the pace of future rate cuts.”

Seema Shah, chief global strategist at Principal Asset Management, says such a strong jobs report means the Fed can’t consider another large cut to interest rates at its next meeting:

“Did the Fed even need to cut rates in September, let alone cut by 50bps?

The monster upside surprise suggests that the labor market may actually be a picture of strength, not weakness, and it completely dismisses the idea that the Fed could even contemplate another 50bps cut in November.

As jobless claims, the Challenger survey, and the multitude of strong economic data have been suggesting, the U.S economy is still robust. And with Fed easing now underway, recession risk has collapsed. Markets will need to keep a closer eye on inflation as, now, there are policy risks on both sides of the economy.”

Wage growth across the US economy was also a little stronger than expected.

Today’s jobs report shows that average hourly earnings rose by 0.4% in September, after gaining 0.5% in August. Wages increased 4.0% year-on-year after climbing 3.9% in August.

Wall Street economists had expected a 0.3% monthly rise in hourly earnings, and a 3.8% annual increase.

Where were the 254,000 new jobs created last month?

The BLS reports that:

  • Employment in food services and drinking places rose by 69,000 in September.

  • Health care added 45,000 jobs in September

  • Employment rose in home health care services (+13,000), hospitals (+12,000), and nursing and residential care facilities (+9,000).

  • Employment in government rose by 31,000, by 16,000 in local government, and by 13,000 in state government.

  • Employment in social assistance increased by 27,000, primarily in individual and family services (+21,000).

  • Construction employment continued to trend up in September (+25,000)

  • Nonresidential specialty trade contractors added 17,000 jobs.

Employment showed little change over the month in other major industries, including mining, quarrying, and oil and gas extraction; manufacturing; wholesale trade; retail trade; transportation and warehousing; information; financial activities; professional and business services; and other services, the BLS adds.

At 254,000, the increase in total nonfarm payroll employment last month was higher than the average monthly gain of 203,000 over the previous year.

The BLS’s latest household survey has more details about the US labor market.

It shows that the unemployment rate for adult men decreased in September to 3.7%. The jobless rates for other groups were little changed.

The number of Americans who have been out of work for less than 5 weeks decreased by 322,000 to 2.1 million in September.

But the number of long-term unemployed (those jobless for 27 weeks or more) was little changed over the month at 1.6 million, up from 1.3 million a year earlier.

Dollar jumps after strong US jobs report

The dollar is soaring, after September’s jobs report smashed forecasts.

The dollar index has jumped by almost 0.6%, putting it on track for its biggest one-day jump in four months.

This is crushing the pound’s attempts to rally – sterling is now down 0.2% today at $1.31, cementing the chances that this week will be the pound’s worst in over a year.

US jobs report beats forecast

Newsflash: Hiring across the US accelerated last month, with many more jobs created than expected.

The US non-farm payroll rose by 254,000 in September, new data from the US Bureau of Labor Statistics shows.

That’s better than expected, and will be welcomed in the White House as a sign that the US economy is not weakening.

The BLS says:

Employment continued to trend up in food services and drinking places, health care, government, social assistance, and construction.

The US unemployment rate has fallen, to 4.1% from 4.2% the previous month.

August’s non-farm payroll has been revised up too, from +142,000 to +159,000.

There’s a wide range of forecasts for today’s non-farm payroll, points out Bloomberg’s Valerie Tytel:

The countdown to the most crucial set of US data during October is nearly over, says Achilleas Georgolopoulos, investment analyst at brokerage XM.

At 12.30 GMT the non-farm payrolls figure is expected to show a 140k increase, with forecasts ranging from 70k to 220k. Both the unemployment rate and the average hourly earnings growth will probably remain unchanged at 4.2% and 3.8%, respectively.

Up to now, data prints have been mixed, with the ISM manufacturing survey disappointing but both the weekly jobless claims and the ISM services survey raising the probability of an upside surprise today. A stronger set of prints later today, especially if the non-payrolls figure surpasses the 200k level, could force the most dovish Fed members to tone down their rhetoric for the November 7 meeting.

Such an outcome could really dent the current sizeable 35% probability for a 50bps rate move in November and further boost the US dollar. It has been a rather strong week for the greenback on the back of the reduced Fed rate cut expectations and the developments in the Middle East, with the dollar index being on course for its best week since mid-March.

