As most of you will know, the Bank of England (BoE) cut interest rates last week from 5.25% to 5.0%, a small but significant change. This was the first rate cut since the 2020 pandemic, when rates fell to a historic low of just 0.1%
Since the end of 2021, interest rates around the globe have increased sharply in response to a significant spike in inflation, largely caused by rising energy prices and the unwinding of restrictions following COVID. As the rate of inflation eventually began to fall, central banks were expected to be able to take the brakes off, and interest rates would start coming down. At the beginning of the year, the first rate reductions were priced into global stock markets as expected in the Spring; however, stickier-than-anticipated inflation in the US has meant that we have all had to wait longer than we had hoped.
Deciding when to reduce interest rates is a difficult balance for central banks to achieve. Cut too soon, and inflation simply rears its head again as more money floods into the economy; cut too late, and unemployment can rise sharply, driving the economy into recession. Cooling inflation while keeping unemployment at historically low levels has been the ideal scenario, or what economists like to call a “soft landing.”
The BoE cut rates last week, but the US Federal Reserve (the US central bank) did not. Following the Fed’s decision not to cut rates US economic indicators have moved sharply in the wrong direction, suggesting that the US could be headed for a recession, something the Fed will have desperately been trying to avoid.
The result of the worsening numbers in the US has been a global stock sell-off, and everyone is now asking, ‘Should the Fed have cut rates this month after all?’
The following is taken from Portfolio Adviser magazine on Friday of last week.
‘Hiring in the US slowed sharply last month and the unemployment rate rose, stoking fears about the state of the world's largest economy.
Employers added 114,000 jobs in July, official figures showed, fewer than expected and far lower than in June.
Global stock markets are already on edge after earlier US data showed weaker manufacturing activity, and major companies such as Intel and Amazon published a string of disappointing financials.
The employment figures suggest the long-running jobs boom in the US might be coming to an end, as the highest borrowing costs in two decades weigh on the economy.
The three major share indexes in the US, which were hitting new records just a few weeks ago, have been on a downward slide in recent days. It has sparked fears which have also spread to international markets.
In Asia and Europe, most major indexes were down on Friday, with Japan's Nikkei 225 index tumbling, to close nearly 6% lower.
Neil Birrell, chief investment officer at Premier Miton Investors, said the US jobs data, which showed the unemployment rate rising to 4.3% from 4.1% in June, "couldn’t have been released at a more sensitive time".
"Markets are wobbling, concerns over Fed policy abound and corporate earnings are in the spotlight," he said. "The weak data will cause more angst, and concerns over the health of the economy will increase."
The Federal Reserve, unlike other central banks including the Bank of England, has held off cutting interest rates in recent months, pointing to relatively strong growth, as a healthy job market helps prop up consumer spending.
But the head of the bank, Jerome Powell, said this week that the labour market had cooled significantly over the last 12 months. Friday's report showed the unemployment rate rising to 4.3%, compared with 3.5% a year ago.
Mr Powell signalled it was likely to cut rates at its next meeting in September, warning he did not want to see further weakening in the labour market.
But Seema Shah, chief global strategist at Principal Asset Management, said the latest figures raised questions about whether the Fed had waited too long. "Job gains have dropped below the 150,000 threshold that would be considered consistent with a solid economy," she said.
"A September rate cut is in the bag and the Fed will be hoping that they haven’t, once again, been too slow to act."
The most important thing to remember is that these market falls will be temporary, normal service will be resumed, and new highs will be tested.
I hope you found the above interesting. As always, if you have any questions about this piece or any other finance-related matter, please do not hesitate to contact me.
Yours sincerely,
