Market snapshot: rate outlook no clearer after new data

The latest jobs report put the cat among the pigeons with a reading that not only exceeded expectations but also threw into the question the weaker recent economic data which had propelled hopes of an imminent interest rate cut.

A volatile trading session ensued after non-farm payrolls increased by 272,000, against estimates of 185,000 and a gain of 175,000 the previous month.

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Although unemployment ticked fractionally higher to 4% as compared to an expected unchanged level of 3.9%, average hourly wages also increased, showing resilience in the labour market which goes some way in contradicting other data from last week that showed signs of weakening in job openings and manufacturing.

The news is clearly positive for the US economy, suggesting that it remains in growth mode despite higher rates, but plays against the market narrative which had initially been expecting several rate cuts this year, whereby the consensus has now dropped nearer to one.

The timing of any cut is also under question, with the possibility of a move in September now dwindling. Any change to interest rates at the Federal Reserve meeting on Wednesday would be a major shock, with scrutiny likely to focus instead on the current thinking around the “dot plot” and immediate prospects.

Adding to the potential confusion is the release of further inflation data, which forms part of the Fed’s dual mandate alongside employment and for which a softer reading could further cloud the picture.

Despite a mildly weaker end to the session, the main indices finished the week in positive territory, adding to their gains in the year to date. The Dow Jones is ahead by 2.9%, the S&P 500 by 12% and the Nasdaq by 14.1%, in a year which has so far seen a resilient showing from the economy which should be positive for company earnings, although the concentration of the rally among mega-cap technology stocks remains a thorny issue.

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Asian markets had limited ability to react to the news from Wall Street given public holidays in the likes of Shanghai, Hong Kong and Australia.

In Japan, the Nikkei was marginally higher following data which showed an annualised contraction of 1.8% to the economy compared to the previous quarter, which underlined the negative impact which recent yen weakness has had on the economy. Even so, the reading was better than the previous release, although investor sentiment could be reined in ahead of the Bank of Japan’s monetary policy announcement this Friday.

Domestic issues will also be in focus this week in the UK, with unemployment and GDP readings due. Having recently exited from a brief and shallow recession, unemployment is expected to remain steady at its current level of 4.3%, although wage growth will be in particular focus. Any unexpected strength in this area of the release could undermine the possibility of a rate cut from the Bank of England in August, which the market has currently pencilled in.

Nonetheless, the UK economy has confounded some of its doubters with a relatively resilient showing this year, and at present the uncertainty caused by an impending election is causing few ripples. The FTSE 250 has clawed back earlier losses to stand ahead by 4% so far this year, with some additional momentum coming from a seemingly improving attitude towards the UK in investment terms, with its previous pariah status now in question.

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A combination of the unexpected news from overseas and a lack of buying appetite led to a weaker opening for the premier index, with a broad markdown of stocks in cyclical and defensive sectors alike.

A rare riser in early trade was Ashtead Group (LSE:AHT), reportedly considering a transfer of its listing to the US in what would be another snub for the UK market despite the more recently improving signs in sentiment. Indeed, despite the tepid opening the FTSE 100 remains up by 6% in the year to date, albeit having moved slightly away from the record levels of last month.