In September Janet Yellen, chair of the US Federal Reserve, provoked global uncertainty when deferring a rise in interest rates.
A month later, after the US job report was published on Friday, expectations that the Federal Reserve will raise interest rates next month for the first time in nine years increased significantly. The report indicated a sharp increase in job creation. In October payroll increased by 271,000. The jobless rate fell to 5 per cent, as the number of unemployed people fell by 1.1m compared with this time last year. Wages rose significantly, with average hourly earnings rising 2.5 per cent over the year. It has lead to sharp reaction in financial markets. The DXY dollar index — which measures the currency against a basket of its peers — was up 1.2 per cent. Yields on Treasuries climbed and forward interest rates soared as traders were quick to price-in the possible rate hike.
Mario Draghi, head of the European Central Bank, signaled a willingness to act even more persistently, with more measures to stimulate the economy possible in December. This indicates possibly even lower interest rates. Reasons include “concerns over growth prospects in emerging markets and other external factors”.
Germany’s two-year bond yield had dropped from minus 0.26 per cent to minus 0.35 per cent. For investors negative yields present a strange scenario in which they face a loss if they hold debt to maturity. Many banks agree that it is highly probable that the ECB will follow and drive rates deeper into negative territory as early as December.
On Thursday the Bank of England announced a decision to hold interest rates at 0.5 per cent and published a report suggesting that inflation would stay low for longer than previously expected. It was a signal that UK interest rates may not be raised in 2016 at all, which surprised most observers.
Many economists had been predicting an interest rate rise in the spring or summer of 2016. But the BoE’s forecast suggests that there is only a small risk of beating the 2 per cent inflation target. The key factors for dimming the outlook included negative effects on inflation from the rise in sterling over the past two years and weakness in emerging markets.
By Artūrs Loze
