The dollar is retreating and global stock markets are marching toward record highs ahead of a non-farm payrolls report that is expected to show US labour markets softening, helping set the stage for a rate cut from the Federal Reserve by the early autumn.
The British pound is adding to its gains after Keir Starmer’s Labour Party absolutely crushed its Conservative opponents in yesterday’s British election, taking at least 410 seats in the 650-seat House of Commons. Traders expect Starmer’s government to usher in a period of relative political calm after 14 years of volatile Tory rule, with higher levels of domestic investment, rising real incomes, and falling borrowing costs helping the economy reverse a long period of relative underperformance.
We think this bullish stance is well-founded in the fundamentals, but suspect exchange rate gains will be relatively limited. The UK doesn’t, in Mark Carney’s memorable phrase, really depend on the “kindness of strangers” – the country generally relies on selling down its stock of foreign assets to fund its twin deficits – but does remain vulnerable to the sort of “buyers strike” that took down the Truss administration. By necessity, the incoming administration can’t unleash the sort of fiscal impulse that could dramatically change the economy’s fortunes, and will likely maintain the rhetorical commitment to financial stability that pervaded the campaign.
Across the Channel, the euro is climbing as polls suggest that far-right parties will fall well short of the support needed to form a majority in Sunday’s French election. According to the most recent polls, Marine le Pen’s National Rally and its allies are projected to win between 200 and 250 seats – out of 577 in the lower house – after centrist and leftist parties strategically pulled hundreds of candidates from three-way races in a coordinated effort to keep the right out of power. Overconfidence could prove dangerous, however: French political polling has often landed wide of the mark in predicting election outcomes, and may be lulling voters into a false sense of complacency. Hedgers should remain wary of the potential for big moves at the Sunday open.
This morning’s non-farm payrolls report could add to the selling pressure on the dollar. If the economic consensus is correct, the Bureau of Labor Statistics will say 189,000 positions were added in June – lowering the three-month moving average to 209,000 – with the unemployment rate remaining unchanged at 4 percent, and hourly earnings slipping to 3.9 percent year-over-year, down from 4.1 percent in the prior month.
However, although the US labour market is unmistakably cooling, it’s not yet cold enough to make Goldilocks turn up her nose. The ‘Sahm Rule’, which suggests that a recession has begun when the three-month average unemployment rate rises 0.5 percent or more from its 12-month low, has not yet been triggered. By our calculations, the jobless rate would need to jump to 4.3 percent (4.285 percent on an unrounded basis) to confirm an imminent slowdown, and tight conditions are present elsewhere: strong headline gains, a still-low layoffs rate, and an elevated prime-age employment rate are all suggestive of underlying strength. Policymakers at the Fed (the bears in this metaphor) are well on their way home and the greenback should be on the defensive, but are unlikely to knock down the door on today’s print, leaving dollar-favourable rate differentials largely intact for now.
North of the border, Canada is seen printing a modest 20,000-position gain for the month of June, with the unemployment rate rising to 6.3 percent as population growth continues to outpace job creation – although such forecasts have been extremely unreliable amid highly-volatile monthly swings over the last year. The private sector continues to experience turbulence, but three non-business sectors – government, healthcare and social assistance, and education – have generated more than 52 percent of the jobs created in the Canadian economy since the pandemic began, and look set to continue acting as a stabilising force on a three-month averaged basis. This is not supportive of the country’s long-run growth and productivity outlook, and we expect policymakers at the Bank of Canada to maintain a dovish bias even if the headline print is surprisingly positive.
The Mexican peso is continuing its move higher as the dollar falls and president-elect Claudia Sheinbaum works to maintain continuity with the outgoing administration, naming a number of officials who had previously served under Andres Manuel Lopez Obrador to head various ministries. The exchange rate’s sensitivity to domestic policy changes remains elevated – and further debate on constitutional issues could generate renewed selling – but risks are also growing north of the Rio Grande. Data out on Wednesday showed Mexico cementing its lead over China and Canada as the United States’ largest import partner, and threatening to turn the trade relationship into a political football ahead of the presidential election. If US policymakers share our suspicion that some of Mexico’s gains are coming from the transshipment of merchandise in which a significant share of the manufacturing value is added in China, hawkish rhetoric could emerge on the campaign trail, and a significant reappraisal of the US-Mexico-Canada Agreement (NAFTA 2.0) will become more likely.
