Aurelia Butler

LONDON (Reuters) – Liz Truss, on course to become Britain’s prime minister on Monday, looks set to walk straight into a financial market firestorm that she will have to act fast to extinguish.The pound had its worst month against the dollar in August since shortly after the Brexit referendum in 2016 and fell against the euro too. Some British government bonds suffered their biggest price losses in decades.     Much of the market turmoil is due to a surging inflation rate which is the highest among Group of Seven economies. Goldman Sachs (NYSE:GS) says it could hit 22% if the impact of Russia’s invasion of Ukraine on gas prices does not fade. Many investors are also alarmed that tax cuts promised by Truss could aggravate Britain’s inflation problem, speeding up the Bank of England’s interest rate hikes and worsening a recession that the BoE expects to start this year and end only in 2024.As well as tax cuts, Truss has recently promised “robust” direct cost-of-living help for households which would put more strain on the budget deficit.Then there are her plans to rethink the way the BoE does its job and to be ready to risk a post-Brexit trade war with the European Union.”I think the UK and the gilt market are in a degree of danger,” Mike Riddell, a senior fixed income portfolio manager at Allianz (ETR:ALVG) Global Investors in London, said.He pointed to sharp falls in recent weeks in the prices of British government bonds, or gilts, and the value of sterling, a rare occurrence.Normally, the prospect of higher BoE interest rates would hurt demand for bonds while pushing up the pound but the currency is down 15% against the U.S. dollar so far this year.Until August, there had never been a month when sterling fell by as much as 4.5% against the dollar and 10-year gilt yields rose by more than 90 basis points, according to Refinitiv and Bank of England data going back to 1971 when sterling floated.”The breakdown in the relationship between gilt yields and sterling is indicative of overseas investors losing confidence in the UK, and that is what is really worrying,” Riddell said.SMASH THE ORTHODOXYOpinion polls have given Truss – currently Britain’s foreign minister – a big lead over Rishi Sunak, who quit as finance minister in July to contest the Conservative Party leadership race which ends on Monday with an announcement of the winner.As a former chief secretary to the Treasury, Truss says she knows how to shake up economic orthodoxy by cutting Britain’s tax burden which is heading for a 70-year high.Sunak has dismissed her tax cut plans as “fairy tales” which will fuel inflation.Asset management firm Pictet said this week it was underweight on gilts due to the risk of a big stimulus push which could force the BoE to accelerate its rate hikes.Julian Jessop, an economist who backs Truss and is close to her advisers, said the idea of borrowing more now to speed up future economic growth made sense.”In these circumstances, you need to be bold and flexible on fiscal policy and if that means that in the short term the budget deficit has to take strain, then so be it,” he said.Britain’s public finances are weighed down by the government’s huge coronavirus spending spree. Public debt as a share of economic output is not far off 100%, up from about 80% before pandemic.But Jessop, a fellow at the Institute for Economic Affairs think-tank, said Truss was probably looking at extra borrowing in the tens of billions of pounds, far less than during the COVID-19 pandemic, something financial markets could swallow.”Once she actually gets the keys to Number 10 (Downing Street) then she can start reassuring markets about what she actually intends to do,” he said.KINDNESS OF STRANGERSFor some investors, that kind of clarification cannot come a moment too soon, with Riddell noting that a planned sale of a big slug of 30-year gilts in mid-September will be a test for Britain’s debt office.Oliver Blackbourn, U.K. portfolio manager at Janus Henderson Investors, said there were also political risks for Truss, who stands to become Britain’s fourth prime minister in six years.She trailed other candidates for much of the Conservative Party leadership race when it was in the hands of party lawmakers, climbing into second place at the last minute to contest the run-off, which is being decided by party members.”How easy is it going to be for her to control her party in the House of Commons when she wasn’t anywhere near the most popular choice among members of parliament?” Blackbourn said. “When you have hard decisions to make, you want to have a strong leader in place.”For Jessop, the Truss-supporting economist, the first item on her agenda if she is announced as prime minister on Monday should be a promise not to meddle with the BoE’s independence.Truss has said she wants to review the central bank’s mandate without compromising its independence but one of her supporters has questioned whether the BoE should have exclusive powers to set interest rates.”It’s very important that she hit the ground running with a clear statement of policy,” Jessop said. More

