Written by Cormac Nevin

While August has been a moderately negative month for markets, we saw a widespread rally last week. This was led by Japanese Equities, as well as growth-biased and small cap equities globally.

The stand-out event of last week was the release of employment data in the US on Friday. This data illustrated how the labour market has been weakening, despite previously appearing to be impervious to the interest rate hiking cycle that the Federal Reserve has been enacting for the last year and a half to cool inflation.

Non-farm payroll data, which is an indication of hiring activity for the month of August, came in slightly higher than expected, however, the data releases for prior months were revised down significantly. It seems to be the case that the initial data releases this year have been too optimistic and are then revised downwards as time passes. In an unexpected move, the unemployment rate for the US also rose from 3.5% to 3.8%, as more people began seeking work who had not been doing so previously. This potentially indicates that the store of cash which households built up over the pandemic, and which has provided a significant economic boost in the reopening, has now begun to run dry.

While the burst of inflationary pressure we witnessed coming out of the Covid-19 pandemic was largely the result of supply chain disruption and shifts in consumer preferences, the Federal Reserve and most other global central banks have responded with a significant tightening in monetary policy to ensure any inflationary impulses are wrought out of the system. In their view, this entails an increase in unemployment to control inflation. The degree of indebtedness globally, along with long-established demographic changes, raises questions about the ability of major economies to sustain higher interest rates without encountering problems. This should likely make central bankers pause for thought.


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