Global markets slump as US jobs report does little to temper rate hike and recession fears

With the labour market remaining strong, and inflation continuing to rise, it all but guarantees another rate hike in the Fed's next meeting in November

Traders are seen on the floor of the New York Stock Exchange. Investors are pondering their next moves as the US Federal Reserve is poised to once again raise interest rates in November. AFP

Global stock markets slumped on Friday as investors worried about almost certain additional interest rate hikes from the US Federal Reserve following a US jobs report that showed gains and the nagging threat of a recession.

Non-farm payrolls rose by 263,000 jobs in September, the Labour Department reported on Friday, which was slightly higher than a 250,000 estimate. The unemployment rate dropped to 3.5 per cent, below a projection of 3.7 per cent.

The good news in jobs, modest as the gains were, is considered bad news for investors.

With the US labour market maintaining its strength, and inflation still continuing to rise, it all but guarantees another rate hike in the Fed's next meeting in November, with analysts expecting another 75 basis point increase.

The US central bank appears ready to sacrifice short-term gains for longer-term growth: it has vowed to keep raising interest rates aggressively until soaring inflation, which is at a four-decade high, is brought down — even if it means plunging the economy into a recession.

While President Joe Biden touted the economy's resilience following the jobs report, Fed chairman Jerome Powell had already said that the central bank was hoping for labour conditions that would eventually temper inflation and wage growth.

Investors had hoped that a weaker jobs report would have been a signal of a slowing economy, which would have made the Fed reconsider its rate hike moves.

Wall Street fell sharply. The Dow Jones Industrial Average slid 2.1 per cent, the S&P 500 declined 2.8 and the tech-heavy Nasdaq Composite shed 3.8 per cent.

"Looking at the non-farm payrolls number and overall US labour market, the question that comes to mind is if this is a type of recession that doesn’t bite," said Naeem Aslam, chief market analyst of AvaTrade.

"For market players, the current data means that the Fed has pretty much a free hand to hike rates and they know that the Fed can tolerate a recession but not high inflation numbers, and this means more aggressive rate hikes."

In Europe, London's FTSE 100 inched down 0.1 per cent, Frankfurt's DAX declined 1.6 per cent and Paris's CAC 40 dropped 1.2 per cent at the close.

Earlier in Asia, Tokyo's Nikkei 225 closed down 0.7 per cent and Hong Kong's Hang Seng Index lost 1.5 per cent. Shanghai was closed for a holiday.

Analysts and investors will turn their attention next to the US consumer price index report next week, which will provide new details on the persisting problem of inflation.

“The Fed will be keeping a close eye on non-farm payrolls over the coming months, monitoring the slowdown in job growth to calibrate their strategy of stemming the record-levels of inflation," Srijan Katyal, global head of strategy and trading services at brokerage ADSS, said in a note.

"Investors and traders should look out for the Fed’s response and take a view as to whether any new rate hikes will tame inflation without pushing the US economy into recession.”

In commodities, oil prices posted their second weekly gain and highest in 5 weeks on Friday following the Opec+ alliance's agreement to reduce output by 2 million barrels per day, its biggest production cut since the start of the coronavirus pandemic.

Brent settled 3.71 per cent higher at $97.92 a barrel, while West Texas Intermediate closed up 4.74 per cent at $92.64 a barrel.

Gold prices, meanwhile, retreated on the back of a strengthening dollar. Spot prices of the precious metal, which is considered a safe haven and hedge against inflation, fell almost 1 per cent to $1,695.52 an ounce on Friday.