A Day Ahead View in US and Global Markets by Mike Dolan
As US markets return from the Independence Day holiday to gauge the significant cooling of the US labor market, British markets have rallied following a long-predicted landslide victory for the UK’s opposition Labor Party in the election. of Thursday.
The combination is weighing on the dollar further on Friday morning, with the index falling for the fourth day in a row and hitting its lowest level in three weeks ahead of the June national employment report. Sterling, close to its best levels since the 2016 Brexit vote on a trade-weighted basis, reached its highest level since June 13 against the dollar.
A litany of soft labor market probes since Wednesday – weekly jobless claims, layoffs and private sector hirings last month all missed forecasts and painted a picture of weakening growth by mid-year. The Atlanta Federal Reserve’s real-time “GDPNow” estimate has fallen to 1.5% and US economic surprises are the most negative in two years.
US job growth is forecast to have slowed to 190,000 in June – down 80,000 from May – and average annual earnings growth is expected to have slowed from 4.1% to 3.9%.
While the unemployment rate is expected to hold steady at 4.0%, an increase to 4.1% would trigger the so-called Sahm Rule – a formula developed by former Fed economist Claudia Sahm that suggests a half-point increase in the rate three months of unemployment. average above the previous year’s minimum signals recession.
Despite continued missteps by Fed officials, markets are back almost fully priced in for two rate cuts this year. That now represents an 80% probability of a first move in September, however unlikely it may seem just before the divisive US elections.
Ten-year Treasury yields were slightly weaker before Friday’s bell, with Wall St futures steady and looking to sustain the record highs hit by the major indexes on Wednesday as corporate earnings surged. of the second quarter begin to flow next week.
But the pound and UK stocks welcomed the expected landslide victory of the UK Labor Party, which returns to power after 14 years with what is estimated to be at least an overwhelming majority of 170 seats.
British mid-cap shares captured by the FTSE 250 index jumped almost 2% on Friday morning and the spread between yields on UK five-year gilt bonds over German government bonds fell to the lowest level in three weeks , in the hope that the new government will provide a period of economic stability after an often tumultuous period of Conservative Party rule.
British housebuilding companies stood out, with an index tracking their shares rising 2.3%.
Unlike France, where Marine Le Pen’s National Rally party made historic gains in last Sunday’s elections, overall the British public largely opted for center or center-left parties.
Across the country, around 20 million people voted for the Labour, Liberal Democrats, Greens and Scottish Nationalists, as opposed to around 10 million for the Conservatives and the far-right UK Reform Party.
But French markets have also rallied this week as tactical positioning and voting ahead of Sunday’s second round of legislative elections seek to prevent the far-right from gaining an overall majority and pointing to a divided parliament in that country.
French and eurozone stocks and the euro currency rose about 0.5% on Friday. The premium on French 10-year government bonds over Germany hit its lowest level in three weeks at 66 basis points.
The other major currency that moved this week was the real, which appreciated another 1% on Thursday, below 5.49 per dollar, after Brazilian President Luiz Inácio Lula da Silva ordered his economic team to comply with the country’s fiscal framework and approved suggestions for spending cuts, the country’s finance minister said.
Real weakness this year saw it fall more than 10% to more than two-year lows due to concerns about fiscal sustainability in Latin America’s largest economy.
Lula da Silva said on Tuesday he was concerned about the currency’s recent weakness, adding that “something” needed to be done to tackle what he called “speculation.”
Elsewhere, Chinese stocks ended the week at a 4-1/2 month low, weighed down by financial and consumer stocks. China’s mainland index has now erased all of its gains for the year.
Key developments expected to provide further guidance to US markets later on Friday:
*June US employment report
* UK election results due
* New York Federal Reserve President John Williams speaks in India; President of the European Central Bank, Christine Lagarde, speaks in France
(Reporting by Mike Dolan, Editing by Tomasz Janowski mike.dolan@thomsonreuters.com)