STOCKHOLM (Reuters) – With its robust welfare provisions and green energy mix, wealthy Sweden should be better placed than most countries in Europe to withstand the energy-driven cost of living crisis battering the continent. But consumer worries over soaring electricity bills, rising interest rates and stalling economic growth mean the campaign for the general election on Sept. 11 has turned into something of a bidding war between the centre-left and right-wing blocs over which can do more to ease the short-term pain. That could entail long-term costs for the economy.”There is a risk that there will be a compensation economy rather than a focus on long-term structural reform,” said Sven-Olov Daunfeldt, chief economist at the Confederation of Swedish Enterprise.Swedes are among Europe’s most well-off. The welfare system – though much less generous than it used to be – means poverty rates are well below the European average. But in recent decades, the gap between rich and poor has been growing, leaving many vulnerable to inflation that is currently at around 8%.Eva Lindman Marko, a 59-year-old educational psychologist, said she got a monthly electricity bill for over 19,000 Swedish crowns ($1,765) in January – two or three times what she pays in a normal winter.Prices could be even higher this coming season – not least because of problems at the Ringhals nuclear plant.Sweden’s electricity comes mainly from hydro-power, nuclear and wind, with only a tiny fraction from gas. But with prices set on international markets, it has not escaped the continent-wide effects of the war in Ukraine on energy prices.”A rise of over 100% feels brutal in itself. But the cost may be three or four times as high,” Lindman Marko said, adding that this winter she plans to lower the thermostat at home, wear thermal clothes and go to the sauna at a local swimming pool to warm up. “Clearly the more worried you are over, for example electricity prices, the more it will affect how you vote,” she said. Petrol and food prices have also soared. The cost of butter is up by around 25%, meat 24% and cheese around 22% this year, according to consumer price comparison site Matpriskollen.Stockholm’s Stadsmission, a non-profit organization, said it had seen its membership of its Matmissionen subsidized foodshops nearly double in the first half of the year.”It’s a broad group – maybe you are a pensioner, maybe you are unemployed or perhaps have not lived for a long time in Sweden,” said Johan Rindevall, who heads up the Matmissionen shops.”Forty percent of our new members this year have been families with children.”Matmissionen sells food donated by major chains to members with monthly incomes below 11,200 crowns at around 30% of the prices seen in high-street shops. PROMISES, PROMISESThe two major political blocs are rushing out promises to help consumers fight the effects of inflation.Prime Minister Magdalena Andersson’s Social Democrat government has promised up to 90 billion Swedish crowns ($8.36 billion) in subsidies to ease the pain of rising electricity bills for households and businesses, on top of billions in subsidies paid last winter.The Moderates, the leading centre-right opposition party, have promised income tax cuts and lower fuel prices, which they say would mean 24,000 crowns extra for working families each year.They intend to pay for measures by cutting back on overseas aid and benefits like unemployment and sickness insurance.As a longer term solution to the energy crisis, the centre-right plans loan guarantees of up to 400 billion crowns to support building new nuclear power stations. Like Germany, Sweden has been shutting reactors in recent years.The Left Party, loosely part of the centre-left bloc, wants to halt electricity exports.Opinion polls don’t give a clear answer as to which policy promises have caught voters’ eyes, but the ruling Social Democrats have at least avoided blame for the gloomy economic outlook.The two main blocs are running neck-and-neck though the Social Democrats are easily the largest party.TOUGH CHOICESWhoever wins may find it hard to live up to all their promises.The NIER, a government think-tank, reckons the next administration will have around 120 billion crowns to play with in terms of extra spending. A chunk of that is already earmarked for defence spending as Sweden raises its allocation to 2% of GDP from the current 1% to support its bid to join NATO, and for other measures like boosting healthcare and employing more police to deal with gang crime.At the same time, GDP growth is expected to slow to around 0.4% next year, according to a government forecast, and even grind to a halt completely if inflation worsens and rates rise more than currently expected.Increasing public debt would “add fuel to inflation and further raise interest rates and could also threaten public finances, threaten welfare and pensions,” Finance Minister Mikael Damberg warned last month.Diverting cash to support households will leave less for structural reforms needed to support the shift to a “green” economy, to rebuild the welfare state and to meet a skills shortage in the labour market.The Social Democrats’ plan to subsidize energy bills will be paid from a fund that is supposed to be used, in part, for expanding transmission capacity – one of the major causes of record domestic electricity prices in Sweden.Plans by the right to decrease the amount of biofuel in petrol and diesel, making them cheaper, will also make it harder to reach the country’s target of zero net emissions by 2045.It is also uncertain which policies will get approval from the next parliament, given that even within the centre-left and right blocs there is much disagreement about what to do and how to pay for it. “No responsible politician can say that they will compensate for every price rise,” Andersson said last month.($1 = 10.7646 Swedish crowns) More

