BoE's Razor –Thin vote split and surging US layoffs reshape rate cut outlook

US Stock markets concluded Thursday’s session on the ropes, weighed by AI concerns and US jobs data throwing up red flags. Given the ongoing US government shutdown, the Fed – and everyone else, for that matter – must rely on private-sector data.

US tech stocks led the decline, with Palantir (PLTR) tumbling 6.8% and Nvidia (NVDA) down 3.7%, consequently pulling the tech-heavy Nasdaq 100 lower by 1.9% to 25,130. The S&P 500 also fell 1.1% to 6,720, with the Dow Jones Industrial Average down 0.8% to 46,912. Asian markets continued to extend losses overnight; the MSCI Asia Pacific Index fell 1.3%, underscoring mounting scepticism about stretched valuations in AI Stocks.

Mixed US jobs data

Thursday's US Challenger Job Cuts report revealed 153,074 announced layoffs in October – the highest monthly total since 2003 – signalling meaningful labour market deterioration. The report attributed this surge to ‘AI adoption, softening consumer and corporate spending, and rising costs driving belt-tightening and hiring freezes’.

Despite this, Wednesday’s October US ADP report came in stronger than expected, adding 42,000 jobs, up from a revised 29,000 in September. Which signal do we trust? The evidence suggests little cause for optimism. While the ADP release shows that the jobs market is not collapsing, modest growth and the concentration in larger firms point to labour market weakness. A December rate cut remains firmly on the table, with markets currently pricing approximately 16 bps of easing (implying a 65% probability of a 25-bp cut).

In fixed income markets, US Treasury yields bull steepened and the USD index explored lower territory yesterday, weighed by weakening jobs data. Meanwhile, the commodities complex saw Oil and Gold prices little changed, with the latter showing buyers and sellers squaring off around the widely watched US$4,000 level.

Fed speak echoes hawkish tone

Yesterday also saw several Fed officials make the airwaves.

Cleveland Fed President Beth Hammack and Fed Governor Michael Barr voiced concerns about inflationary pressures; Hammack noted that price pressures pose a bigger risk than labour market softness. We also had Chicago Fed President Austan Goolsbee express apprehension about making decisions without official data during the ongoing government shutdown.

Fed Bank of New York President John Williams and Fed Vice Chair Philip Jefferson are scheduled to speak later today.

The BoE maintains bank rate at 4.00% amid a more divided MPC vote

The BoE’s rate announcement was a key highlight yesterday. In a closer-than-expected vote, Committee members voted 5-4 to keep the bank rate at 4.0% (compared to expectations of a 6-3 split). Given the surprising dovish vote and the BoE signalling that inflation has peaked, a 25-bp cut next month is certainly on the table. At this point, though, I believe it all comes down to BoE Governor Andrew Bailey.

From the minutes, which now allow MPC members to set out their rationale, the division among policymakers is clear. Four members – Breeden, Dhingra, Ramsden, and Taylor – voted to cut the bank rate by 25 bps, believing that the policy is restrictive, disinflation is on track, and risks to the economy tilt towards weak demand.

On the other side of the fence, we have members Greene, Lombardelli, Mann, and Pill arguing to keep rates unchanged amid concerns that inflation risks remain skewed to the upside.

Bailey holds the decisive vote. Although he chose to keep rates steady, the BoE Governor recognised that ‘upside risks to inflation have become less pressing since August’, somewhat siding with dovish members. Bailey also said he thinks additional policy easing is likely if ‘disinflation becomes more clearly established in the period ahead’.

Between now and the next meeting on 18 December, we will see two more inflation reports, with the second due a day before the meeting. These reports will be crucial to watch. Attention now shifts to the UK Autumn Budget on 26 November, with growing speculation that tax rises are on the menu.

Day ahead

The October Canadian jobs report, as well as the November US consumer sentiment data from the University of Michigan, are due for release today. As shown in the LSEG calendar below, Canada’s unemployment rate is forecast to stay steady at 7.1%, with job growth expected to decline by 2,500, following the surprise beat in September (60,400). Regarding US consumer sentiment figures, economists expect little change in the headline number at 53.2.