What does latest US job report mean for predicted interest rate cut?
July 5, 2019

Graham Bishop, Investment Director at Heartwood Investment Management, the asset management arm of Handelsbanken in the UK, shares his opinion.

The final set of labour market data ahead of July's US Federal Reserve (Fed) meeting has been released, demonstrating better-than-expected jobs growth, he writes.

The kneejerk reaction from markets was one of unease – investors have strongly expected an interest rate cut at the next Fed meeting, but this will only occur if the central bank truly believes it needs to support a faltering US economy, he adds.

"A rise in the number of jobs created could point to a better-than-expected economic backdrop. But are markets right to assume that the latest jobs report lowers the chances of Fed intervention?

"We know that the Fed watches employment data in particular (alongside inflation figures) when assessing its policy options. But while investor eyes are generally fixed on headline jobs growth, the devil can often be in the detail.

"Below this headline figure, the trend over recent months has been a deceleration in the growth rate of hours worked. Today's data reinforce this trend.

"Importantly, the gap between the growth in hours worked and overall earnings growth typically widens ahead of an economic soft patch. We have witnessed a widening of this data over recent months, further fanning the flames of expectations for interest rate cuts later in July.

"Given that a more accommodative Fed could extend the already record-breaking length of the current economic cycle, and notwithstanding the well-publicized wider risks facing the global economy (including geopolitical and trade tensions), recent mixed news in the US jobs market could create the trigger for better market sentiment in the near term," he concludes.





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Graham Bishop, Investment Director at Heartwood Investment Management, the asset management arm of Handelsbanken in the UK, shares his opinion.

The final set of labour market data ahead of July's US Federal Reserve (Fed) meeting has been released, demonstrating better-than-expected jobs growth, he writes.

The kneejerk reaction from markets was one of unease – investors have strongly expected an interest rate cut at the next Fed meeting, but this will only occur if the central bank truly believes it needs to support a faltering US economy, he adds.

"A rise in the number of jobs created could point to a better-than-expected economic backdrop. But are markets right to assume that the latest jobs report lowers the chances of Fed intervention?

"We know that the Fed watches employment data in particular (alongside inflation figures) when assessing its policy options. But while investor eyes are generally fixed on headline jobs growth, the devil can often be in the detail.

"Below this headline figure, the trend over recent months has been a deceleration in the growth rate of hours worked. Today's data reinforce this trend.

"Importantly, the gap between the growth in hours worked and overall earnings growth typically widens ahead of an economic soft patch. We have witnessed a widening of this data over recent months, further fanning the flames of expectations for interest rate cuts later in July.

"Given that a more accommodative Fed could extend the already record-breaking length of the current economic cycle, and notwithstanding the well-publicized wider risks facing the global economy (including geopolitical and trade tensions), recent mixed news in the US jobs market could create the trigger for better market sentiment in the near term," he concludes.



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