Investors bank on rate cuts next year as economy slows

Investors yesterday stepped up their bets that interest rates will be cut next year as storm clouds gather over the global economy.

Worse-than-expected US employment data led markets to bet that the US central bank would launch a round of interest rate cuts in May.

And the latest gloomy data from Britain – which showed another month of decline for the services sector – had traders pricing in two Bank of England (BoE) rate cuts from August.

Figures showing a drop in exports for Germany added to the atmosphere of numbness and the sense that a global cycle of interest rate hikes is over.

US markets benefited from the positive developments, with bond yields – a measure of global borrowing costs – falling and Wall Street indices rising.

In London, the FTSE 100 was lower that day, but had its best week since September.

And the pound rose sharply on the prospect of the US raising rates before the BoE.

Sterling completed its best week since July – up almost two cents to just under $1.24.

Carsten Brzeski, chief economist at ING Bank, said signs of a slowdown in growth mean the major central banks “will eventually realize that their job of raising rates is already done.”

Policymakers signal that interest rates will remain ‘high for longer’ while inflation is still above target – especially in Britain, where it has only fallen to 6.7 percent. “However, it could easily happen that this ‘longer’ period will be shorter than that of policy rate increases,” Breski said.

“There appear to be early signs that central bankers are preparing to cut interest rates even if inflation is not back on target.”

Traders were focused yesterday on America’s top nonfarm payrolls report, which showed 150,000 jobs added in October, lower than the expected 180,000.

Meanwhile, unemployment rose from 3.8 percent to 3.9 percent, the highest level since January 2022. Janet Mui, head of market analysis at RBC Brewin Dolphin, said: “The US labor market is gradually cooling down. It suggests that higher interest rates are working and that the economy is doing well.

“Overall, this report adds further confidence to markets that the Fed will abandon its plan (as stated in the September forecasts) for another rate hike in December.”

In Britain, the latest Purchasing Managers’ Index (PMI) figures for October showed that the services sector – which represents four-fifths of economic output – shrank for the third month in a row.

That contributed to the gloomy GDP outlook outlined by the BoE a day earlier. She believes that inflation fell below 5 percent in October – ahead of figures to be published later this month – and that the economy has already entered an 18-month period of stagnation that will continue into next year.

Even though Bank of England Governor Andrew Bailey insists it is “far too early” to think about rate cuts, markets have a different view.

Meanwhile, traders see the European Central Bank cutting interest rates by as much as half a percent by July next year. The chance of cuts increased after German exports fell by 2.4 percent more than expected in September.