It’s nearly time for the final major piece of economic news of the week, the US non-farm payroll.

September’s NFP – due at 8.30am East Coast time or 1.30pm in the UK – will give an insight into the health of the US jobs market – crucial both for the upcoming presidential election, and the path of US interest rates.

Economists predict that around 140,000 new jobs were created in September, according to a Reuters poll.

That would be very slightly lower than August’s 142,000, when there was a hiring slowdown.

A surprisingly strong jobs report, or a jump in wage growth, might shake investors’ confidence that the US Federal Reserve will cut interest rates speedily this year.

Currently, a quarter-point cut in November is a 70% chance, according to CME Fedwatch, with a 30% possibility of a second half-point cut in a row.

Back in the construction sector, the merger of housebuilders Barratt and Redrow has been given the green light by competition authorities.

The Competition and Markets Authority has said it has decided to accept undertakings made by the two companies, so the merger will therefore not be referred for a phase 2 investigation.

The CMA had been concerned that a Barratt development in Whitchurch, Shropshire, was close to Redrow’s development in Nantwich, Cheshire, possibly creating a local competition issue.

David Thomas, CEO of Barratt says:

“Today is a significant milestone for Barratt Redrow, as we come together as one organisation. With this combination, we have created an exceptional housebuilder in terms of quality, service and sustainability, able to accelerate the delivery of the homes this country needs.

Together, we offer a broader range of homes and price points for our customers who we will continue to put at the heart of everything we do. Our focus now is on integrating our businesses as efficiently and effectively as we can to deliver the expected benefits of the Combination.

We will leverage the best of both companies to deliver significant benefits to our people, our customers and our supply chain partners, and ensuring that Barratt Redrow is set up to deliver long term value to all of its stakeholders.”.

The pound is continuing to bounce back this morning.

It’s now up almost half a cent at $1.317, recovering around a third of yesterday’s selloff.

This is thanks to Huw Pill’s hawkish words about interest rates, and also the pick-up in construction sector activity.

Samer Hasn, senior market analyst at brokerage XS.com, says:

Better-than-expected construction data, with activity growing at the fastest pace in two and a half years, boosted the pound’s gains today.

Escalating geopolitical tensions are likely to keep the Bank of England wary of cutting interest rates too quickly as upward risks to inflation mount.

But, the pound is still on track for its worst week in over a year…

Updated

Senior Post Office executives treated the company board as a “confessional”, burdening them with huge amounts of paperwork in an attempt to dodge their responsibilities for delivering on the roles, the inquiry into the Horizon IT scandal has heard.

Rachel Scarrabelotti, group company secretary for the Post Office since April 2022, said that respect was lost for the board through the actions of senior executives presenting long papers on operational matters that were not part of their oversight responsibilities.

“They treated the board as a confessional,” she said, giving testimony at the public inquiry into the Post Office and the Horizon IT scandal this morning.

“They would bring all the information they could to the board and tell the board everything hoping it would somehow alleviate them of their responsibility.”

She said that the issues and presentations should properly have been handled by the Post Office’s executives instead.

“It blurs the lines of accountability,” she said. “Respect has been perhaps lost for the board as they are associated with operational matters that are for the executive. Ultimately, the board doesn’t get to fulfill its proper function to be the board.”

She said that Nigel Railton, the interim chair of the Post Office appointed following the firing of Henry Staunton in January, had cracked down on the practice putting strict limits on the length of board papers to stop executives shirking their responsibilities through information overload.

“They now have to be pithy,” she said.

“You have to say what you want, why you want it, and get out.”

Key event

The European Union is to adopt tariffs on China-made battery electric vehicles (BEVs) following a vote today.

In a statement the EC says:

Today, the European Commission’s proposal to impose definitive countervailing duties on imports of battery electric vehicles (BEVs) from China has obtained the necessary support from EU Member States for the adoption of tariffs.

This represents another step towards the conclusion of the Commission’s anti-subsidy investigation.

Back in June, the EC announced it intended to impose tariffs of up to 38% on imports of Chinese electric vehicles, triggering duties of more than €2bn (£1.7bn) a year.

