Chances of US interest rate cut in September are on the rise: Richard Hunter

US markets returned from Independence Day on a high, as the latest jobs report added fuel to the fire of an interest rate reduction in September.

The unemployment rate ticked higher to 4.1 per cent against expectations that it would remain unchanged at 4 per cent and, of equal significance was the fact that there were also downward revisions to prior months.

Treasury yields fell on the news, while the market is now pricing in a 77 per cent chance of the first rate cut in September, up from around 65 per cent just a week ago.

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With another inflation print due this week, the case for a cut could strengthen further.

Richard Hunter offers his expert insightRichard Hunter offers his expert insight
Richard Hunter offers his expert insight

In the meantime, recent economic data has revealed a slowing economy which could change the Fed’s focus in an effort to quell inflation without tipping the economy into recessionary territory.

This week will also herald the beginning of the latest earning season, with updates from banks such as Citigroup, JP Morgan Chase and Wells Fargo of particular significance.

While guidance comments could give something of a read across to the UK banks who report around the end of the month, of more imminent importance will be the state of the consumer and attitudes to lending, set against debt default levels.

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In addition, for the banks as a whole there will also be some scrutiny of whether the levels of deal making in the relevant investment bank arms has led to a boost in revenues.

The general level of rising optimism was enough to push the technology-exposed indices to new highs once more, with the S&P500 and the Nasdaq now having risen by 16.7 per cent and 22.3 per cent respectively in the year to date. The Dow Jones has also consolidated its recent gains to stand ahead by 4.5 per cent so far this year.

In China, the real estate sector was not at its usual place in the forefront of investor attention, as shipping shares fell markedly with Cosco Shipping falling by over 7 per cent. The news will neither temper the more recent pessimistic view of investors on the region, nor does it give any immediate indication of an economic recovery which investors have been pining for this year.

UK markets were similarly downbeat, with the two major indices limping to losses in early trade. The updates from China did little to lift the mood, reflecting in some weakness on the likes of Burberry, Standard Chartered and HSBC. The oil majors also drifted on a lower oil price, shaving some of the gains from the premier index which remains ahead by 5.9 per cent so far this year.

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The FTSE250 also dipped as the new government attempts to propel economic growth in the UK, with announcements on its strategy expected to follow over the next few weeks.

Despite a dip which leaves the index up by 5.5 per cent in the year to date, one bright spot came in the form of Ocado, which announced plans for a third customer fulfilment centre in Japan.

The shares rose by almost 5 per cent on the news, which is of some small consolation to a share price which has declined by more than 50 per cent this year, resulting in its recent relegation from the FTSE100.

Richard Hunter is head of markets for interactive investor

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