Strong jobs data fuel US rate rise expectations

US Equity Market
US Briefing –

The Dow Jones Industrial Average Index , the S&P 500 Index and the Nasdaq Index all reached new highs during August. Over the month as a whole, the Dow Jones Industrial Average Index fell by 0.2% and the S&P 500 Index edged 0.1% lower, while the Nasdaq Index rose by 1%.

The financials sector performed strongly during August, driven up by mounting expectations of higher interest rates. In comparison, dividend-paying sectors – including utilities and telecoms – performed relatively poorly. Meanwhile, in a controversial ruling, the European Commission decreed that technology company Apple should pay up to €13 billion in unpaid taxes, describing the Irish tax benefits enjoyed by Apple as “illegal”. Both Apple and Ireland’s Finance Minister intend to appeal against the decision, which could have wider implications for other multinationals that benefit from favourable tax environments. Despite this, the information technology sector ended the month in positive territory.

Second-quarter economic growth in the US was revised down from 1.2% to 1.1% during August. However, stronger-than-expected jobs data raised expectations of higher interest rates before the end of 2016. The country’s economy added 255,000 jobs during July, and the figures for June and May were also revised upwards. Wages increased at an annualised rate of 2.6%. Industrial output was comparatively robust in July, rising at a monthly rate of 0.7%.

According to the minutes of the Federal Open Market Committee’s (FOMC’s) July meeting, several members believe that “economic conditions would soon warrant taking another step” to tighten monetary policy. Nevertheless, in the short term, the FOMC decided to “continue to leave (its) policy options open and maintain the flexibility to adjust the stance of policy based on incoming information”. Inflation remains well below the Federal Reserve’s (Fed’s) target rate of 2% , and Fed Chair Janet Yellen believes that inflation is being dampened by the “transitory effects” of earlier weakness in energy and import prices. Ms Yellen said that the “case for (a rate) increase … has strengthened in recent months” and, although she gave no guidance about timing, she believes the US economy is moving towards the Fed’s goals of “maximum employment and price stability”. Over the coming months, investors’ attention is likely to focus on the Fed’s next move, and on the approaching Presidential election. Looking further ahead, the Fed also sees “several longer-term global risks related to Brexit”.