Markets price out “jumbo” 50 basis point rate cut after jobs report comes in hot

It’s a tough gig being a forex trader. One minute the Bank of England is looking decidedly hawkish, on a relative basis, and is touting its gradualist approach to cutting and the Fed is wading into jumbo rate cuts. Next up, the “soft landing” narrative returns, the Fed is seen being more careful and the governor of the BoE says they will get more aggressive with cuts — and cable has its worst week for about a year.

A hot jobs report on Friday seems to have put paid to any chance the Fed would do back-to-back jumbo rate cuts to bed. Markets have entirely priced out 50 basis points (bps) of cuts at the November meeting. And whilst we have had a couple of months of growth scares that spooked stocks, the data seemed to suggest the US economy is doing just about ok. The Dow rallied to a record high and the S&P 500 added 0.9% on the day. Nonfarm payrolls grew by 254,000 in September, well ahead of the 150,000 expected, whilst we also had some chunky upward revisions to July and August. Wages firmed up to 4.0% from 3.9% annual growth. But the market reaction seems mainly about the jobless rate.

US unemployment falls to 4.1%

Unemployment fell to 4.1% — it was the triggering in August of the so-called Sahm Rule — when unemployment increases half a percentage point from the previous 12-month low, a reliable recession indicator, which triggered the big selloff in equities. Unemployment coming back down below that level is seen as very much a ‘good thing’.

Something we have touched on before is that all the new jobs have gone to immigrants. This is good for GDP and growth — and suggests a Trump win in November could be negative for headline growth rates.

Meanwhile, a new report from the bipartisan Committee for a Responsible Federal Budget says Trump would raise the US debt by twice as much as Harris. Vice-president Harris’s plan would increase the debt by $3.50 trillion through 2035, while Trump’s plan would increase the debt by $7.50 trillion, said the CRFB. Trump threatened to put a tariff of 200% on vehicles imported from Mexico.  

Oil prices see best week in close to two years on Middle East concerns

Crude oil prices enjoyed their best week since January 2023 and it still looking pretty solid with the potential for ever-widening war in the Middle East keeping traders on their toes. Shell shares trade a bit higher this morning with the oil major delivering its trading update ahead of Q3 results at the end of the month. Although refining margins dropped by around a third to $5.5 a barrel from $7.7 a barrel in the previous period, increased volume guidance in its upstream and gas divisions helped bolster sentiment. Last week Exxon got out of the traps early to say lower oil prices would hit third-quarter earnings. Energy stocks still ended up 7% for the week as crude jumped.

We looked at commodities including oil in this week’s edition of the Overleveraged podcast (caveat emptor: this was recorded before the Iranian attack on Israel).  

Europe off to lacklustre start as Hang Seng trades at best since March ‘22, Nikkei up 2% on weak yen

European stocks got off to a more lacklustre start on Monday morning. Geopolitics is a factor here — but when is it not? Asian equities were broadly higher, taking on the positive US vibe as Chinese equities continued their ascent. 

The Hang Seng index rose above 23,000 to trade at its best since March ‘22. The Nikkei also rallied over 2% as the yen touched its August low against the dollar. Japan's top currency diplomat said they “will monitor currency market moves including speculative trading with a sense of urgency”. 

The US dollar has caught bid across the board with the euro trading at its lowest in two months, sterling at a one-month low.

Meanwhile, sterling has bounced off its 200-day SMA support but remains vulnerable to further dollar strength even as BoE chief economist Huw Pill tried to repair some of the damage done by Governor Andrew Bailey’s ham-fisted comments about more aggressive easing.