Morning Bid: US Jobs and New UK Government Take Center Stage

A Look at the Day Ahead in U.S. and Global Markets

As U.S. markets resume after the Independence Day holiday, investors are focusing on a notable slowdown in the labor market. Concurrently, British markets surged following a resounding victory for the UK's opposition Labour Party in Thursday's elections. This combination has further pressured the dollar, which has declined for the fourth consecutive day, reaching its lowest point in three weeks ahead of the June national employment report. On the other hand, the British pound, nearing its best levels since the Brexit vote on a trade-weighted basis, reached its highest since mid-June against the dollar.

Several indicators on Wednesday pointed towards a weakening U.S. labor market. Weekly jobless claims, layoffs, and private sector hiring for the past month all fell short of expectations, painting a picture of slowing growth as the year progresses. The Atlanta Federal Reserve's "GDPNow" real-time estimate dropped to 1.5%, and U.S. economic surprises hit their most negative level in two years. Payroll growth in the U.S. is predicted to have slowed to 190,000 in June, down significantly from May, while annual average earnings growth is expected to ease slightly. Although the unemployment rate is expected to hover at 4.0%, an increase to 4.1% would trigger the Sahm Rule, a recession indicator.

Despite mixed signals from Fed officials, markets are nearly fully priced for two rate cuts this year, with an 80% chance of the first cut coming in September, despite the proximity to the divisive U.S. elections. Ahead of Friday's market opening, ten-year Treasury yields saw a minor dip, while Wall Street futures remained steady, aiming to maintain record highs achieved mid-week as second-quarter corporate earnings begin to come in next week.

UK Market Reaction

Celebration was evident in UK markets following the Labour Party's expected landslide win, marking their return to power after 14 years with an estimated 170-seat majority. The FTSE 250 index, which includes British mid-caps, rose nearly 2%, and the spread between five-year UK gilt yields and German government bonds fell to its lowest in three weeks. This surge is fueled by hopes that the new government will usher in economic stability after a turbulent period under Conservative rule, with British homebuilding firms seeing notable gains.

Unlike the political climate in France, where Marine Le Pen's National Rally party achieved historic gains in elections last Sunday, the UK electorate largely favored center or center-left parties. Approximately 20 million voters supported Labour, Liberal Democrats, Green, and Scottish Nationalists, compared to about 10 million who supported Conservatives and the far-right Reform UK Party. Nevertheless, French markets have also rallied this week, with tactical positioning and voting anticipated to prevent a far-right majority in the upcoming second round of assembly elections, pointing towards a likely hung parliament. Subsequently, French and Eurozone stocks along with the euro gained about 0.5%, and the spread between French and German government bonds narrowed to its lowest in three weeks.

Global Currency Movements

The Brazilian real was another notable currency mover, strengthening by 1% on Thursday after President Luiz Inacio Lula da Silva instructed compliance with the country's fiscal framework and approved spending cuts. This move aimed to counteract the real's more than 10% drop this year due to concerns over fiscal sustainability, with Lula expressing worry over the recent depreciation of the currency.

Meanwhile, Chinese stocks ended the week at a 4-1/2-month low, dragged down by the financial and consumer sectors, erasing all gains for the year. Investors are keenly awaiting developments that will provide more direction to the U.S. markets later on Friday, including the U.S. June employment report, final UK election results, and addresses from New York Federal Reserve President John Williams and European Central Bank President Christine Lagarde.