Making sense of the forces driving global markets |
By Jamie McGeever, Markets Columnist |
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- World stocks hit record peaks for a fifth day, and on Wall Street the S&P 500 and Nasdaq rise closer to their recent highs. Benchmark U.S. indices gain as much as 0.6%.
- Intel shares leap almost 8%, the biggest advancer on the S&P 500, while energy (+1.8%) and consumer cyclicals (+1.3%) are the best-performing sectors.
- Sterling is among the biggest decliners in G10 FX, falling 0.4% against the dollar and euro after unexpectedly weak UK labor market data.
- Colombia's peso is the biggest mover in global FX, sliding 1.5% following attempted assassination on Sunday of Senator Miguel Uribe, a potential presidential candidate. Government also temporarily suspends fiscal rules on Tuesday.
- U.S. bond yields slip, no more than 2 bps. Dealers digest 3-year auction, Bloomberg report that Treasury Secretary Scott Bessent could be contender to replace Powell at the Fed. All eyes now on Wednesday's CPI data.
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Buoyancy trumping uncertainty |
On the day The World Bank slashed global growth forecasts, warning of the "significant headwind" from tariffs and heightened uncertainty, global stocks on Tuesday clocked their fifth consecutive all-time high. Britain's benchmark FTSE 100 is a whisker from reaching new peaks and Germany's DAX hit an all-time high last week, while on Wall Street the Nasdaq and S&P 500 are within a couple of percentage points of new record levels also. Yet the reasons for equity investors to be fearful right now are plentiful- worries over growth, inflation, tariffs, long-term interest rates, U.S. debt and deficits, and the fact that China, the world's second largest economy, is still mired in a low growth and deflationary funk. Something not quite adding up, right? Perhaps. On the other hand, the fiscal taps are being turned on in China and Germany, British finance minister Rachel Reeves outlines her multi-year 2 trillion pounds ($2.7 trillion) spending plan on Wednesday, and U.S. President Donald Trump's 'big beautiful bill' tax cut-and-spend bill currently going through Congress is front-loaded with fiscal stimulus too. None of that is really fresh news but the upshot is a lot of liquidity coursing through the global economy. Right now it is something investors appear willing to accept even if the price is increased debt, and for the US and UK in particular, worse public finances. Big corporate deals are being struck, like the OpenAI and Google cloud service tie up and Meta Platforms reportedly paying $15 billion for a 49% stake in AI startup Scale AI, and implied equity and bond volatility is low. After a period of fretting more about deficits and spiking bond yields, investors may now be viewing the future with their glass half full. Fiscal stimulus is coming and interest rates around the world are being cut. The monetary outliers are Japan and the US, but the Bank of Japan could be near the end of its tightening cycle and the Fed may be about to begin easing later this year. On top of this, there's a general belief that U.S. President Donald Trump will back down from his hardline stance on tariffs and that a palatable deal with China will be reached, the so-called 'TACO' - Trump Always Chickens Out - trade. Fresh news on that front, at least, should be forthcoming on Wednesday. |
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Trump immigration crackdown creates jobs distortions, Fed headaches |
Seismic shifts in immigration are distorting the U.S. employment picture, making it harder for investors and policymakers to know exactly how much the labor market is actually slowing. Assuming the Trump administration makes good on its pledge to reduce immigration, either by stopping the flow of people coming into the country or by deporting many already here, the labor supply will shrink. The long-term impact of lower immigration is generally agreed to be negative, as new workers are needed to replace retirees, fill job vacancies and drive economic growth. Over time, fewer new workers will likely mean lower growth. But in the short term, a smaller pool of workers results in a tighter labor market, which keeps a lid on the unemployment rate, albeit artificially and probably temporarily. This may already be playing out. |
Figures released last week showed that employment in May fell by 696,000 jobs. That's the biggest single monthly decline since the historic losses seen during the pandemic in early 2020. Some economists argue that the recent drop is a consequence of Trump's immigration crackdown. Nonfarm payrolls rose 139,000. Meanwhile, the unemployment rate held steady at 4.2%, which though higher than it was two years ago, is still historically low by any measure. All else being equal, this points to a tight labor market, which should put upward pressure on wages and perhaps even warrant a more hawkish policy stance from the Federal Reserve. But that is almost certainly a misreading. |
When labor supply and the labor force participation rate fall, this brings down a country's so-called 'breakeven' job growth. That's the number of net new jobs the economy needs to keep up with growth in the working-age population and maintain a steady unemployment rate. That figure is falling, and if the Trump administration toughens up its anti-immigration policies further, this decline is likely to accelerate. |
What could move markets tomorrow? |
- South Korea unemployment (May)
- Japan wholesale inflation (May)
- ECB officials speaking at various events, including: Board members Claudia Buch and Philip Lane, and Governing Council member Gabriel Makhlouf
- UK finance minister Rachel Reeves announces multi-year spending plan
- $39 billion U.S. 10-year Treasury note auction
- U.S. CPI inflation (May)
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. |
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