Investment Insights

US Jobs Report Derails Markets

  • Oct 12, 2022
  • Andrew Gillham

Markets attempted to stage a recovery at the beginning of last week but escalating geopolitical tensions and another strong US jobs report sent them back into reverse. The blue-chip S&P 500 and technology focussed Nasdaq indices fell 1.8% and 2.5% respectively, hitting new lows for 2022.

In a much less chaotic week than we have been accustomed to of late, the relative calm was disrupted by the release of the monthly US nonfarm payrolls report on Friday afternoon. It revealed the world’s largest economy added 263,000 jobs last month, slightly ahead of expectations, and the unemployment rate fell to 3.5%, the lowest level since the 1960s.

It might be counterintuitive, but we are at a stage where good news is bad news for markets. The fear is that positive economic data will encourage central banks to go harder at trying to tame inflation, which means higher interest rates. Markets are now pricing in a fourth consecutive 0.75% interest rate hike from the Federal Reserve on 2nd November.

Higher interest rates and government bond yields are a global phenomenon as central banks around the world strive to battle inflation whilst many governments are also borrowing more to subsidize energy bills. However, the chancellor’s mini-budget has clearly aggravated the situation in the UK and its government bond yields have risen more sharply than in other G7 economies.

In a bid to soothe markets, Kwasi Kwarteng will bring forward the publication of the government’s medium-term fiscal plan to 31st October and this time around it will be accompanied by new forecasts for the economy and public finances from the Office of Budget Responsibility. The Bank of England’s Monetary Policy Committee will meet a few days later and markets expect it to raise interest rates by at least a 1%.

The yield on 5-year UK government bonds (“Gilts”) has shot up by more than 1% to 4.5% since the mini-budget. This had a direct impact on the cost of borrowing to buy a property and the average 5-year fixed rate mortgage has risen to 6.2%, the highest since 2009. Banks have also pulled more than 40% of mortgage products in the last couple of weeks.

After many twists and turns, Elon Musk’s deal to buy Twitter is back on. In another dramatic U-turn last week, the world’s richest man sent a letter to Twitter offering to proceed with the deal at the initially agreed price of $54.20 per share, valuing the social media platform at $44 billion.

Musk had soured on the deal, citing concerns over the number of fake accounts on the platform, and moved to withdraw his bid, setting up an acrimonious legal battle. His change of heart came just 2 weeks before the two sides were set to go to trial. The judge overseeing the case has agreed to delay the trial and issued a deadline of 28th October by which time the deal must be finalised, or the trial will proceed next month.

Twitter shares jumped $10 higher to $52 on the news. The discount to the agreed price implies there is still a risk of another twist between now and the end of October.

The saga has also weighed on Tesla and its shares have fallen 23% in just over a week, wiping more than $200 million off its market value. The initial drop came after it reported deliveries of new cars fell short of expectations in the third quarter but its share price continued to slide last week on concerns Musk will need to sell more shares to fund his Twitter acquisition.

Energy markets bucked the trend and rallied strongly after members of Opec+ agreed to the biggest cut to oil production since the start of the pandemic at a meeting in Vienna on Wednesday. Brent crude rose 8% to $96 a barrel.

The cartel, led by Saudi Arabia and Russia, will aim to reduce output by 2 million barrels a day from November, equivalent to around 2% of global demand, in a bid to stabilise prices which had fallen to their lowest level since before Russia’s invasion of Ukraine.

The once close relationship between Saudi Arabia and the US has become strained since President Biden took office and the move drew strong criticism from the White House which accused Opec of aligning itself with Russia. The Biden administration is expected to counter some of the output cut by releasing millions of barrels from the Department of Energy’s Strategic Petroleum Reserve.

(Cover Image Source: Patrick Tomasso)

TEAM Asset Management is a trading name of Theta Enhanced Asset Management Limited which is regulated by the Jersey Financial Services Commission.