According to Reuters, EU countries failed to vote clearly in favour or against tariffs on Chinese electric vehicles, leaving the European Commission to decide what to do.

Germany has opposed the plan, concerned that a trade war with China would hurt German exports when its economy is already weak.

The London stock market is in the red this morning, with the FTSE 100 share index down 0.3% or 25 points at 8257 points, despite a pick-up in bank shares.

Joshua Mahony, analyst at Scope Markets, says:

The FTSE 100 has struggled for positive momentum in early trade, with much of the index losing ground despite a sharp rise in the latest construction PMI figure.

The banking sector has provided the main tailwind this morning, with traders taking a more cautious approach following comments from BoE Chief Economist Pill that struck a much less dovish tone than that from Bailey yesterday.

While markets remain optimistic that we will see cuts in both November and December, Pill’s preference to remain restrictive in a bid to drive down underlying inflation does highlight the lack of a central dovish narrative that markets might believe exists.

Bank of England chief economist Huw Pill has “poured cold water” over yesterday’s dovish comments from governor Andrew Bailey, says Matthew Ryan, head of market strategy at global financial services firm Ebury.

Ryan explains:

Pill reiterated the MPC’s official stance that the bank remains wary of cutting rates too deeply or too quickly, highlighting continued concerns over structural issues that could keep UK inflation elevated for longer.

“His communications provide an element of validation to our view that markets perhaps took Bailey’s words too literally, and as a confirmation of faster cuts ahead, rather than merely a warning that this is a possibility. Indeed, we were somewhat perplexed and thrown off guard by Bailey’s comments, as we do not believe that UK data since the last MPC meeting has necessarily deteriorated to an extent that would warrant a shift to a more dovish stance.”

UK construction sector posts fastest upturn since April 2022

September was a strong month for the UK construction sector, partly due to falling borrowing costs, new data shows.

The latest survey of purchasing managers across UK building firms has found that business activity accelerated to its fastest rate in nearly two-and-a-half years.

Builders report a rise in new work, thanks to increased willingness-to-spend among clients and a more supportive economic backdrop.

This lifted the S&P Global UK Construction PMI to 57.2 in September, up from 53.6 in August, signalling faster growth (50 poinst = stagnation).

Civil engineering, commercial building, and house building all strengthened.

Indeed, the upturn in residential work was the fastest since March 2022, suggesting recent falls in mortgage rates are stimulating the market.

Tim Moore, economics director at S&P Global Market Intelligence, says:

“UK construction companies indicated a decisive improvement in output growth momentum during September, driven by faster upturns across all three major categories of activity.

A combination of lower interest rates, domestic economic stability and strong pipelines of infrastructure work have helped to boost order books in recent months.

Huw Pill also explained the ICAEW that the Bank of England introduced a new form of communication, identifying three distinct cases to characterise the economic outlook.

He says:

The first case sees disinflation from here as a process largely independent of other developments in the economy. Disinflation owes to a self-sustaining virtuous cycle of declining headline inflation, falling inflation expectations, weaker pay growth and easing domestic services price inflation. Just as inflation rose on the back of external shocks, it will revert to target as those shocks recede.

The second case also foresees continued disinflation. This again owes to the selfsustaining virtuous cycle of declining headline inflation which I already outlined. But what is distinctive here is that this virtuous cycle relies on the maintenance of a restrictive monetary policy stance to bear down on inflationary pressures. Bank Rate will need to fall over time, but at a pace that ensures sufficient restriction is maintained in the transition for UK inflation to reach target in a lasting and sustained manner, not just fleetingly or in passing.

The third case posits deeper structural changes in the UK economy that threaten to impart a more lasting inflationary dynamic, if not met with an equally lasting monetary policy response necessary to return inflation to target and keep it there.

Those three scenarios cover the range of views on the MPC, from the doves who want to cut rates to the hawks who are more worried about inflation.

Pill says he sees merits in all three options, but that his “modal outlook” is probably closest to the second case.

Huw Pill kicked off his speech to the chartered accountants with a joke, declaring:

In giving a talk to such a distinguished group of accountants, I am reminded of a famous joke about economists: ‘An economist is someone who wanted to be an accountant, but didn’t have the personality’.

