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So it looks more and more likely that the US FED will raise interest rates at their 21 September meeting. Friday saw NFP numbers confirm that the US eco0nomy is indeed flourishing with 255k jobs created. This is exactly what the FED were hoping for and they got their wish.
As a result of the “perky” NFP numbers the USD rallied as did stocks. In fact, Asian equities climbed towards one year highs, while the FTSE climbed to the highs of 2016. Don’t be confused here with Brexit consequences. While Brexit WILL have an effect on the US economy the anticipated rate hike in the US is a global stocks shot in the arm. Despite Gov. Carney lowering UK rates, the US economy is really what everyone really cares about so a rate hike is a sign of a prosperous economy and that means stocks rally globally.
While things are looking good in the US, the UK’s labour market is not faring well. The UK report on jobs described somewhat of a freefall in the UK job market in July with permanent hiring falling to levels not seen since 2009. It is no wonder then the BoE cut rates and expanded its Asset Purchasing Facility to try boost the economy. It will take some time to see the true effects of Brexit once corporate earnings are published as well as the 3Q GDP that will then include Brexit. While the major banks located in the UK have not started to pull their people out just yet (it’s too soon) I am certain that with time they will see the advantages of locating within an EU member state and this will mean local employees will have to start moving east if they want to keep their jobs. Having said that, wages are higher in the UK than in mainland Europe so these same employees will likely have to take a wage cut if they want to keep their jobs. While I have not heard of this starting to happen just yet, talk has begun and banks will start to make their moves in the coming months.
China stills shows signs of weakness as July’s trade data was weaker than expected with imports falling markedly. Major commodity imports fells in both volume and value terms in July which shows just how fragile the economy remains. Cast your mind back, Pres. Yellen of the FED made it clear that a rate hike is both US data dependent AND global data dependent. So while I note above the strong US NFP data on Friday boosted the chances of a rate hike in September, the FED futures currently stands at a 30% chance of that happening. While the US economy can withstand a rate hike, the FED need to be sure that the hike does not tip the global economy into a recession. There has been lots of talk in the UK of that happening as manufacturing PMI and wage growth already showing signs of clear weakness post Brexit. The way to stop this is call another referendum and see what happens given people now have the full picture and aware of the lies the LEAVE camp used to convince people how to vote. I certainly hope PM May does just that and calls for another referendum early next year.
In the meantime I am afraid to say the GBP continues to teeter on the edge trading on the low 1.30’s vs the USD and breaking 1.1765 (0.8500) vs the EUR. In layman’s terms things are looking pretty grim. I just cannot see how things are going to improve especially with talk the BoE might have to cut UK rates again to 0.00. Prepare for negative interest rates.
Have a good day
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