UK Rate Hike, Trump’s Pick for Fed Chair and U.S. October Jobs Report

On the latest edition of Market Week in Review, Consulting Director Todd LaFountaine chatted with Chief Investment Strategist Erik Ristuben about the recent hike in interest rates in the UK, President Trump’s nomination of Jerome Powell to lead the U.S. Federal Reserve and the latest numbers from the U.S. jobs report for October.

Citing inflation concerns, Bank of England hikes interest rates

The Bank of England’s Nov. 2 decision to hike the base interest rate from 0.25% to 0.5% was “a dovish raise,” Ristuben said—as members of the bank’s monetary policy committee indicated that if they were to do so again, it would be a very gradual process. In Ristuben and the team of Russell Investments strategists’ opinion, this was likely a “one-and-done” hike. “One of the bank’s principal reasons for raising rates was due to higher-than-expected inflation—which has surged ahead of wage growth in recent months,” he said. However, Ristuben noted that inflation in the UK is mainly tied to the devaluation of the British pound, which he expects to be transitory.

“Consumers have been the strength of the British economy in the post-Brexit world,” Ristuben remarked—“so now the question becomes, are they going to be able to continue exhibiting that kind of strength when cash is more expensive?” He predicts that the net result of the hike will be a downturn in economic growth, which would likely prevent the central bank from raising rates again anytime soon.

Markets unmoved after Trump taps Powell to be next Fed chair

Turning to the U.S., Ristuben noted that President Donald Trump’s recent nomination of Jerome Powell to serve as the next chair of the Federal Reserve (the Fed) caused very little reaction in markets. Why? Markets hate uncertainty more than anything else, he explained—and in choosing Powell, Trump chose someone whose viewpoints on monetary policy are closely aligned to those of the current chair, Janet Yellen. “The fact that there was not even a ripple in equity or bond markets shows that both expect Powell to perpetuate the same policies that Yellen has been pursuing,” Ristuben said, adding that Powell may be a little more open to dialing back on regulatory measures.

October jobs report in U.S. reveals healthy economy, but wage growth disappoints

Shifting to the U.S. employment report for October, which showed a monthly gain of 261,000 jobs, Ristuben said the key takeaway is that the country’s economy is doing fine. The low numbers from September proved to be transitory, he said—a result of the damages wrought by Hurricanes Harvey and Irma. “On the surface, it may seem like October’s numbers were a disappointment,” he said, “because consensus expectations for the month called for the creation of 310,000 jobs.” However, Ristuben stated, when the newly-revised job estimates for August and September are factored in, the country is at—or even slightly ahead of—industry expectations. “This is very similar to what’s happening across the globe,” he noted, “with solid economic growth all around.”

However, Ristuben said, the one disappointing number of note was wage growth, which slumped to 2.4% year-over-year—down from 2.8% in September. This is especially important for the Fed as it mulls an interest rate hike in December, he said, because the justification for a raise has been that it’s necessary in order to combat inflationary pressures. “If those pressures aren’t seen anywhere in the marketplace, I think it’s going to be hard for them to raise rates,” he stated. With the latest data in mind, Ristuben and the team of Russell Investments strategists put the odds of a December rate hike at 50-50—“essentially, a coin flip,” he said.