The Federal Reserve (Fed) lowered borrowing costs by half a percentage point earlier this month, officially kicking off its first rate-cutting cycle since the pandemic.
The reduction signals that the Fed is serious about preventing further weakening in the job market. However, this stance comes at a time when US economic surprises have been improving strongly in recent weeks. Despite the latest employment report showing the US economy added a less-than-expected 142,000 jobs in August, and downward revisions to June and July’s figures, the recent surge in positive economic surprises offers a still not-so-pessimistic outlook for the economy at large.
Now, both the Fed and investors will get more insight into the health of the job market later this week, when the US Labor Department releases its key monthly employment report on Friday. Forecasters believe that September was a slightly better month they’re expecting the report to show that 150,000 jobs were added while the unemployment rate stayed flat at 4.2%.
A jobs number below that or an uptick in the unemployment rate would vindicate the Fed’s decision to start its easing cycle with a jumbo-sized rate cut. The central bank, after all, was widely criticised for hiking rates too slowly when the economy faced its worst bout of inflation in 40 years.
And now, if it doesn’t respond swiftly to the faltering job market, it could risk a further rise in the unemployment rate – and that could lead to a pullback in consumer spending, increasing the likelihood of a recession.
That said, even if Friday’s figures are better than expected, that doesn’t necessarily mean the Fed made a mistake by opting for a bumper half-point cut. Inflation in the US is currently hovering at 2.5% – not too far off the central bank’s 2% target. That, combined with a job market that’s starting to look rough around the edges, suggests that economy-choking high interest rates are far from necessary. And let’s not lose sight of the bigger picture even after the latest cut, the Fed’s benchmark interest rate, at a range of 4.75% to 5%, is at its highest level since 2007.
On The Calendar
- Monday Japan industrial production and retail sales (August), China PMIs (September), UK M4 money supply (August), Italy inflation (September).
- Tuesday Japan unemployment rate (August), eurozone inflation (September), US job openings and labor turnover survey (August). Earnings Nike.
- Wednesday Eurozone unemployment rate (August), Italy unemployment rate (August).
- Thursday US factory orders (August). Earnings Constellation Brands.
- Friday US labor market report (September).
What you might’ve missed last week
US
- Consultancy firm Bain predicted that the global AI market could be worth $1 trillion by 2027.
- US consumer confidence unexpectedly fell by the most in three years.
Europe
- Business activity in the eurozone shrank, surprising analysts who’d expected a modest expansion.
Asia
- China unveiled a broad package of stimulus measures to boost the ailing property market and wider economy.
Italy
- The government is currently in talks with domestic banks to secure additional contributions aimed at boosting state finances.
- UniCredit raised its stake in German lender Commerzbank to 21% from 9%.
- The Italian government has proposed a €1.6 billion investment in new aerobatic aircraft from Leonardo.
- Revised data from 2021-2023 revealed weaker 2023 economic growth for Italy but improved budget deficit and public debt ratios, driven by adjustments to 2022 figures.
Why it matters
The global AI market is booming, with tech firms rushing to build data centres to train and run AI models while software-as-a-service providers increasingly integrate the super-smart technology into their products. That push to innovate means the market for AI-related services and hardware hit $185 billion last year. And it seems that’s just a start consultancy firm Bain released a report last week that predicted the market will expand by an average of 40% to 55% every year until 2027, to potentially hit a total value of $1 trillion.
A survey last week showed US consumer confidence unexpectedly fell in September by the most in three years. Americans are growing increasingly concerned about the labour market, with many of them citing fewer hours, slower raises, and less job openings. Case in point a closely watched metric tracking the difference between folks who say jobs are plentiful and those who say jobs are hard to find fell for the eighth straight month – the longest streak since the Great Recession of 2008-09. Despite this, many consumers still see a low chance of recession, though some believe the economy is already in a downturn.
The eurozone’s latest Purchasing Managers’ Index (PMI) showed business activity in the region shrank in September. Analysts had predicted a modest fall from August’s 51 to 50.5. But the bloc’s PMI actually sank to 48.9, dipping below the 50 mark that separates growth from contraction for the first time since February. The decline was led by the eurozone’s two biggest economies, Germany and France, both of which saw business activity drop off by far more than expected.
China’s struggling economy was in the spotlight this week, too. The country’s authorities unveiled a broad package of stimulus measures designed to reinvigorate the world’s second-biggest economy. The moves included a cut to a key short-term interest rate and a reduction in the amount of money that banks must hold in reserve, a bid to encourage them to hand out more loans. Measures were also announced to shore up the nation’s troubled property sector, including lowering borrowing costs on outstanding mortgages and easing the minimum down-payment ratio for second-home purchases. Finally, a $113 billion fund will be set up to help certain companies buy stocks and others afford share buybacks.
The UK economy is experiencing a period of both opportunity and challenge. Growth forecasts have been upgraded, with the OECD projecting a 1.1% expansion for 2024, positioning the UK as the second fastest growing G7 economy. Yet, inflation remains a key concern, and the Bank of England may deliver slower interest rate cuts than other central banks. That inflationary pressure, combined with public borrowing that exceeded forecasts, has pushed the government to consider tough spending decisions, potentially including tax hikes. That may have a knock-on effect on consumer confidence, which plunged to its lowest in two and a half years. Household spending is a critical driver of growth, so consumer caution could drag on economic momentum. Despite these challenges, some UK companies are pushing ahead with ambitious plans Drax aims to invest in biomass plants in the US, and real estate listings platform Rightmove rejected multiple takeover bids, signalling confidence in its standalone future prospects.
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