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Why US job numbers matter to UK investors

Maike Currie
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Maike Currie

Despite the buzz surrounding ‘Super Thursday’, today’s non-farm payroll employment data is much more important in determining the future path of interest rates, both at home and across the pond in the US.

The Federal Reserve has promised to raise rates as soon as it sees some improvement in the labour market, and today’s jobs report is seen as a key trigger for a rate hike as soon as September.

July’s non-farm payroll jobs showed 215,000 jobs were created, while the unemployment rate was unchanged at 5.3 per cent. Average earnings improved by 0.2 per cent from the previous month’s no change.

This is broadly in line with expectations, making the chances of September rate rise by the Federal Reserve all the more likely. At the very least, the Fed should make a move on rates by the end of this year.

As for the future path of UK interest rates – things are a lot less clear. Yesterday’s deluge of data, which saw the Bank of England release its decision on interest rates along with the Monetary Policy Committee meeting minutes and the quarterly inflation report, all within the space of 45 minutes, was done in the name of greater transparency and clearer messaging. But all things being equal no-one came away much the wiser.

The key message was that interest rates will go up, and when they do, any rise will be gradual and limited. (We knew that already.) As for when they will go up, the picture remains murky. As Mark Carney put it, “the exact timing is unknown but the likely timing will be ‘data dependent’”. We knew that much too.

The “data” the Bank of England governor pointed to included wage growth (improving albeit slowly), UK productivity (still a puzzle), core inflation (still low) and the state of the international economy. In fact, yesterday’s release flurry was littered with references to the global economy and the uncertainty this means for the Bank’s decision-makers.

Concerns included the risk of fall-out from a Fed rate rise, referring to the ‘taper tantrum’ of 2013 when the then chair Ben Bernanke announced the withdrawal of US quantitative easing, volatility in Chinese markets, a slowdown in emerging markets and whether the massive falls in commodity prices is signalling a slowdown in global demand.

How these risks will pan out remains unknown, but here’s what we do know: the Bank of England is unlikely to raise rates ahead of the Federal Reserve. This will only rattle markets, and while the UK is still experiencing disinflation off the back of falling oil prices and a strong pound, a reflationary theme is emerging on the other side of the Atlantic.

So what will a US rate rise mean for UK investors? First, despite the rate hike being well trailed, and largely priced into markets, there will be some short term volatility. Don’t expect a rate rage, like the taper tantrum of 2013, but prepare for some market ups and downs. If you’re investing for the long term, this shouldn’t matter. Keep calm and stay invested. Ultimately, equity markets should take heart from the reason behind rates rise, namely better US growth.

The second thing to expect is the dollar to strengthen even further following a rate rise. This will be good news for the UK’s many blue-chip companies that report earnings in US dollars and declare dollar dividends. UK equity income funds which invest in these companies should benefit as a result. Income investors have already enjoyed a bumper second quarter for dividend payouts thanks in large part to the currency effect of a stronger dollar.