World markets see-saw as dollar hits record low and oil prices soar
· Jobs data confirms that US economy is in recession
· Federal Reserve steps in to ease fresh credit turmoil
- The Guardian,
- Saturday March 8 2008
- Article history
World markets experienced another volatile day yesterday, with oil prices hitting a record high and the dollar a record low as gloomy US jobs data prompted fears that the world's largest economy had finally tipped into recession.
World stock and bond prices see-sawed, following a week of extreme uncertainty as investors saw the US Federal Reserve step into money markets in a bid to try to prevent the sub-prime mortgage crisis sparking off a new phase in the global credit turmoil.
Oil prices, which had been setting new highs through the week, jumped to $106.31 a barrel during the day in the US, while London Brent crude surged to $103.98, threatening to push petrol prices at the pumps in Britain to further highs.
That will complicate the task of the chancellor, Alistair Darling, as he prepares next Wednesday's budget against a background of record petrol prices.
The British Chambers of Commerce appealed yesterday for him to scrap the 2p-a-litre duty rise pencilled in for April.
"The Treasury has already generated a massive £2.2bn windfall in oil revenue since last October's fuel duty rise and must surely now recognise that scrapping the next rise in April is in the best interest of the UK economy," said Chris Hannant, the BCC's head of policy.
Analysts said that although oil prices normally fall when there is a fear of recession, dealers were focusing on the fact that the US central bank, the Federal Reserve, was expected to cut another half a point off its key interest rate on March 19. This would boost the US economy and push the dollar, in which oil is priced, even lower.
"The logic of the past few weeks has been to ignore US fundamentals," said Mike Wittner, global head of oil research at Société Générale.
The dollar slid to a record low against the euro, above $1.54, yesterday, and fell against a basket of major currencies. Investors have been rushing out of dollars as a weakening economy means lower interest rates and lower dividends on US assets.
Markets were particularly spooked during the day by figures showing the US suffered a bigger-than-expected decline in jobs numbers last month, which prompted analysts to say the world's largest economy was now in recession.
A government report showed that jobs outside the volatile agriculture sector, known as "non-farm payrolls", fell by 63,000 in February, the biggest drop in nearly five years and much bigger than economists had expected.
The US labor department also revised the January number to a drop of 22,000 rather than 17,000 and December's figure was revised from a rise of 82,000 to one of just 41,000. The back-to-back January and February job losses were the first consecutive monthly declines since May and June of 2003. And had the public sector not taken on nearly 40,000 people last month, the number of jobs lost would have exceeded 100,000. The labor department said that since the US housing market peaked in the autumn of 2006, the country's construction sector had shed a third of a million jobs. News on Thursday showed that foreclosures, or repossessions, had hit a record high in the fourth quarter of last year while house prices look to be in freefall.
Analysts said the latest numbers were as good as confirmation that the US economy was already in recession as a result of the housing market collapse and sub-prime mortgage crisis, which has already claimed victims across the globe, including Northern Rock.
"The debate should no longer be about whether there is or is not a recession, only about how deep it will be. Private employment has now fallen for three months in a row," said Nigel Gault, economist at Global Insight. "The Fed has to be more aggressive," said Richard DeKaser, chief economist for National City Corporation in Cleveland, Ohio.
US treasury bond prices shot up in anticipation that the Fed would cut interest rates, while stock prices around the world dived, later recovering somewhat on news the Fed had taken action to ease liquidity in interbank markets (see box).
As the FTSE 100 closed down more than 1% at 5,699.9, the Dow Jones industrial average had dipped below the 12,000 mark for the first time since mid-January. It was trading at 11,593 as dealers sold off industrial stocks that would suffer if the US were in recession.
"The underlying trends are horrible, with worse to come," said economist Ian Shepherdson of High Frequency Economics. "The Fed has to ease much more."
The White House admitted the jobs data was bad. "This quarter's going to be a difficult quarter for the US economy. We are in a low-growth period," said a White House spokesman, Tony Fratto.
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