Fearsof an economic slowdown in the U.S. evaporated on Friday, July 8, with therelease of data showing acceleration in employment numbers. Payrolls in thecountry grew 287,000in June, the fastest pace since October 2015, and brought relief after inMay.
Stockfutures in the U.S. jumped on the job market data, with bond yields higher andthe dollar stronger. Expectations of an increase in interest rates rose, butofficials at the Federal Reserve signaled a wait and see attitude while marketscontinue to assimilate the U.K.'s vote to exit the European Union.
TheInternational Monetary Fund has already decided, and has downgraded itsprojections for growth in the eurozone, arguing that the U.K.'s decision willdent the region's economic recovery over the next two years. On Friday, the IMFannounced that it expects the eurozone's economy to grow 1.6% this year and byonly 1.4% in 2017, down from the previous growth estimates of 1.7% in bothyears.
Inthe U.K., a survey on Friday showed the sharpest decline in consumer confidencein 21 years, and sterling last week touched a 31-year low against the U.S.dollar. The greenback is also performing well against the renminbi, which is atits lowest level against the dollar since November 2010.
Unsurprisingly,the Bank of England's Governor Mark Carney said the U.K. economy is showingsigns of strain after the Brexit vote, and he promised action. This week he isexpected to cut interest rates, possibly to as low as zero. Currently at 0.5%,the prime interest rate is already the lowest in the bank's 321-year history,and markets expect a cut to at least 0.25% on Thursday.
Demandfor fixed-rate returns has soared against the backdrop of yields on governmentdebt hitting record lows globally. Indeed, such was the demand last week forthe issue of a 10-year bond by the U.K. government that the debt was sold witha yield of just 0.91%, the lowest U.K. benchmark gilt rate on record.
SinceBrexit, investors have also poured money into corporate bonds, which hasreduced the cost of company borrowing. Moody's measure of bond yields forBAA-rated companies has dropped below 4.2%, the lowest level for company debtsince the 1950s, and contrasts with the long-term average of over 7.6%.
Lowinterest rates and political uncertainty continue to be good for gold, whichrose 2.7% last week to US$1,357/oz. Even in terms of the stronger dollar, theyellow metal is up 28% this year, and the net long position in gold — thedifference between bets on rising and falling prices — has soared, and the goldheld by exchange-traded funds is up 40% since the Brexit vote.
Asnoted in last week's Backfillblog, the price of silver is doing even better than gold. Theso-called Devil's metal is up 40% this year, and breached US$21/oz at the startof last week, its highest level for two years. A report by Bank of AmericaMerrill Lynch suggested "an overshoot to US$30/oz is possible."