Markets plunge on fears of US slowdown

Markets plunge on fears of US slowdown
By Eoin Callan in Washington
Copyright The Financial Times Limited 2007
Published: September 7 2007 14:02 | Last updated: September 8 2007 01:11


Global stock markets tumbled on Friday on fears that the US economy was facing a sharp slowdown as the first monthly fall in employment in four years made an interest rate cut this month all but certain.

The evidence of weakness in the jobs market shocked investors and raised expectations that the US Federal Reserve would be forced to cut interest rates by as much as half a percentage point this month to stave off recession.

The anxieties about the US economy were exacerbated after the close of trading when Countrywide, the leading US home lender, announced plans to cut up to 12,000 jobs and predicted further weakness in the mortgage market.

Stocks in the US and Europe had suffered heavy losses on the back of the US job figures and the dollar fell sharply as investors sought the safety of government bonds.

In New York, the Dow Jones Industrial Average fell 1.9 per cent to 13,113.4, while the S&P 500 lost 1.7 per cent to 1,453.55. In London, the FTSE 100 fell 1.9 per cent to 6,191.2, below its starting level for the year, and in Europe the FTSE Eurofirst 300 shed 2.2 per cent to 1,494.88. Shares in banks and financials bore the brunt of the sell-off.

The dollar fell to $1.3770 against the euro, within a whisker of its record low in July. The weaker dollar helped prop up the price of gold, which broke through $700 an ounce for the first time in 16 months.

As bond prices soared, the yield on the two-year US Treasury bond fell as low as 3.88 per cent, a two-year low. The 10-year US Treasury yield dropped below 4.4 per cent, its lowest level since January 2006.

The jobs data showed employers cut 4,000 workers, compared with Wall Street forecasts that about 110,000 jobs would be created. The government also said 81,000 fewer jobs were created in June and July than previously thought.

Economists were particularly worried by the composition of the job losses. With expectations that construction and finance would be hard hit by the turmoil in the mortgage markets, manufacturing saw the largest job losses since mid-2003.

Hank Paulson, US Treasury secretary, said the drop in payrolls was “not the kind of number I’d like to see’’, but added: “Data does not always move in a straight line, so occasionally you will find some surprises. The economy will continue to grow in the second half of the year.’’

Rodrigo Rato, managing director of the International Monetary Fund, said the organisation was cutting its forecast for world economic growth because of the US subprime mortgage crisis and the resulting turmoil in financial markets. Mr Rato said it was a “serious crisis”.

There was also strong political pressure on Friday from Capitol Hill on the Fed to act. Barney Frank, chairman of the House committee on financial services, called for “a meaningful interest rate cut”.

Additional reporting by Krishna Guha, David Wighton and Joanna Chung