Fed poised for emergency cuts as cracks appear in US economy

THE US Federal Reserve may be forced into emergency rate cuts as soon as this month after shockingly weak job figures set off recession tremors through the US bond markets and triggered a worldwide flight to safety.

The US non-farm payrolls report for May fell far short of expectations at 75,000 new jobs, while the figures for both April and March were downgraded sharply. “It was a huge miss,” said James Smith from ING.

Yields on 10-year US Treasuries fell to 2.05pc, leading to the most drastic inversion of the US yield curve in this financial cycle. German bund yields hit an all-time low of minus 0.26pc.

The combined effect of fading fiscal stimulus in the US and escalating trade wars – visible in wilting world trade traffic – have caught up with America’s fortress economy. Manufacturing suffered its worst slump last month since 2009 and order books are contracting, according to IHS Markit. The service sector is rolling over as well with a lag.

Futures markets are pricing in three rate cuts over the rest of this year. “Every question we’re getting from clients is whether the Fed is behind the curve. They need to cut rates by 50 basis points immediately,” said Andrew Roberts from Natwest Markets. “There is a global slowdown under way driven by emerging Asia.”

In the US the picture is darkening. The New York Fed’s closely watched gauge of recession risk has jumped to 30pc, a level last seen in July 2007, a month before the credit “heart attack” that ushered in the financial crisis.

Wall Street soared on the bad jobs news – on the grounds that the Fed will be forced to come to the rescue.

The prospect of rate cuts and a US slowdown is causing heartburn in Frankfurt. It threatens to set off a dollar slide and therefore a rising euro. This would effectively tighten policy in euroland at a time when Italy and Germany are flirting with recession and the ECB is trying to stave off deflation.

The euro jumped to a three-month high of $1.1340 against the dollar yesterday. The ECB has no credible instruments left to drive down the exchange rate. QE is close to useless once long yields are at zero – as the Japanese have learnt – and if you have a structural trade surplus.

The eurozone is now condemned to suffer the slow torture of a stronger currency in a downturn. This is the ultimate macro-economic cul de sac.