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US job data pour cold water on Fed
rate move
By Tony Tassell
Published: August 5 2006 03:00 | Last updated: August 5 2006 03:00
Weaker-than-expected US employment data yesterday lifted market
expectations that the US Federal Reserve might next week call a halt
to the current cycle of rising interest rates.
That prospect initially lifted equities after a quiet week but US
markets turned lower after attention shifted to weakening economic
growth.
Bonds rallied after the closely-watched July non-farm payrolls data
but the dollar came under pressure.
US employers added a fewer-than-expected 113,000 people to
payrolls last month, well below theconsensus forecast of 144,000 and
growth of 124,000 seen in June.
Further evidence of a slowing US economy was provided by news of
an unexpected 0.2 per cent increase in the unemployment rate to 4.8
per cent.
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The data were widely seen as providing the Fed with ammunition to
leave its benchmark Fed funds rate at 5.25 per cent when its
monetary policy committee meets on Tuesday.
Before the data, futures contracts indicated investors had priced in
about a 40 per cent probability of a quarter-point rate rise. Afterwards,
this dropped to about 20 per cent, indicating expectations that the
Fed will almostcertainly pause.
The payrolls data effectively reversed a move on Thursday after the
Bank of England announced a shock quarter-point rise in its
benchmark interest to 4.75 per cent, just 12 months after cutting it.
Along with rate rises by central banks in Australia and South Africa,
the move has added to worries ofglobal monetary policy tightening.
Tony Crescenzi, chief bond market strategist at Miller Tabak, said:
"The employment report seals the deal on a pause in the Fed's
interest rate hikes and a continuation of the trend would spell the end
of hikes for the current cycle.
"The current pace of economic growth is desirable given that it is
what is necessary to wring the economy of inflation pressures."
Capital Economics argued that the Fed would raise rates, although it
said this was a minority view.
"Understandably, the markets have been swayed by the incoming
data over the past month that has showed economic growth stalling.
But . . . when it comes to the crunch, we think the Fed will give
precedence to the higher inflation data," its economists said.
US Treasuries rallied after the data. Benchmark 10-year yields were
down 6 basis points at 4.903 per cent, having started the week at
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4.991 per cent. The dollar slid 0.7 per cent to a two-month low of
$1.2891 to the euro, making a 1 per cent weekly fall.
At the close on Wall Street, the S&P 500 was up 0.1 per cent for the
week, a loss for the day of 0.1 per cent. The Nasdaq Composite had
a weekly loss of 0.4 per cent, and was down 0.4 per cent on the day.
The Dow Jones Industrial Average rose 0.2 per cent for the week, but
was flat on the day.
Thomson Financial said 400, or 80 per cent, of the S&P 500
companies had now reported second-quarter earnings.
Of these, 71 per cent had beaten expectations and the blended
earnings rate for the second-quarter - forecastfigures plus reported
numbers - had now risen to16 per cent. The growth rate of
companies that had reported had jumped to17.4 per cent.
David Dropsey, analyst at Thomson Financial, said while there had
been a few high-profile earnings disappointments, most companies
were "blowing out their numbers".
In Europe, the FTSE Eurofirst 300 rose 1.18 per cent to 1,345.46,
leaving the index flat over the week.
In the UK, the FTSE 100 gained 0.9 per cent, to pare losses over the
week to1.4 per cent in the wake of the shock BoE rate rise.
The rate rise helped sterling rally 2.5 per cent to $1.9094 during the
week, a 15-month high. The 10-year gilt yield also rose from 4.598 to
4.698 per cent over the week.
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In Asia, share markets mostly made gains although more modest
than the surges seen in the preceding week. The Nikkei 225 Average
rose 1.02 per cent over the week in Japan.
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