Soaring US jobs growth in October and falling unemployment have strengthened the case for the US Federal Reserve to start raising interest rates next month. The world’s largest economy added 271,000 jobs last month. This represents the biggest increase this year, smashing expectations for a 185,000 rise in US payrolls. The unemployment rate fell to a seven-and-a-half-year-low of 5 pc.
Interest Rates
US: Markets now believe there is a 75 pc chance the Fed will raise interest rates at its FOMC (Federal Open Markets Committee) meeting in December.
The benchmark US interest rate is the ‘Fed Funds ‘ rate which has a target band of 0-0.25 of 1%. Any rate rise would likely be modest at a further 0.25% increase. However, the move would be hugely symbolic as the first rise in US rates since the 2008 financial crisis.
UK: For the first time we are seeing a divergence in expectations between US and UK interest rate rises with Mark Carney, Governor of the Bank of England quoting “emerging market economies had slowed markedly” further holding back global growth, pushing UK rate rise expectations now to late 2016. UK Base Rates have been at 0.5% for six years.
Foreign Exchange
The US dollar surged versus other currencies, particularly against the Euro, on the prospect of higher rates reaching EUR /USD 1.0750, the weakest level for the single currency for six months.
Equities
Equities rebounded strongly from China slowdown inspired falls in the summer with the US S&P index up nearly 10% last month. Other markets similarly rebounded in October. Worth noting that the third quarter stock market performance was the worst for four years, and the October rally was the best in four years. November has seen global equity markets consolidate.However, worth noting that the US market is now not far from its all time high which is incredible given the woes of the summer.
European equities have been underpinned by Mario Draghi’s (President of European Central Bank) comments about the possibility of further stimulus measures. Currently the ECB is in the middle of a 1.1 trillion Quantitative Easing programme that sees the ECB purchase Euro 60 billion government and quasi-government bonds each month, effectively adding funds into the monetary system to stimulate growth.
Fixed Income
US government bonds prices fell sharply (therefore yields rising) on the prospect of higher interest rates with the 10 year US Treasury Bond rising from 2.10% yield to 2.32%, a significant move. The US bond market clearly influences other bond markets so yields also rose across Europe and the UK.
Commodities
With many commodities priced in US dollars, as the US currency rises then the price of that commodity must fall ‘all other things being equal’.
So oil and gold prices fell last week as the dollar rose. With over supply in the oil market, due to OPEC’s decision to refuse to cut production levels, so as to drive down the price of oil and force US shale gas producers out of the market, (US land-locked producers have higher costs than OPEC), there is a lot of attention on the ‘oil rig count’ in the US i.e. the number of oil rigs in production. There were only 572 rigs in production last month compared with 1,568 this time last year, highlighting the impact of low oil prices on US producers and indicating OPEC’s tactics may be working.
Gold also fell last week below the US$ 1,100 an ounce level as the dollar rose. Gold can also perform badly in an higher interest rate environment as it pays no interest. Most investors buy gold in times of uncertainty as the ultimate ‘safe haven’ investment, with the precious metal having been around 5000 years.
Equities
S&P 500: 2100
Nasdaq: 5150
FTSE 100: 6350
Bonds – 10 Year Government Yields
US 2.32%
EU 0.70%
GB 2.00%
Foreign Exchange
USD/EUR 1.0750 (1 euro buys 1.0750 dollars)
GBP/USD 1.5050 (1 pound buys 1.5050 dollars)
Commodities
OIL: Brent: 47.00 (dollars per barrel)
GOLD: 1090 (dollars per ounce)
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Paul McCormick