At least, that is what passes for humour among economists. Perhaps it proves the point – although, on reflection, I am not sure which profession should take greater offence.

Pill’s predecessor, Andy Haldane, was more of a punster, remarking once that “Economists exist to make the weathermen look good”.

Pill speech shows MPC "split" over interest rates

Simon French, chief economist at investment bank Panmure Liberum, says Huw Pill is “striking a different tone” to Andrew Bailey in his interview with the Guardian.

French adds:

Market doesn’t believe it with 92% likelihood of November cut, & 60% for a December follow-up cut. But it is a clear message even the internal MPC members are split on pace of removing restrictiveness:

Pound stronger as Pill urges caution on rate cuts

The pound jumped as traders reacted to Huw Pill’s call for a cautious approach to interest rate cuts.

It rallied as high as $1.3164, up from $1.312 last night,before settling back at $1.315

That recovers some of the pound’s losses yesterday, and means this might only be sterling’s worst week since July 2023.

Updated

BoE chief economist urges caution over rate cuts

Newsflash: The chief economist of the Bank of England has warned against cutting interest rates “too far or too fast”, a day after his boss signalled that the BoE could take a “more aggressive” position.

Huw Pill has told the Institute of Chartered Accountants for England and Wales this morning that there is “ample reason for caution” in assessing how far inflationary pressures have dissipated, and thus how quickly borrowing costs should fall.

Pill says:

While further cuts in Bank Rate remain in prospect should the economic and inflation outlook evolve broadly as expected, it will be important to guard against the risk of cutting rates either too far or too fast.

For me, the need for such caution points to a gradual withdrawal of monetary policy restriction.

This is quite a contrast with governor Andrew Bailey’s comments to the Guardian this week – he told us there was a chance of the Bank becoming more “a bit more activist” in its approach to cutting interest rates, if the news on inflation continued to be good.

Pill is a hawkish member of the Bank’s monetary policy committee – he was one of four policymakers who opposed the rate cut in August, but were outvoted by the other five members of the MPC.

He tells the ICAEW that he hopes to deliver “robust monetary policy” that will guide inflation back to target, while avoiding volatility in economic activity and employment.

Sounding almost evangelical about the Bank’s mission, Pill explains:

Rather price stability is a foundation – you could even argue, the foundation – of a thriving, modern, vigorous and growing UK market economy, which provides opportunities for all: precisely what I would envisage as an ‘economy-fit-for-thefuture’.

Focusing monetary policy on the achievement of price stability is therefore not just a legal and institutional obligation for members of the MPC. It is the right thing to do. That is certainly my view; and I know that I am joined in this by my colleagues. We are in the price stability business.

Updated

Brent on track for strongest week in two years

Today’s rally means Brent crude has now climbed by 8.7% so far this week, to above $78/barrel.

That would be the biggest one-week gain in percentage terms since early October 2022.

Jim Reid, strategist at Deutsche Bank, told clients this morning:

Markets have remained focused on the Middle East over the last 24 hours, as investors weigh up the likelihood of a fresh escalation and how Israel might respond to Iran’s missile strikes last Tuesday.

That response from Israel is yet to materialise, but there was a fresh spike in oil prices after President Biden was asked whether he’d support an Israeli strike on Iran’s oil facilities, and he said “we’re discussing that”

Brent crude now over $78/barrel

Oil prices are climbing again today, pushing Brent crude over $78 per barrel for the first time since the end of August.

The rally comes after former Israeli prime minister Ehud Barak has predicted that Israel is likely to mount a large-scale airstrike against Iran’s oil industry and possibly a symbolic attack on a military target related to its nuclear programme.

That follows president Joe Biden’s off-the-cuff comments yesterday that his administration has been “discussing” possible Israeli plans to attack Iran’s oil industry.

Today, the Israeli military tells residents of over 20 more southern towns in Lebanon to evacuate immediately, following overnight strikes on Beirut:

There’s relief over in the US this morning, after the US ports strike that shut down shipping on the east and Gulf coasts for three days came to an end.

The International Longshoremen’s Association (ILA) announced that the union had reached an agreement with the United States Maritime Alliance (USMX) on wages, suspending their walkout until January. Work would resume immediately, the union said.

