Further 75 basis points hike 'almost a done deal' as US labour figures beat expectations

More than double predictions

James Baxter-Derrington
clock • 2 min read
“Rates are going above 4% - today's number should put to bed any doubters.” - Seema Shah, chief strategist at Principal Global Investors
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“Rates are going above 4% - today's number should put to bed any doubters.” - Seema Shah, chief strategist at Principal Global Investors

Investors should be prepared to see further tightening from the Federal Reserve as the strength of US employment data takes economists by surprise.

The US jobs market added 528,000 jobs in July, pushing the unemployment rate down slightly to 3.5%, but economists had predicted jobs growth would slow to 250,000.

As such, investors should be prepared for a 75 basis points hike from the Fed come September, according to chief strategist at Principal Global Investors Seema Shah, who said such a rise was "almost a done deal".

US economy enters technical recession

"Not only is the labour market undoubtedly still tight, but wage growth is uncomfortably strong," she explained. "The Fed has its work cut out for it to create sufficient slack that could ease price pressures.

"All the jobs lost during the pandemic have now been regained. But while that is positive news, markets will take today's number as a timely reminder that there is significantly more Fed hiking still to come.

"Rates are going above 4% and today's number should put to bed any doubters."

Hinesh Patel, portfolio manager at Quilter Investors, agreed the report revealed a "red hot" labour market, but pointed to the recent disappointing earnings season as evidence there are difficult times on the horizon.

"Walmart's results, a good indicator of consumer confidence and the state of the US economy, began to sound the alarm bells," he said.

"The US is a robust market though, and much of the negativity however is being driven by statistical quirks and the scourge of inflation. The future direction of the Federal Reserve, as we have seen all this year, will ultimately depend on the path of inflation."

Fed makes further 75 basis points hike in bid to tame inflation

These figures seem to back the National Bureau of Economic Research's assertion the US is not in a recession, as Rupert Thompson, investment strategist at Kingswood argued.

"These numbers make it all the more unlikely that the US has entered a recession, as the consecutive falls in GDP seen in both the first and second quarters would normally suggest," he said.

Richard Flynn however, argued that the two consecutive quarters of negative growth is a "negative indication of the near-term outlook" and warned investors to keep an eye on any downward revisions, payroll contractions or expansions in unemployment.

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