Fishin’ For Compliments

US and UK economic updates

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What's going on?

American and British economic data released on Tuesday didn’t shoot the lights out, but it did show both regions in better stead than some investors had thought.

What does this mean?

The UK’s second-quarter labor data didn’t make for laborious reading: even though the unemployment rate rose from the previous quarter, the proportion of working adults was the highest since records began (tweet this). That’s probably because more declared themselves available for work. Employees had good reason to be happy too: last quarter’s average wage saw its biggest quarterly increase in eleven years, outpacing the rise in prices of goods and services.

Speaking of the inflation rate, US prices last month (excluding food and energy) were 2.2% higher than a year ago. That’s more than economists expected – and ahead of the US Federal Reserve’s 2% target.

Why should I care?

For markets: Investors want what they want.

Above-target inflation seems to support the Fed’s insistence that last month’s interest rate cut – the first in over a decade – was potentially temporary. But most investors still think another rate cut’s coming next month. And they’ve been buying up bonds in the meantime, sending yields – which move inversely to prices – down further this week. That’s because US government bonds with a higher interest rate are more attractive than forthcoming new bonds with lower rates. Across the pond, meanwhile, some investors think the Bank of England should raise rates.

The bigger picture: Shooting themselves in the foot.

Yields of long-term bonds are typically higher than those of short-term bonds, but recent US government bond-buying has narrowed the difference between the two. And yields of two- and ten-year bonds are close to inverting altogether – a bellwether which has historically signaled an upcoming recession. The very expectation of a recession could bring one about if it reduces spending and hampers economic growth. Retail data due on Thursday alongside Walmart’s quarterly update may allay (or, er, exacerbate) those fears.

Originally posted as part of the Finimize daily email.

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