NEW YORK (Reuters) – U.S. job growth rose slightly more than expected in August and the unemployment rate ticked higher, giving the Federal Reserve enough cushion to stay on its aggressive rate hike path as it tries to tame inflation. Nonfarm payrolls increased by 315,000, the Labor Department’s employment report showed on Friday. July was revised modestly lower to show payrolls rising by 526,000 instead of the previously reported 528,000. Economists polled by Reuters had forecast 300,000 jobs added last month. Employers increased wages at a slower pace last month. Average hourly earnings increased 0.3% in August after gaining 0.5% in July. That kept the year-on-year increase unchanged at 5.2%. MARKET REACTION:STOCKS: After being roughly flat before the report, S&P e-mini futures rose sharply, last up 0.6%BONDS: The yield on 10-year Treasury notes initially jumped before pulling back and was last up 0.2 basis points to 3.267%; The two-year U.S. Treasury yield, was down 4.8 basis points at 3.474%.FOREX: The dollar index weakened and was last down 0.265% at 109.280COMMENTS:BRIAN JACOBSEN, SENIOR INVESTMENT STRATEGIST, ALLSPRING GLOBAL INVESTMENTS, MENOMONEE FALLS, WISCONSIN”Neutral job gains would be close to 100,000 and we’re still printing numbers in excess of that. But things are cooling from very hot levels. It’s directionally a good report with the increase in the labor force participation rate, but it’s a long distance to the destination the Fed is steering towards. Labor numbers are not very timely and not very reliable, so they’re horrible indicators to use to steer an economy, but that’s the way the Fed wants to drive so we just have to buckle up and ride along.”PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK“We added just a bit more jobs than consensus but it was basically inline.” “Hourly wages – that was a good number, better than expected – and the participation rate moved up.” “The bottom line is even though job creation is still solid, the fact is unemployment is moving up and the participation rate is moving up. That’s a sign we that we’re going to see weaker reports ahead. Hourly wages have probably peaked.”“The markets are going to like this data. It’s not too hot nor too cold. This report indicates the Fed is going to raise interest rates by half a percentage point this month, the reason being is that wage inflation seems to have peaked.” “The jobs market is heading for a real cool-off period.”“There were no major surprises. The only real surprise was the unemployment rate.”DAVID PAGE, HEAD OF MACROECONOMIC RESEARCH, AXA INVESTMENT MANAGERS”The basic message is the labor market might be starting to cool and the Fed might not have to move so aggressively. That’s what markets are really worried about, so we are seeing some easing of that.””Some signs of a labor market that’s coming back towards something that’s sustainable, something that the Fed could live with. All of that suggests to us that the Fed will see some easing in the labor market, which is, of course, what they’re trying to achieve in terms of slowing activity, and that probably means they can afford to move by just 50 basis points in September.””We can see the Fed is at the beginning of the end in terms of tightening. Clearly huge developments in the labor market are fundamental here and the market is seemingly reacting to that. The drop in the two year yields, reflects some easing back of the more aggressive thoughts we’ve seen in recent weeks post Jackson Hole.”CHARLIE RIPLEY, SENIOR INVESTMENT STRATEGIST, ALLIANZ INVESTMENT MANAGEMENT, MINNEAPOLIS”Today’s jobs report is a market happy report. The headline number was slightly above estimates. Wages were largely in line. The big thing in this report was the participation rate going up.”    “More people participating in the labor market is a good sign. We’ve seen it pretty depressed since the pandemic.”    “Overall I don’t think it changes the hand for the Fed as it goes into the September meeting, 75 basis points is still on the table.’    “The more important report coming up is CPI and that’s really going to determine how aggressive they need to be going into the end of the year.”     “Stock futures are up and the curve is steepening a bit. It’s not enough to determine what the Fed’s going to do in September. It’s not a strong enough report to signal a more aggressive Fed at this point but it’s not weak enough for the Fed to let off the gas pedal.” (This story has been refiled to note jobless rate rose, not fell) (Compliled by the global Finance & Markets Breaking News team) More

