WeeklyWatch – Release of US jobs data begins to show economy cracks

12^th April 2023

Stock Take

Surprise oil production cuts

Meandering markets were bookended by two major developments last week. The OPEC+ group of oil-producing nations announced another surprise cut in output at the beginning of the week: around 1.16 million barrels a day of voluntary cuts starting in May. These come on top of those already agreed in October.

Market stability was named as the reason for the move, which came despite Washington’s pressure on Gulf States to weaken their ties with Russia. Businesses and consumers could be hit hard as oil prices are likely to rise back towards $100 a barrel – not to mention adding another challenge to central banks as they continue their efforts to put out the inflation fire.

US jobs data comes in

On Friday, the latest US jobs data was released, which will indicate the likely next move on interest rates by the Federal Reserve. It’s also the last report before the next meeting of its rate-setting committee in early May. The US Department of Labor’s data showed a slowdown in jobs growth for March in line with economists’ forecasts, adding to the week’s earlier news that job vacancies in February dropped to their lowest level in almost two years.

Wage increases also showed the lowest reading since mid-2021, rising 4.2% year-on-year. And while the unemployment rate slipped to 3.5%, the US economy seems to be cooling off – but not enough to ease inflation in the short term. The jobs report strengthened expectations the Fed will raise rates by 0.25% at its next meeting.

Cracks showing in the US economy

An Institute for Supply Management (ISM) survey released earlier in the week showed cracks appearing in the US economy – US manufacturing activity fell to its lowest level in nearly three years during March while new orders also contracted. According to Deutsche Bank, there have only been four previous occasions when the ISM manufacturing reading was this low without a recession coming in the following 12–18 months.

Further, cooling demand led the US services sector to slow more than expected in March, which makes up over two-thirds of the US economy. It’s currently central to the fight against inflation due to services prices being stickier and less responsive to interest rate increases.

It was hoped that weak economic data meant the Fed’s tightening policy was working and easing of interest rate hikes would follow. As fears of recession increase, however, investors’ previous ‘bad news is good news’ sentiment has transitioned to ‘bad news is bad news’.

The European markets

Markets in Europe had a relatively quiet week. Economic researchers at the Ifo Institute forecast a narrow recession escape for Germany and a growth of 0.1% for the first quarter, but that inflation was unlikely to ease quickly. Mark Dowding of BlueBay Asset Management agrees:

“Our recent meetings with policymakers have highlighted how core prices in the region continue to trend higher for the time being, and so it still feels premature to talk about the end of the European Central Bank (ECB) rate hiking cycle, let alone commencing a discussion as to when the central bank may start to lower rates. There is a sense that inflation may stay above 4% for some time to come, and if this is the case, then the first ECB rate cut is unlikely to occur for another 12 months.”

It’s a challenging time for the global economy, as Kristalina Georgieva, head of the International Monetary Fund (IMF), underlined by saying it would grow at approximately 3% over the next five years – its slowest pace since 1990. The IMF also expects a growth decline from 90% of advanced economies, reflecting the weight of higher borrowing costs.

Markets in Europe, Australia and Hong Kong were closed on Easter Monday, but expectations of an interest rate hike from the Fed caused Wall Street to slip.

Wealth Check

Fraud has become an increasing problem for all businesses, including small and medium-sized enterprises (SMEs), and it’s become critical to protect your company. Between 2021 and 2022, the value of UK fraud cases rocketed by 151% – from £444.7 million to £1.12 billion, according to the KPMG Fraud Barometer 2022.¹ And that’s only cases over £100,000, making it likely there are many more frauds against SMEs below that value.

Small businesses can be seen as soft targets by criminals, largely because they either don’t have enough awareness or resources to fight fraud. What’s more, SME owners sometimes see fraud prevention and protection as a lower priority while they’re busy growing their business.

Types of fraud include investment fraud, in which a criminal poses as an investment services provider to convince you to transfer large sums of money, and advance-fee fraud, where criminals persuade victims to pay for non-existent goods or services upfront.

Money laundering, investment scams and fraudulently obtaining mortgages were the most common frauds by value and rose dramatically between 2021 and 2022.

Although professional criminals are the biggest culprits, anyone can commit fraud, including employees, management, private individuals, customers and other business contacts – meaning business owners need to remain hypervigilant. Any company with money flowing in and out can become a target from anywhere in the world, but financial services is a particularly vulnerable sector due to the higher potential value for fraudsters.

Happily, there are plenty of fraud-prevention tools available to businesses, such as identity and authentication tools, fraud data and trace services, automatic monitoring and anomaly detection.

Matthew Smith, Head of Cyber and Information Security at St. James’s Place, advises every company to make sure it has a secure email and multi-factor authentication (MFA) turned on

“It isn’t necessarily expensive or time-consuming – it might just take an hour to ensure you have the right security settings, the latest versions and updates of all software, and two-factor authentication on your accounts.”

Source:

¹KPMG, ‘Fraud barometer 2022’, February 2023.

In the Picture

Despite recent volatility and inflation, long-term investments can help protect and even grow wealth over time.

Please be aware that past performance is not indicative of future performance, and note it is not possible to invest directly into the indices shown. The figures do not take into account any charges applicable to the appropriate investment wrapper or any relevant tax charges.

The value of an investment with Wellesley Wealth Advisory will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The Last Word

“25 years ago, Northern Ireland’s leaders chose peace. The Belfast/Good Friday Agreement ended decades of violence and brought stability. I look forward to marking the anniversary in Belfast, underscoring the US commitment to preserving peace and encouraging prosperity.”

– Joe Biden, on his upcoming visit to Northern Ireland.

BlueBay Asset Management is a fund manager for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley Wealth Advisory.

Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2023. FTSE Russell is a trading name of certain of the LSE Group companies.

“FTSE Russell®” is a trademark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

SJP Approved 12/04/2023