Stock markets plunged around the world on Friday amid widespread fears about a possible US recession.
Shock US jobs figures and concern that the Federal Reserve has waited too long to cut interest rates sparked heavy selling on Wall Street, where the S&P 500 fell more than 2pc. Misgivings about the health of the world’s biggest economy triggered market slumps elsewhere, with the FTSE 100 closing down 1.3pc in London.
US unemployment hit a three-year high in July, new data released on Friday showed, prompting economists to warn that the central bank was “once again behind the curve” on interest rates.
The US added just 114,000 jobs last month, according to the Bureau of Labor Statistics.
This was down from 179,000 in June and much lower than analysts’ expectations. Unemployment rose from 4.1pc to 4.3pc, its highest level since October 2021.
Stocks have been volatile for days and the figures triggered a renewed market rout. Stocks and bond yields fell, oil prices declined and gold briefly surged above $2,500 for the first time as investors hunted for safe havens for their cash.
Janet Mui, head of market analysis at RBC Brewin Dolphin, said a slew of weak data in recent days had suggested that the economy was more fragile than previously thought.
“Today’s US jobs report disappointed on most fronts, re-igniting concerns of a potential recession,” she said.
The Federal Reserve held interest rates at 23-year highs of 5.25pc to 5.5pc on Wednesday.
Chairman Jerome Powell indicated that a first post-pandemic cut could come in September.
However, investors now expect the Fed to cut interest rates further and faster than previously thought in order to support a flagging jobs market and wider economy.
Traders now expect the Fed will be forced to cut interest rates at all three of its remaining meetings this year, while bets on two more Bank of England cuts have increased.
Traders are now betting there is a 50pc chance the Bank will trim rates again in September after reducing borrowing costs this week.
The market odds came despite the Bank’s chief economist Huw Pill saying observers should not expect sequential rate cuts from now on.
He said: “We cannot be complacent, we cannot declare ‘job done’. We shouldn’t yet be promising that rates are going to move down further in the very short term.”
Markets brushed off the comments as investors bet that events in the US may yet force the Bank’s hand.
The S&P 500 fell by as much as 2pc in early trading on Friday.
The tech-focused Nasdaq fell by as much as 2.3pc. More than $2 trillion has been wiped off the index in just three weeks, plunging it into so-called correction territory. It has now fallen by more than 10pc since its recent high in early July.
Japan’s Nikkei 225 index had closed down by 2,216.63 points overnight - its second-largest points drop in history - after weaker than expected US factory data showed output dropped to an eight-month low in July.
In London, the UK-focused FTSE 250 fell almost 3pc.
Jason Furman, who served eight years as President Obama’s top economic adviser, said the Fed would be forced to cut rates more quickly than previously planned following the shock rise in unemployment
“The Fed should and will cut in September,” he said. “The only question is whether to do 25bp [basis points] or 50bp - and if the unemployment rate rises or possibly even stays here, my vote would be for 50bp.”
Max McKechnie at JP Morgan Asset Management said the jobs market was clearly slowing down. He said: “The Fed was slow to raise rates in response to the inflation surge. With labour market slack back to pre-pandemic levels and real-time inflation pressures easing materially, today’s print will increase concerns that policymakers are once again behind the curve when it comes to cutting rates.”
US inflation has fallen substantially from its 2022 peak and Mr Powell said this week that he no longer needed to see further evidence of a slowing jobs market to feel confident that price pressures were coming under control.
Average hourly earnings rose 3.6pc in the year to July, which was also weaker than expected.
President Joe Biden acknowledged the US workforce was now “growing more gradually”, but stressed that business investment “remains strong”. He said: “There’s more to do but we’re making progress growing the economy from the middle out and the bottom up.”
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