Reeves On Borrowed Time As NFP Looms

WHERE WE STAND – Yesterday wasn’t exactly the most thrilling day for financial markets, though at least the cricket was on to provide something of a distraction.

It wasn’t just the cricket that provided a distraction, though, with another episode of the long-running UK political soap opera to keep us entertained as well.

In short – the Government’s attempt to pass welfare reforms on Tuesday failed, actually resulting in increased spending, as opposed to the cuts supposed to be delivered; then, at PMQs yesterday, PM Starmer refused to repeat his pledge that Rachel Reeves would still be Chancellor at the next election, with Reeves appearing in tears on the front bench behind the PM; later, in a damage control exercise, Number 10 and HMT spokespersons stressed Starmer’s ‘full support’ in his Chancellor.

If all that sounds rather shambolic, it’s because it is! Unsurprisingly, the market took a rather dim view of all this, with the calculus being that Reeves’s days in office are numbered, no matter what denials may be issued. Frankly, it seems difficult to conclude anything else.

The problem here, though, is who, and indeed what, comes next. I reckon this is a case of ‘better the devil you know’ and that, while I’m not exactly Reeves’s biggest fan, she’s probably the best of a bad bunch of candidates for the job. The big issue is that there are four ways to resolve the issue of constantly breaching the fiscal rules – spending cuts, tax hikes, greater borrowing, or changing the rules. The first and second have been tried, and failed, while the third would go down like a lead balloon with financial markets.

That leaves the fourth as the most likely option for a new Chancellor, which also makes higher borrowing a much greater probability, again exerting significant pressure on Gilts across the curve, and also on the GBP, which slumped well over 1% against most G10 peers. This dynamic, of the currency and Govvies selling-off together, is a classic sign of a market increasingly jittery over the fiscal backdrop, with these jitters unlikely to dissipate any time soon. It’s also an EM-ish dynamic, as much as it pains me to say that.

In a counter-intuitive way, this could be Reeves’s best argument to keep her job, in that markets would experience such a significant adverse reaction if she were replaced. Still, it probably won’t be enough, with it being increasingly politically expedient for Starmer to shuffle her out of the Treasury.

Elsewhere, yesterday, the data docket was relatively barren, though the ADP employment report did point to a surprise -33k fall in employment last month. Still, it’s ADP, so take it with a huge pinch of salt, as the link between that figure, and the NFP print due later today, is at best ropey.

Of much more importance than that, was news that the US and Vietnam had struck a trade deal, announced in true Trumpian fashion via a Truth Social post. Imports into the US from Vietnam will now be subject to a 20% tariff, though this doubles in the case of “transshipments”. Relatively punchy levels, but at least this serves to confirm my longstanding view that the direction of travel on trade remains towards deals being done, and much calmer rhetoric prevailing.

This, of course, continues to support the bull case for equities, along with solid economic growth, and strong earnings growth, though the latter will soon be tested with Q2 earnings season less than a fortnight away. Anyway, equities gained ground on Wall Street yesterday, with the path of least resistance continuing to lead to the upside, given the aforementioned rationale.

Meanwhile, in the Treasury complex, some selling pressure emerged across the curve, with the long-end underperforming, presumably a spill-over impact from the sell-off seen in Gilts. See, we may not be the world power we once were, but us Brits can still move global markets sometimes! In any case, we remain within well-defined ranges, the benchmark 10-year between 4.25% and 4.50%, as participants wait and see whether today’s jobs report can result in a more decisive breakout.

Similar can be said of the FX complex, where the pressure seen in the GBP made waves elsewhere, as the greenback advanced against most G10 peers. I view this move as more of a short-term bounce, than a more durable rebound, however, with the balance of risks continuing to point to further USD downside, particularly as the erosion of monetary policy independence continues, and reserve asset allocators increasingly look elsewhere.

LOOK AHEAD – Not only is today a ‘synthetic Friday’, with the US out for Independence Day tomorrow, it’s also ‘Jobs Day’!

The June US labour market report drops this lunchtime, with headline nonfarm payrolls seen rising +110k, a modest slowing from the +139k seen in May, but still just about above the breakeven rate. Earnings, meanwhile, are seen rising 0.3% MoM and 3.9% YoY, neither of which should give the FOMC too much concern on the inflation front, with unemployment set to rise 0.1pp to 4.3%, though with the unrounded May figure having been 4.2443% this isn’t the biggest jump in reality.

On the whole, it’s difficult to imagine the jobs report being a game-changer for the FOMC, given Chair Powell’s resolute ‘wait and see’ approach to policy, amid a plethora of upside inflation risks. From a market perspective, the initial reaction, particularly in the equity space, is likely to see focus fall on the macroeconomic story painted by the report, as opposed to any potential dovish policy implications, especially in the event of a soft report. Good news is good news, and bad news is bad news.

Away from the jobs report, a plethora of services PMI prints are due, though only the US ISM survey is likely to be market-moving, with the remainder simply ‘final’ prints that are unlikely to be revised from the respective ‘flash’ estimates. On the policy front, we see minutes from the June ECB meeting, as well as remarks from the Fed’s Bostic.

Lastly, as noted, with tomorrow being Independence Day, we not only have US market closures on Friday to contend with, but also early market closures this evening. Setting that aside, with a long holiday weekend looming, participants will probably look to head for the exits as early as possible, probably seeing both volumes and liquidity thin out relatively soon after the jobs data has been digested.