Nerves ease about inflationary pressures and oil hovers at lower levels

LAGOS (Capital Markets in Africa) – Another day, and another US jobs report has set the tone, but this time it’s relief rather than anxiety washing through. The FTSE 100 is treading water amid calmer sentiment in early trading, after tech stocks on Wall Street powered indices higher. Hopes are increasing that interest rates in the US might not have to stay at quite such high levels for quite so long. 

Investors are fixated on data indicating the strength of the American economy and what it will mean for monetary policy.  The ADP National Employment report showed that 89,000 jobs were created in the private sector in September, far below estimates.  If this pattern is reflected in the key non-farm payrolls report on Friday, it could mean cuts to interest rates might be brought a little closer on the horizon and the possibility of another hike will diminish fast. Fed policymakers want signs that the economy is cooling to keep a lid on bubbling inflation before easing restrictive policy. If Friday’s payroll numbers indicate employers are becoming a lot more cautious, there may well be another relief wave, but attention is then set to turn quickly to whether the US may suffer a harder landing after all.

Closely, watched US Treasury yields have also retreated from highs reached this week, as the market reassesses the potential path of interest rates. However, sharp falls in yields and renewed appetite for long-dated debt isn’t looking likely in the immediate future. Bond vigilantes appear to be hovering, demanding more bang for their buck to hold government debt as they cast critical eyes on high levels of US Federal spending, seeing the deficit rising further. UK government borrowing costs have fallen back very slightly but are still around levels not seen in 25 years, with 30-year gilt yields still just under 5%.

The price of oil has now stabilised after the biggest one day drop in more than a year. US motorists have not been guzzling gas as fast as usual with the spike in fuel prices taking hold pushing down demand. The strength of the dollar also makes purchases of foreign oil more expensive and can lower demand. Finished motor petrol supplied, an indicator of gasoline demand, fell last week to around 8 million barrels a day, the lowest since the start of the year according to the EIA. However, with OPEC+ members Saudi Arabia and Russia maintaining their production cuts and Riyadh stating determination to keep prices stabilised a sturdy floor is expected to be kept on prices. 

The volatile market conditions this week have claimed a casualty in the IPO of Renk, a German manufacturing components maker for the defence sector. Timing is everything for an IPO and the nervousness infiltrating investor sentiment has clearly led to fears that enthusiasm for a new listing will be low. Economic waters are getting choppier in the eurozone with the latest HCOB PMI numbers for the bloc indicating demand fell in September at a rapid click, the fastest pace in almost three years. With companies and consumers turning increasingly cautious amid high interest rates, and waves of uncertainty hitting markets, it’s little surprise Renk is delaying its floatation until turbulence subsides.

Susannah Streeter, head of money and markets, Hargreaves Lansdown