US jobs data in shock fall
With the Federal Reserve meeting in two weeks' time against a background of a seizing up of the world's money markets, speculation was rife that the US central bank would definitely make the first cut in interest rates since summer 2003 - possibly of half a percentage point.
Analysts said it was clear an interest rate cut was needed irrespective of the current credit crunch which today saw three-month interbank lending rates in the London Libor market hit a fresh, nine-year high of 6.88%.
Financial markets had expected the so-called non-farm payrolls number to show a monthly gain of 110,000. Instead, the data showed a fall of 4,000 in August plus downward revisions of 81,000 to the previous two months' numbers.
With house prices already falling in many American cities and with several mortgage lenders having gone bust, talk has been growing that the world's largest economy could soon head into recession. Friday's payrolls data suggested it may already be there.
"The simply awful payroll figures are bad enough to warrant the Fed cutting interest rates this month even without the current turmoil in credit markets," said Paul Ashworth, economist at Capital Economist.
"We now expect the Fed to cut rates to 4.5% by year-end and there is a real possibility that it will start with a 50 basis point reduction at its scheduled meeting this month."
The Fed has held US rates steady at 5.25% for over a year.
Earlier this week the OECD urged America's central bank to insure against the prospect of recession with an immediate cut in interest rates.
Nigel Gault, economist with Global Insight in Boston, said the jobs data showed the labour market in a bad state even before the current woes in the credit market. He predicted that job cuts at mortgage companies affected by the meltdown in sub-prime lending would cause employment to fall further.
The FTSE 100 lost 122.1 points, or almost 2%, to close at 6,191.2. European shares lost 2.3%. In New York, the Dow Jones industrial average tumbled more than 200 points after the numbers, or 1.66%, to trade as low as 13,122, although it later recovered to 13,152.08 by 7pm London time.
The dollar fell broadly on the foreign exchanges on the news, with its trade-weighted index falling 0.7% to 79.85, its lowest level in 15 years. It fell to just under $2.03 to the pound.
Gold rose to its highest level in 16 months, closing in European trading at $703 an ounce. In Britain, the benchmark 10-year gilt yield fell to a five-month low of 4.97% on expectations that a slowing economy in Britain would lead to lower inflation.
US Treasury secretary Henry Paulson said he was not totally surprised about the decline in jobs in August given the problems in the housing market and less government hiring, but he insisted the US economy was healthy.
"I've been saying that the housing decline - and we've been seeing a housing decline for some time - is going to extract a penalty on growth and what we're going through in the credit markets is very apt to extract a penalty on growth, but the economy is going to continue to grow in the second half of the year," he said. Strong export demand and healthy wage growth should support the economy, he added.
He said he was talking to bankers to see if the sub-prime mortgage crisis would provoke a more widespread drop in lending.
"I'm focused on the asset-backed paper market, some of the more complex products, those parts of the credit markets and the capital markets that aren't functioning as normal, and we're vigilant there."