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Week ahead: US non-farm payrolls, RBA and RBNZ

2 Oct 2022 12:48 PM

Sterling dominated the headlines last week, as there were concerns the UK government might struggle to service its debt. Liz Truss is the new British Prime Minister, and she plans to ramp up government borrowing, firstly to fund the energy support scheme, and secondly fund the huge wave of tax cuts. Sterling tanked as currency traders started to lose confidence in the British economy. GBP/USD tumbled to a record low, and sterling dropped to a multi-year lows against the Swiss franc and the Australian dollar. There was such a major fall in long dated UK government bonds, the Bank of England had to snap of the gilts in a bid support the market as there were worries UK-based pension groups could collapse. The fact the BoE intervened in the market sent out a message the institution is nervous, and as a result, sterling declined. The US dollar also saw a lot of volatility as it set a new 20-year high at the start of the week but sold off after James Bullard, Fed member warned that trouble is ahead. Mr Bullard said there is a higher risk of a recession and that interest rates will probably remain higher for longer, which would be the worst of both worlds. Typically, central banks lower rates when economies are cooling, but we are in a unique scenario where inflation is rising, and growth is dropping. Bullard’s comments were not a total surprise, but they still managed ramp up selling pressure on the greenback.

On Friday, the US non-farm payrolls repot will be posted, and the event is likely to inject volatility into the markets. The most recent update was well received as it showed that 315,000 jobs were added in August, easily topping the 295,000 that economists had predicted but it was a big drop off from the 526,000 seen in the July update. In fact, the 315,000 reading was the lowest in eight months, so it seems as if the momentum in the jobs market is running out of steam. Touching on that topic, the unemployment rate edged up to 3.7% from 3.5% - which was its lowest mark in two years. In the grand scheme of things, the labour market is strong. After all, the Federal Reserve operated a very loose monetary policy for well over two years, and that played a major role in improving the jobs market, but as a consequence of the quantitative easing and slashing interest rates to almost zero, inflation surged to its highest level in 40 years. In a bid to tackle the jump in inflation, the Fed carried out five interest rate hikes in six months. In that time frame, rates have been lifted by 2.75%. Rate hikes take months to trickle down to the economy, and so that means the increased cost of borrowing will be felt in the wider economy in the months ahead, which could play a role in bringing down inflation.

On Tuesday, the Reserve Bank of Australia, will announce its interest rate hike. In September, the bank hiked rates by 50-basis points, and it was the fifth rate increase of this year. Philip Lowe, the head of the RBA announced that two more rate hikes are on the agenda as the bank is determined to bring down inflation. The previous three lifts were increases of 0.5% so in a way that bar has been set in what traders can expect. Traders will be wondering will the RBA keep up the momentum of tightening policy. The Reserve Bank of New Zealand will reveal its interest rate decision on Wednesday.  In August, the RBNZ, raised rates by 0.5% and the bank declared it needs to keep tightening policy at pace.

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