Morning Bid: Spotlight on Labor

Market Overview: Insights from Mike Dolan

As U.S. markets resume trading after the Independence Day holiday, they are faced with the implications of a noticeable slowdown in the domestic labor market. Meanwhile, British markets are experiencing a boost following predictions of a substantial victory for the opposition Labour Party in the upcoming elections.

This combination of factors is exerting downward pressure on the U.S. dollar, which has seen its index decline for the fourth consecutive day, reaching its lowest level in three weeks ahead of the June employment report. The British pound is trading close to its highest points since the Brexit referendum in 2016, marking its best performance since mid-June against the dollar.

Recent data pointed to a softening labor market, with weekly jobless claims, layoffs, and private sector hiring figures all falling short of expectations. The Atlanta Federal Reserve’s real-time GDPNow estimate has also been revised down to 1.5%, reflecting an overall decline in U.S. economic surprises, now at their most negative in two years.

Payroll growth in the U.S. is anticipated to have decelerated to 190,000 in June, a reduction of over 80,000 from May’s figures. Furthermore, annual average earnings growth is expected to slip to 3.9% from 4.1%. While the unemployment rate is projected to remain steady at 4.0%, a slight increase to 4.1% could trigger the Sahm Rule, which indicates a potential recession if the three-month average of the jobless rate rises significantly above its lowest point from the previous year.

Despite mixed signals from Federal Reserve officials regarding monetary policy, markets are now largely pricing in the expectation of two rate cuts this year, with an 80% likelihood of the first cut occurring in September, despite the proximity to divisive U.S. elections.

In terms of bond markets, ten-year Treasury yields have dipped slightly before the opening bell on Friday, and Wall Street futures appear stable, aiming to sustain the record highs achieved for major indexes earlier in the week as the second-quarter corporate earnings season approaches.

In the UK, the anticipated landslide victory for the Labour Party, projected to have a majority of at least 170 seats, has fostered optimism. British mid-cap stocks rallied nearly 2% early Friday, and the gap between UK gilt yields and German government bonds shrank to its lowest in three weeks, reflecting hopes for economic stability under the new government after a chaotic Conservative tenure. Homebuilding firms notably garnered attention as their shares rose by 2.3%.

Contrastingly, while Marine Le Pen’s National Rally party made historic advancements in France recently, the British electoral landscape seems to favor center or center-left parties, with approximately 20 million voters supporting Labour and other similar parties, compared to about 10 million for the Conservatives and far-right factions.

French markets have also seen positive movements this week, with stocks and the euro showing gains amid strategic positioning ahead of pending assembly elections aimed at curbing far-right dominance.

Another significant currency trend observed this week is the strengthening of Brazil’s real, which gained 1% due to President Luiz Inacio Lula da Silva’s directives to align fiscal policies with established frameworks and endorse spending cuts.

In Asia, Chinese stock markets concluded the week at a 4.5-month low, driven down by financial and consumer sectors, having erased all gains made throughout the year.

Key developments expected to influence U.S. markets later today include:

• The June employment report
• UK election results
• Speeches from New York Federal Reserve President John Williams in India and European Central Bank President Christine Lagarde in France

This wraps up the market outlook as investors look for further clarity and direction in global economic conditions.