The Barclays (LSE:BARC) share price is sensitive to changes in central bank interest rates and economic data. And on Friday 4 October the stock jumped 3% at 1:30pm. So, what happened?
A little on Barclays
Barclays is a universal bank with its primary operations in the UK and a strong presence in the US. As a diversified financial institution, Barclays offers a range of services, including consumer, corporate, and investment banking, as well as wealth management.
Shares in the bank have surged this year, partially on stronger economic data, but also management’s plans to make the company more efficient. The overhaul will see more of its risk-weighted assets (RWA) allocated towards UK consumer banking — one of the strongest parts of the business.
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The bank’s performance, especially in the consumer sector, remains sensitive to interest rate fluctuations, with higher rates generally leading to higher net interest income, but potentially leading to additional stress.
Something called ‘jobs day’
Central banks are very data-dependent when making decisions on interest rates. And as such, stock markets are very sensitive to economic data, and arguably have become even more sensitive this year.
So, Friday 4 October was jobs day — this is the nickname for the first Friday of every month when the US Bureau of Labor Statistics releases its monthly Employment Situation Report at 1:30pm UK time.
And this month analysts had been rather cautious with their forecasts after August’s data came in below expectations.
But there was a surprise. In September, the US created far more jobs than expected. In fact, it was a blowout month with 254,000 new jobs created during the month — analysts had forecasted 140,000.
The data tells us that the US economy, notably the private sector, is stronger than we were starting to think.
A robust US economy is great in many respects, reducing uncertainty, especially with the upcoming election.
Moreover, it means that the US Federal Reserve is likely to cut rates at a slower speed than previously forecasted.
This also means the Bank of England is less likely to cut interest rates by 50 basis points this year, as previously forecasted.
What does this mean for Barclays?
A for the implications for Barclays, there are two standout conclusions.
Firstly, a slowing economy is bad for banks. When economies go into reverse, it puts more stress on debt because people like me and you, as well as businesses, may lose our jobs or contracts.
So, a strong economy reduces the pressure on debt.
Secondly, if the economy is strong, bank’s worry less about the negatives associated with higher rates, namely defaults.
Moreover, banks invest in government debt, often through a series of financial instruments. And, currently, with interest rates high, government debt has a strong yield.
In turn, banks are slowly replacing the old gilts and treasury bonds that yield 1% with new bonds that yield closer to 4% or even 5%.
It’s the perfect scenario compared with the forecasts from a few months ago. But things can change, and fast.
