- Stock market sell-off looks set to continue as worries surge about interest rates staying higher for longer
- Kevin McCarthy is ousted as Speaker of the House of Representatives in rebel Republican strike, adding to worries about US debt negotiations.
- Government borrowing costs hit 16-year highs and Britain’s HS2 set to be a casualty of tight budget rules.
- Brent crude hovers around $90 a barrel ahead of OPEC meeting.
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
’Chill winds of worry are swirling about high interest rates settling in and there is set to be little respite from the sell-off. Investors have again been reminded by central bank policymakers in the US that the screws may have to be tightened on monetary policy again, and kept there for some time, to stop inflation whipping higher again.
This fresh bout of anxiety has been prompted by new jobs data in the US indicating that vacancies unexpectedly jumped in August. This has added to worries about labour market tightness, and led to expectations that not only will there be another interest rate hike, to try and dampen down demand in the economy, but that any prospect for rate cuts has been pushed further into the distance.
Fresh turmoil in Washington isn’t helping, with political dysfunction colliding with interest rate fears. The Speaker of the House of Representatives, Kevin McCarthy, who helped broker the agreement on avoiding a government shut down, has been ousted in a shock move as rebel Republicans teamed up with democrats in the no confidence vote. This not only bodes ill for future debate on the debt ceiling, with fresh impasse expected, but this bout of political dysfunction could have much wider policy repercussions.
A risk-off sentiment is now percolating, with the closely watched CBOE volatility index, also known as the ‘fear gauge,’ reaching its highest level since May. Concerns are spreading that if higher borrowing costs bed in they will weigh heavily on governments, companies and consumers and potential,lly cause fresh upsets elsewhere in the system, in an echo of the bank failures which wracked the financial sector in the Spring.
The bond sell off has been bedding in with the yield on 30-year Treasuries shooting to levels not seen for 16 years. This is already pushing fresh Federal borrowing into ‘ouch territory’ and there are concerns yields could inch even higher. The sell off in long-term government bonds has been spreading in Europe too. Yields on 30-year gilts have headed above 5%, with investors demanding more interest to buy in, giving ministers less wiggle room to ease cost-of-living pain through tax cuts or public sector pay offers, particularly given the UK government’s self-imposed borrowing rules.
The rail infrastructure project HS2 looks set to be the latest casualty of higher borrowing costs, with a decision on scrapping the line extension to Manchester expected from the Prime Minister later today, despite last ditch efforts by contractors, including German giant Siemens, to keep the project on track. Once heralded by the Conservative party as the most significant transport infrastructure project since the building of the railways, it is set to be a shadow of those ambitions.
Oil prices are largely unchanged ahead of an OPEC meeting with Brent Crude hanging around $90 a barrel. Concerns about the US potentially heading for a more difficult landing if interest rates are raised further have weighed down prices in recent sessions. But there is expected to be no tweak announced at the OPEC gathering to production cuts already announced by Saudi Arabia and Russia. So, with tighter supply colliding with expectations for demand to keep growing this year, a high floor is set to be kept on prices.
