ALEX BRUMMER: Wall Street storm warning as US economy heads for slowdown
In the US, no economic data is watched as closely as the monthly employment figures.
There was therefore a lot of interest in the latest non-farm employment figures, which showed that employment growth over the past three months, which had previously been strong, is now at its lowest level since mid-2020.
While the unemployment rate has fallen to 4.2 percent of the labor force, there are growing concerns that the booming U.S. economy is heading for a slowdown or even recession.
It would be a mistake to put so much on one economic number. But the ripples can spread far and wide. In July, a surprise drop in the pace of job growth sent stock markets around the world into a tailspin. Now it’s happening again.
The weakening U.S. employment outlook will almost certainly accelerate an era of lower borrowing costs. Federal Reserve Chairman Jay Powell was clear at the Jackson Hole symposium in August that it is time to cut U.S. interest rates.
Concern: The deteriorating US jobs outlook will almost certainly accelerate an era of lower borrowing costs
That view was echoed yesterday by New York Fed President John Williams – who runs the day-to-day money market operations – in a speech, which removed any doubt that the time has come to lower the US’s money cost.
Several major central banks, including the Bank of England and the European Central Bank, have already cut interest rates.
The big debate now is whether the US central bank will go big in its September session and cut the key federal funds rate by half a percentage point from 5.25 percent to 5.5 percent. There are concerns that the Fed has taken monetary medicine too far and kept US interest rates too high for too long.
Amid geopolitical turmoil and trade barriers rising around the world, there are concerns that the much-vaunted soft landing could become much harder. Added to this is uncertainty over the outcome of the US election. Both presidential candidates are likely to spend more. Kamala Harris, part of the fiscally dodgy Biden years, is far more cautious than Donald Trump. It is estimated that he could increase the US deficit by as much as $5.8 trillion over the next decade, more than five times as much as her Democratic rival.
Traditionally, falling interest rates are good for stocks and bad for bonds. But this time around, rates are not expected to bottom out, as they did during the Great Financial Crisis and Covid-19. What’s more, stock market valuations are high and profits are being taken. This week, the Oracle of Omaha, Warren Buffett, seized the opportunity to make $7bn (£5.3bn) profit on Bank of America shares. This follows recent tech stock sell-offs.
Keep the seat belts tight.
Cyber robbery
Poppy Gustafsson’s sudden, unexpected departure as CEO of cybersecurity pioneer Darktrace is astonishing. Coming on the eve of the company’s acquisition by US private equity firm Thoma Bravo, it’s not a good look.
High-tech is an industry built on scientific and software skills, largely held by the people at the top. It’s hard to imagine most of the ‘magnificent seven’ without the technical genius of their founders. You can bet Thoma Bravo won’t be happy about Gustafsson’s departure, even though she has agreed to become a non-executive director. Being an ‘independent’ on the board of a private equity-controlled company is pointless.
The whole idea behind buyout firms is that companies can be run much more efficiently behind closed doors, without the meddling of non-executives worried about out-of-control bosses and boards.
It’s unclear whether the recent death of Mike Lynch, an early backer of Darktrace through Invoke Capital, was a factor in Gustafsson’s thinking. But we know from Lynch’s Autonomy saga that sell-offs can be traumatic.
Opposite the music
Live music fans are still reeling from the discovery that Oasis ticket distributors use dynamic pricing to maximise returns. They may have been shocked by a recent deal that saw private equity barons KKR spend £1bn on Superstruct Entertainment. It organises live experience festivals across Europe, including the world’s largest Heavy Metal festival in Germany and the Y Not Festival in Derbyshire.
Fans should not assume that tickets, merchandise or snacks will become cheaper.
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