The strike – which involved 45,000 workers across 36 ports, from Texas to Maine – was the first to hit the east and Gulf coast ports of the US since 1977.

The tentative agreement is for a wage hike of around 62%, a source familiar with the matter told Reuters. Both sides said in a statement they would return to the bargaining table to negotiate all outstanding issues.

Reeves raises hopes of investment surge

Rachel Reeves also paved the way for a rise in capital spending at the budget later this month, dropping the broadest possible hint that she could change the government’s fiscal rules to enable this.

“We’ll set out details of the fiscal rules at the budget, but we have got to make sure we unlock that space for capital investment,” she told journalists ahead of a visit to the Liverpool city region today to announce almost £22bn of funding over 25 years for carbon capture and storage projects.

The Guardian will be at the trip with the chancellor, prime minister Keir Starmer, and energy secretary Ed Miliband, later this morning.

Reeves suggested she could outline upgraded investment plans at her 30 October tax and spending event. At the Conservatives’ last budget in March forecasts showed public investment was set to fall from 2.4% of national output to about 1.7% by 2028-29. Labour’s manifesto plans would limit that drop to about 1.8%.

However, Reeves hinted she could go further, saying of Tory plans to cut investment spending that she was “not going to make those mistakes”.

She said:

“They were cutting back on investment, at exactly the time we need to be increasing investment in our economy.

“I haven’t hidden my ambitions to want to boost capital spending in the UK. I absolutely want to do that, it’s how to break out of this sort of doom loop of low growth and deteriorating living standards. That means prioritising capital investment, particularly capital investment that leverages in the private sector.”

The Institute for Fiscal Studies estimates that keeping investment at current levels as a share of GDP would cost £24bn a year of additional spending by 2028-29. To avoid real-terms cuts over the same period would mean a top up of about £18bn by that year.

Merseyside is currently the place to be for big Labour announcements. The chancellor’s comments come after she used her conference speech in Liverpool last week to suggest she could relax her fiscal rules to engineer an investment boom.

There are more details on her options for doing so here:

Reeves warns of risk of inflation shock from Middle East crisis

Rachel Reeves has said Britain’s economy faces heightened risks of an inflation shock from a spiralling conflict in the Middle East.

Speaking to journalists ahead of a trip to the Liverpool city region today to announce a multibillion pound investment in carbon capture and storage, the chancellor said the Treasury was closely monitoring developments amid escalating tensions between Israel and Iran.

Reeves referred to the Guardian’s exclusive interview with the Bank of England governor, Andrew Bailey, on Thursday, where he warned of “very serious” risks to the economy from the worsening conflict with potential to reignite inflationary pressures.

“I very much accept what the Bank of England governor said yesterday,” the chancellor said, adding:

“This is a very real risk to the UK and global economy

“There’s a risk both on inflation and on GDP. It’s something we’ll keep a close eye on, these things. So far the response has been quite minimal but obviously these are important things to keep an eye on.”

Reeves said that although oil prices had risen sharply in recent days (see earlier post) they remained significantly lower than the levels seen a year ago, while highlighting that equity markets had remained relatively calm despite the mounting fears over the Middle East conflict.

“I recognise that there are big risks, there, if this does become a full blown regional conflict,” she said. The chancellor warned the main dangers for inflation were currently coming from disruption in the Red Sea to global shipping, which was driving up the cost of freight shipments, where Houthi rebels, backed by Iran, have been attacking international freight.

She said:

“The biggest impact so far in terms of economics of what’s happening in the Middle East is on shipping costs.”.

Oil prices spiked on Thursday after President Joe Biden suggested his administration has been “discussing” possible Israeli plans to attack Iran’s oil industry in retaliation for the Iranian ballistic missile attack on Tuesday. The price of a barrel of oil shot up by about 5% to about $77. However, that remains below a peak this year of over $90 a barrel back in April.

Economists warn a spiralling conflict pushing up oil prices and freight costs could unpick progress to bring down inflation over the past year, which has enabled the world’s most powerful central banks to begin cutting interest rates. Bailey told the Guardian on Thursday that if the news on inflation remained good, the Bank could be in a position to be “a bit more aggressive” on cutting borrowing costs.

