Alsharq Tribune- Rahma Otaify
Concerns over the UK government’s borrowing costs were revived again after stronger than expected US jobs figures triggered volatile conditions in global financial markets, according to British newspaper, The Guardian.
The newspaper indicated that the yield - in effect the interest rate - on UK government bonds, known as gilts, rose after the US job market data to near levels recorded on Thursday, before falling back slightly as investor jitters persisted. Gilt yields have risen sharply in the past three months, fueled by global developments but also domestic concerns, pushing the UK’s long-term borrowing costs to the highest levels since 1998.
It added that the pound fell by nearly a cent, or 0.7% against the US dollar, as the US currency rose sharply against other leading international currencies. Share prices fell on both sides of the Atlantic (North and South American countries on one hand, and European countries on the other).
The US Department of Labor said the US economy added 256,000 jobs in December, and the unemployment rate fell to 4.1 percent. The US economy added the most jobs since March in December, and the unemployment rate unexpectedly fell, concluding a year that supports the Federal Reserve's argument for holding off on cutting interest rates.
Economists confirmed that the US jobs report closes the door to cutting interest rates at the next Federal Reserve meeting, which will be held on January 28 and 29, and reduces the chances of cutting interest rates at the subsequent Federal Reserve meeting in March. They considered it the latest sign of the US labor market recovering from the slump it suffered in the middle of last year, after US central bank officials considered the labor market no longer a source of inflationary pressures.
Since expectations indicate that inflation will not fall and interest rates will not be reduced, this affects financial markets, leading to a decrease in the value of bonds and thus an increase in their returns. Treasury bond yields rose as investors bet that the Federal Reserve will be slower to cut interest rates this year.
The Guardian added that amid rapid selling in the global bond market, investors warned that the UK would be particularly affected amid growing concerns about persistently high inflation and higher interest rates for a longer period.
According to The Guardian, markets no longer expect the Bank of England to cut its base interest rates twice in 2025. It highlighted that nearly 700,000 homeowners in the UK will face higher mortgage costs once their fixed-rate deals expire this year.
The newspaper quoted Seema Shah, the Chief Global Strategist at the Fund Manager Principal Asset Management as stating that, "For global bonds, the strength of the US jobs report just adds to their challenges. The peak for yields has not yet been reached, suggesting additional stresses that several markets, especially the UK, can ill afford".
Analysts in British financial markets were also quoted by The Guardian as saying that, "UK borrowing costs could be dragged higher by the gyrations in global markets. As the world’s largest and most important bond market, shifts in the US typically have an impact on borrowing costs elsewhere".
According to the newspaper, the increase in borrowing costs has been particularly marked for the UK, amid investor concerns about near flat lining economic growth and sticky inflation. These have forced the Bank of England to keep interest rates higher for longer, as well as caused the government’s delicate financial position. Economists have warned a sustained rise in borrowing costs could sweep away a £10 billion buffer that Chancellor of the Exchequer had kept in reserve in the autumn budget.
For its part, the American Wall Street Journal reported that for the US, there are other sources of potential price pressures on the horizon. US President-elect Donald Trump has indicated that he intends to radically limit immigration, which has been a major source of new workers in recent years and helped ease labor shortages after the COVID-19 pandemic.
In addition, Trump has promised to increase tariffs on the three largest trading partners of the United States, namely Mexico, Canada and China, along with several other countries. Economists said this would likely lead to higher prices for affected commodities and could weigh on economic growth, noting that at the moment, there is so much uncertainty about Trump's plans that Federal Reserve policymakers are waiting and watching
