US jobs boom rekindles interest rate fears.

Last week’s employment data in the US provided a big positive shock to the economy and a negative one for the stock market. The 528,000 new positions created in the US economy in July were more than twice as many as forecast and sharply higher than the 400,000 or so created in the previous month.

While this is obviously good news for American workers, and it suggests that the US economy is further away from recession than feared, investors took it badly. That’s because the hot labour market gives the Federal Reserve all the ammunition it needs to justify another jumbo rate hike at its next meeting in September. After the 0.75 percentage point rises in June and July, more of the same is now expected next month.

The scale of the shock showed up in the bond market where the yield on a two-year Treasury – typically the maturity of bond that’s most tied to interest rate expectations – jumped by 0.21 percentage points to 3.25%. That’s a big move in the usually sedate world of fixed income.

In the UK the latest Bank of England Monetary Policy Report certainly caught people’s attention. It lays bare the impact of soaring energy costs on the UK economy. Inflation is now seen peaking at an eye-watering 13% this autumn, up from the forecasts in the Bank’s previous Report in May of close to 10%. This reflects, in particular, the further very steep increase in the price of natural gas over the summer amid falling Russian exports to Europe. The hit to real household disposable incomes is substantial, with the Bank forecasting that they will decline by close to 4% during 2022-23. As a result, the Bank is now expecting a recession for the UK economy next year, with GDP projected to fall by between 1.0% and 1.5% in 2023, depending on the course of energy prices. Growth is expected to remain very subdued in 2024-25.

In the Eurozone, industrial production data are also due. Output is thought to have stagnated in June, leaving industrial production at the same level in Q2 as it was in Q1.

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