Oil on track for biggest weekly gain in over a year

The oil price is on track for its biggest monthly gains in over a year, as tensions in the Middle East have risen alarmingly.

Brent crude, the international benchmark, has climbed by 7.8% so far this week, to $77.60 per barrel, a gain of $5.60.

That would be its biggest percentage gain since February 2023, and largest dollar rise since October 2023.

Fears of potential supply disruption have lifted oil.

It jumped on Tuesday, when Iran launched its missile attack on Israel, and again yesterday when US president Joe Biden said the US was discussing with Israel the possibility of Israeli strikes on Iran’s oil infrastructure.

Brent crude is currently at a one-month high.

But, it’s still effectively flat for the year, and much lower than after Russia’s invasion of Ukraine in 2022 when oil jumped over $100/barrel.

Derren Nathan, head of equity research at Hargreaves Lansdown, says the potential for disruption to Iranian production has been the key driver of the oil price this week.

Nathan explains:

Despite US sanctions, Iranian exports have increased to 1.7mn barrels per day this year.

But to put that in context, OPEC+ nations have treble that amount in spare capacity, so unless other producing nations suffer disruption, they should be able to take up that slack. However, a more worrying scenario would be the closure of the Straight of Hormuz, a vital shipping channel between Iran and Oman which has recently carried as much as 15mn barrels per day of crude, leaving potential for a significant oil price shock if marine traffic is blocked.”

Introduction: A bad week for the pound

Good morning, and welcome to our rolling coverage of business, the financial markets, and the world economy.

After a bruising few days, the pound is on track for its worst week in over a year.

Sterling has lost around 1.7% against the US dollar so far this week, as it dropped by 2.2 cents since Monday to around $1.314 this morning. That puts the pound on track for its biggest weekly loss since July 2023 – any weaker, and we’ll be back to February 2023.

It has weakened as global investors have rushed into safe-haven assets, while economists are anticipating faster cuts to UK interest rates than previously expected.

As we covered yesterday, the pound hit a three-week low against the dollar on Thursday after Bank of England governor told The Guardian that the BoE could become “a bit more activist” and “a bit more aggressive“ in its approach to lowering rates, if inflation pressures keep weakening.

That put the skids under the pound:

Before Bailey’s comments, traders had expected the BoE to be more cautious than its US and eurozone counterparts.

Not any more! RBC Capital Markets, for example, now predict the Bank could cut rates by a quarter-point at its next five meetings, bringing rates down from 5% today to 3.75% by next May.

The money markets predict slightly less easing, though – they indicate rates could have fallen to 4% by next May.

The second factor hitting the pound is a surge of money into the US dollar, which is trading near a six-week high against a basket of currencies.

Investors have sought out the safety of the greenback as Middle East tensions have risen this week, with Iran launching a missile attack at Israel and the Israeli military striking parts of Beirut.

Hubert de Barochez, senior markets economist at Capital Economics, fears the pound could be heading for more weakness, telling clients:

The British pound fell sharply on Thursday, and we suspect that it will weaken more over the next year or so given our dovish view of Bank of England policy, the currency’s still-high valuation, and stretched speculative positioning.

Also coming up today

We’ll hear from Huw Pill, one of the more hawkish policymakers at the Bank of England, this morning.

Investors are bracing for the latest US jobs report today, the last-but-one non-farm payroll before the US presidential election. It’s expected to show around 140,000 jobs were created in America last month, very slightly lower than in August.

And in the UK, the government has pledged nearly £22bn to fund carbon capture and storage projects as it tries to hit climate targets.

The chancellor, prime minister and the energy secretary, Ed Miliband, will unveil the details on a visit to the Liverpool city region on Friday declaring a “new era” for clean energy jobs.

The plan means Rachel Reeves is paving the way for a multibillion-pound increase in public-sector investment at the budget…

The agenda

  • 8.30am BST: Eurozone construction PMI for September

  • 8.55am BST: Bank of England’s chief economist Huw Pill to speak at the Institute Chartered Accountants in England and Wales annual conference

  • 9am BST: UK new car registrations for September

  • 9am BST: UN food price index for September

  • 9.30am BST: UK construction PMI for September

  • 1.30pm BST: US non-farm payroll jobs report for September

Updated

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