US jobs report and BoE rate cut

 
There have been wide-ranging concerns about the US economy, given the Federal Reserve’s go-slow approach with regards to raising interest rates. Other positives to take out of the latest jobs report include increases in the average number of hours worked, as well as a slight improvement in the growth of wages.
The positive to take out of this data – contrary to conflicting reports – is that the prospect of a recession in the US economy has been pushed back to a later date. The numbers make for good reading for the Federal Open Market Committee (FOMC), which will take a long and hard look at the data and determine that the US economy is in better shape than they had given it credit for. It is important to take a look at the NFP numbers and break it down according to sector, industry, growths and declines.
The main areas of growth for the US economy were financial activities, business services, professional services and healthcare. As expected, employment prospects in the mining sector continued on a downward trajectory.
– Professional services and business services +70,000 (this component has added 550,000 jobs since July 2015).
– Healthcare +43,000 (90,000 new jobs in regulatory healthcare services, 17,000 new jobs in hospitals, and 7,000 new jobs in residential care facilities and nursing care facilities.) In all, healthcare has added 477,000 new jobs since July 2015.
– Mining continued on its bearish trend with a decline of 6,000 jobs. Mining numbers topped out in 2014 September and since then the industry has contracted by 26% (-220,000 jobs).
– Leisure and hospitality +45,000, made up of +21,000 in food services and drinking places. For 2016, the average increase in in this sector was 18,000. In 2015, leisure and hospitality averaged 30,000.
– Government jobs increased by 38,000.
For the most part, there was little change in wholesale trade, construction, retail trade and manufacturing in July.

Interesting Trends in Non-Farm Payrolls Growth Since August 2015

NFP growth since August 2015 has tended to look like a downward sloping Manhattan. Growth between August and September 2015 was non-existent with figures of 150,000 and 149,000, respectively. A big jump came in October when 295,000 new jobs were created, and this gradually declined through November (280,000), to December (271,000). By January 2016, jobs growth had trickled to just 168,000 new jobs, but the big spike in February was a welcome change at 233,000 new jobs. Since then, the recessionary fears have been biting at the US economy with March at 186,000, April at 144,000 and May at just 24,000. The huge June growth of 292,000 new jobs was a dramatic reversal for the US economy. And with expectations of just 180,000 forecast for July, the actual figure of 255,000 new jobs reaffirmed faith in the US economy.
Let’s take a look at the impact of NFP growth on Wall Street on Friday, August 5.
– The Dow Jones Industrial Average gained 1.04%, or 191.48 points, to close at 18,543.53;
– The S&P 500 Index gained 0.86%, or 18.62 points, to close at 2,182.87;
– The NASDAQ Composite Index gained 1.06%, or 54.87 points, to close at 5,221.12.

How Does this All Tie in with Fed Rate Hikes in 2016?

But this data does not necessarily mean that the Fed will move to hike interest rates in September. According to the latest CME FedWatch tool, the likelihood of interest rates increasing by 25 basis points on September 21 is just 15%, while 85% expect the interest rate to remain 0.25% – 0.50%. The stats are identical for November 2, while a Fed rate hike on December 14 is much more likely. According to the CME Group, the FedWatch tool indicates a 56.6% likelihood of interest rates remaining at the current 0.25-0.50%, a 38.4% likelihood of rising by 25 basis points to 0.50-0.75% and a 5% likelihood of rising beyond that to 0.75-1%. The Fed is running out of time if it wants to hike interest rates in 2016, since there are just three more meetings left in the year.
With diminished prospects for a rate hike, US government bond yields are increasing in the US and in Europe. The 2-year US Treasury yield rose by 8 points to 0.73% and the 10-year U.S. Treasury yield rose by 9 points or 1.59%. In Germany, the Bund was at -0.06%, an increase of 4 basis points on Friday, August 5, and 6 basis points higher for the week ending on Friday, August 5. As expected, gold decreased as news of a resurgent US economy spread. Gold dropped below its key $1,350 per ounce level by as much as $25, down $15 for the week. It is now trading at $1,335 per ounce. More importantly, the US dollar gained traction as news of a strong US economy brought the dollar bulls out to play. The US dollar index is now at 96.24 for a gain of 0.05% on the day. The USD/GBP gained 0.3147% and is now 0.765, while the USD/EUR gained 0.4007% and is now at 0.902, inching towards parity.

What About the Bank of England’s Decision to Slash Rates by 0.25%?

We can no longer ignore the effects of decisions taken across the Atlantic when it comes to the US or the UK economies. The Bank of England made good on its promise to take all necessary measures to safeguard and grow the UK economy in the wake of the Brexit referendum. Mark Carney, Governor of the BoE and the Monetary Policy Committee (MPC) took an unprecedented stand on Super Thursday. The MPC voted unanimously (nine out of nine members) to cut interest rates by 25 basis points to their lowest level on record at just 0.25%. The bank rate has been slashed in order to accommodate strong growth by facilitating low-cost credit to homeowners, investors, and those seeking short-term and long-term credit.
The volatility generated by the Brexit decision has been a major factor in preventing the Fed from raising rates. Now that the Bank of England has acted, the Fed may take its cue and move in the opposite direction.
The BoE is seeking to flood the UK economy with monetary stimulus by injecting an additional GBP 60 bln in asset repurchases to add to the GBP 375 bln that was already taking place. Additionally, there is GBP 10 bln in corporate bond purchases that will be coming into effect. These measures will accelerate the velocity flow of money and they are designed to increase the inflation rate which is seen as a prerequisite for growth.
The GBP/USD currency pair has been weakened by the dual effect of strong US economic data and a glut of GBP in the currency markets. If we examine the overall impact of UK and US projections, it is clear that conditions on opposite sides of the Atlantic are vastly different. The USD is likely to strengthen as investors piling to equities markets, gold will likely weaken and the Fed will move to hike rates. In the UK, the GBP will consolidate at a lower level, inflation will rise and economic activity will increase.
As for Brexit woes, that data will only be available later in August, September and beyond.

Note that this column does not constitute financial advice.