Global markets react to US job report

Market update

Equity markets ended last week moderately positive as solid momentum over the start of the week was tempered by a weaker than expected US jobs report on Friday. The US economy added 22,000 jobs in August, according to this data, which was far below market expectations of 75,000. Previous months were also revised downwards – notably June, which was revised to a decrease of 13,000 jobs. The unemployment rate also ticked up to 4.3% from 4.2% in the previous month. The initial reaction from US markets was positive, but this was quickly reversed as concerns over economic weakness won over optimism for Federal Reserve rate cuts. Markets in other regions reacted in a similar manner to the US jobs data as the path of US rates remains systemically important for global markets.

Rates fell across geographies and along the yield curve as investors consolidated expectations for a September rate cut by the Federal Reserve. After the jobs report, probabilities implied by futures pricing shifted towards a 90% probability of a 0.25% cut and 10% probability of a 0.50% cut, while the possibility of a hold was effectively ruled out. US 10-year yields fell by 16 basis points to 4.07%, UK yields fell by 7 basis points to 4.65% and German yields fell by 6 basis points to 2.66%.

Gold rose by 4% last week, as the expectation of lower interest rates is generally positive for low yielding assets like gold. Oil on the other hand fell by 3.4% to $64.21 per barrel.

Macro news

US

Weak business activity. In August, the US manufacturing PMI (a key economic indicator that tracks business activity) came in at 48.7 (expected: 49). This marked the sixth consecutive month that the index was below the 50 threshold, indicating an output contraction.

The US job market showed significant weakness in August, adding only 22,000 jobs compared to expectations of 75,000. Previous months were also revised downward, with June notably revised to a loss of 13,000 jobs. The unemployment rate rose slightly to 4.3% from 4.2%, signalling a softening labour market.

UK

Strong activity figures for services. While the service sector in the UK experienced strong growth (PMI at 54.2), the construction and manufacturing sectors showed a downturn (45.5 and 47, respectively).

Government long-term borrowing costs have increased to a 27-year high. On Wednesday, the interest rate demanded by investors on the state's long-dated borrowing (30-year bonds) rose to just below 5.75%, pushing it to a level not seen since May 1998.

House price growth has slowed. According to Nationwide data, house prices dipped by 0.1% month-on-month in August. The annual growth rate slowed from 2.4% to 2.1%. Recent increases in long-term interest rates have worsened household affordability metrics.