5th Aug 2016 15:55
LONDON (Alliance News) - Stocks in London were given a boost on Friday after the US jobs report showed the labour market is in good health with jobs growth in July above expectations, potentially bringing a 2016 US rate hike into play.
Data from the Labor Department showed that nonfarm payroll employment surged up by 255,000 jobs in July after jumping by an upwardly revised 292,000 jobs in June. Employment had been expected to increase by about 185,000 jobs compared to the addition of 287,000 jobs originally reported for the previous month.
The report pointed to notable job growth in the professional and business services, health care and social assistance, and leisure and hospitality sectors. Government employment also continued to rise.
The unemployment rate held steady at 4.9% in July, having been expected to edge down to 4.8%. This was because the household survey measure of employment soared by 420,000 jobs, but the number of people in the labour force also shot up by 407,000.
Average hourly employee earnings climbed by USD0.08 or 0.3% to USD25.69 in July, although the annual rate of growth was unchanged at 2.6%.
"Two consecutive months of payroll gains above 250k suggest that the US labour market is in good shape. Moreover, the strong gains in wages and hours worked point to robust income gains which should boost consumer spending," said Mickey Levy, chief US, Americas and Asia economist at Berenberg.
The implication of the strong jobs numbers is that an interest rate increase from the Federal Reserve is now more likely.
"If economic data continues to be robust and the August jobs report also shows strong gains, the pressure will be on the [Federal Open Market Committee] for the next rate hike to be sooner rather than later," Levy added.
Lloyds Bank said the jobs data will be welcome news for the Fed given the weak estimate of US second quarter GDP last week.
"It leaves an interest rate hike by the Fed this year a strong possibility. Indeed the initial market response has been to raise the likely probability attached to a Fed hike by year end to 46% from 35% prior to the report," Lloyds said.
"Even with this data, however, the next policy meeting on September 21st may now be seen as too soon to raise rates by the majority on the FOMC. Instead we expect the Fed to next raise interest rates by 0.25% at its December meeting," the bank added.
Before the Fed's next meeting focus will be on Chair Janet Yellen, who will be speaking at the Jackson Hole conference on August 26.
The dollar shot higher in response to the data. At the London stock market close, the pound traded the dollar at USD1.3070 compared to USD1.3138 at the close on Thursday.
The euro was quoted at USD1.1079 at the close on Friday, against USD1.1134 at the same time on Thursday.
The dollar's rise weighed on commodity prices. An ounce of gold traded at USD1,338.55 at the European equities close, versus USD1,363.19 at the same time on Thursday.
Brent oil was at USD43.58 a barrel at the close Friday but managed to close above the USD43.30 seen at the same time on Thursday.
Stocks, on the other hand, were buoyed by the report. The FTSE 100 ended up 0.8%, or 53.31 points, at 6,793.47, its highest close in just over a year.
The FTSE 250 ended up 1.3%, or 221.03 points, at 17,465.35. The mid-cap index has now recouped all of the losses since the Brexit vote at the end of June. The AIM All-Share continued its strong run, closing up 0.9%, or 6.76 points, at 768.42, the index's highest close in over a year.
In Europe, the CAC 40 in Paris closed up 1.5%, and the DAX 30 in Frankfurt up 1.4%.
On Wall Street at the London close, the Dow 30 was up 0.9%, the S&P 500 was up 0.8% and the Nasdaq Composite was up 1.1%.
Royal Bank of Scotland Group ended as the biggest faller in the FTSE 100, down 5.5%. The lender gave up on the costly and complex separation of its Williams & Glyn business, blaming the lower interest rate environment for that decision and the cloud it cast over its outlook for meeting return targets.
Williams & Glyn is a retail and commercial banking unit within RBS that the bank has to shed as a European Union-mandated requirement for its bailout by the British government. Since the bailout, it has been working to build a new IT platform for the business so that it can operate independently.
The decision by RBS and the comments it made about the impact of low interest rates on a smaller full-service lender like Williams & Glyn came after the Bank of England on Thursday had cut UK interest rates 25 basis points to 0.25%.
Investec analyst Ian Gordon said the outlook was "brutally honest" and "de facto confirmed" RBS as the bank "worst impacted" by a UK interest rate cut. He said RBS's guidance indicated a GBP140.0 million hit to RBS income from the 25 basis point cut announced by the BoE and, in Gordon's view, it will get little benefit from the Term Funding Scheme.
Ibstock was the biggest FTSE 250 gainer, up 7.7%. The brick maker said contingency plans had been put in place to limit any impact coming from the uncertainty following the UK's vote to leave the European Union.
The company said its key focus under these plans will be the management of stock levels and said capacity will be flexed to balance production with sales levels as necessary. Ibstock said it will manage its cost base in response to the evolution of its markets as visibility improves.
Insurer esure Group ended down 4.1%, after it trimmed its interim dividend, saying it wanted to retain capital in order to fund its growth plans, as pretax profit sank on one-off costs but underlying profit was also marginally lower.
The company, which provides general insurance and owns price comparison service GoCompare, declared a 3.0 pence interim dividend, down from 4.2p a year earlier.
It reported a pretax profit for the half-year to the end of June of GBP30.7 million, down 69% from GBP97.6 million a year earlier. Underlying pretax profit, taking out the one-off effects, was essentially flat in the first half, at GBP45.6 million versus GBP46.5 million a year prior.
In the economic calendar for Monday there are Chinese trade balances data, German industrial production is at 0700 BST, the Sentix investor confidence survey for the eurozone is at 0930 BST and the US labor market conditions index is at 1500 BST.
The only scheduled event in the UK corporate calendar is interim results from Internet of Things technology company Telit Communications.
By Neil Thakrar; [email protected]; @NeilThakrar1
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