WASHINGTON (Reuters) – U.S. employers hired slightly more workers than expected in August, keeping the Federal Reserve on track to deliver a third 75 basis points interest rate hike this month, though the unemployment rate increased to 3.7%.Nonfarm payrolls increased by 315,000 jobs last month, the Labor Department said in its closely watched employment report on Friday. Data for July was revised slightly down to show payrolls surging 526,000 instead of 528,000 as previously reported. That marked the 20th straight month of job growth.Economists polled by Reuters had forecast payrolls increasing 300,000. Estimates ranged from as low as 75,000 to as high as 450,000. The unemployment rate increased to 3.7% from a a pre-pandemic low of 3.5% in July.The employment report came a week after Fed Chair Jerome Powell warned Americans of a painful period of slow economic growth and possibly rising unemployment as the U.S. central bank aggressively tightens monetary policy to quell inflation. Solid job growth last month was further evidence that the economy continues to expand even as gross domestic product contracted in the first half of the year and was another sign the Fed still needs to cool the labor market despite the front loading of rate hikes.The Fed has twice raised its policy rate by three-quarters of a percentage point in June and July. Since March, it has lifted that rate from near zero to its current range of 2.25% to 2.50%. Financial markets are pricing a roughly 70% probability of a 75 basis points increase at the Fed’s Sept. 20-21 policy meeting, according to CME’s FedWatch Tool.August consumer price data due mid-month will also be a major factor in determining the size of the next rate increase. Despite rising recession risks, the labor market continues to chart its own path. There were 11.2 million job openings on the last day of July, with two job openings for every unemployed person. First-time applications for unemployment benefits are running very low by historical standards. Economists attributed the labor market resilience to businesses hoarding workers after experiencing difficulties in the past year as the COVID-19 pandemic forced some people out of the workforce in part because of prolonged illness caused by the disease. With legal immigration slowing, they say fewer workers are likely to become a permanent reality for employers.There is also pent-up demand for workers in service industries like restaurants and airlines, which are among the sectors hardest hit by the pandemic. The labor force participation rate, or the proportion of working-age Americans who have a job or are looking for one remains more than a full percentage point below its pre-pandemic level.Average hourly earnings rose 0.3% in August after increasing 0.5% in July. That kept the annual increase in wages at 5.2% in August. Strong wage gains are keeping the income side of the economic growth ledger expanding, though at a moderate pace, and a recession at bay for now. More

Wall Street stock futures rose on Friday after fresh data showed that the unemployment rate in the world’s largest economy unexpectedly ticked higher last month.Labour market figures released before the New York opening bell showed that US employers added 315,000 new jobs in August, down from 528,000 in July but higher than economists’ forecasts of 300,000. However, the unemployment rate stood at 3.7 per cent — higher than expectations of 3.5 per cent.Futures contracts tracking the broad S&P 500 gauge jumped 0.7 per cent in response, before trimming those gains to trade up 0.2 per cent. Contracts following the Nasdaq 100 — which is stacked with tech shares that are more sensitive to interest rate expectations — also popped initially, later trading up 0.3 per cent.Jobs data have been closely scrutinised in recent months for clues about how aggressively the US Federal Reserve will tighten monetary policy, with evidence of a hotter labour market fuelling expectations of larger and faster interest rate rises. Conversely, indications of cooling jobs activity have helped to reduce projections of how far the Fed will opt to jack up borrowing costs, as it strives to strike a balance between quelling rapid price growth and pushing the US economy even further into a protracted slowdown. European shares extended their gains after the jobs data release across the Atlantic, with the regional Stoxx 600 index adding 1.1 per cent by lunchtime in London — putting the brakes on five straight days of declines.Those moves came at the end of a gloomy week for global equities. Hawkish rhetoric from Federal Reserve chair Jay Powell at the Jackson Hole Economic Symposium last Friday set the tone for higher borrowing costs to come, stoking worries about rate-setters around the world inducing a deep recession in their efforts to curb inflation.The Fed lifted rates by 0.75 percentage points in July for the second time in a row, taking its target range to 2.25 to 2.50 per cent. Its next monetary policy meeting will take place in late September. Concerns about the health of the global economy had been exacerbated on Thursday by the introduction of a new lockdown in the Chinese megacity of Chengdu, as officials stuck to the country’s zero-Covid policy. Weak Chinese manufacturing data, released the same day, rounded out the darkening mood — signalling waning demand and, in turn, a wider slowdown.In government debt markets, the yield on the 10-year US Treasury note added 0.01 percentage points to 3.28 per cent. The policy-sensitive two-year yield lost 0.03 percentage points to 3.49 per cent, having this week touched its highest point in 15 years. Bond yields rise as their prices fall.The dollar slipped 0.2 per cent lower against a basket of six peers, but continued to hover around its highest level in two decades. The greenback has been elevated in recent months by its traditional status as a haven currency, and expectations of higher borrowing costs in the US while economic conditions worsen in the UK and Europe on the back of an escalating energy crisis. More