Stocks get a boost from tariff certainty, as pound rides high on UK wage growth

Risk sentiment is picking back up again on Tuesday. European stocks are a sea of green, after news that Donald Trump had extended the deadline to agree tariff rates with China for another 90 days. This has averted fears of a trade war between the world’s two largest economies, and although an agreement is yet to be agreed, the can has been kicked down the road and that is enough to maintain the market mood in high summer markets.

Gold price stabilizes as Trump clarifies tariff rules

The gold price has also been in focus for the last two days. President Trump did another tariff U-turn on Monday when he said that gold bars would not be subject to tariffs. This weighed on the price of gold in both London and New York. Gold prices had surged at the end of last week on the back of a spike in demand to try and front run tariff rates, however, this has now been erased, and the London gold price is lower by $56 in two days. The Comex gold price has only partially reversed its gains so far this week, however, the spread between the US and London gold price has narrowed as tariff fears have eased.

Pound stays on top after UK labour market data

Tariff risks seem to be contained, for this week at least, which allows the focus to shift to economic data. The pound is the top performing currency in the G10 FX space so far in August, and it is the second top performing currency in the G10 on Tuesday, after the latest labour market report was not as weak as some had feared.

UK jobs market cools in an orderly fashion

Wage growth remained robust in June, and the drop in the number of payrolled employees was not as bad as feared last month, with an 8,000 loss, a 20,000 decline had been expected by analysts. The unemployment rate remained steady at 4.7%. This suggests that the UK labour market is cooling in an orderly fashion rather than collapsing, although job vacancies are hard to come by. The number of vacancies fell 5.8% in the 3-months to June to 718,000, with declines in 16 out of 18 major industries. The number of unemployed people per vacancy was 2.3 in the three months to June, up from 2.1 in the previous quarter. Added to this, the number of vacancies has declined by nearly 10% since their post Covid peak.

Pay growth remains robust, which is why the Bank of England is treading a cautious path when it comes to interest rate cuts, and it is one of the reasons why 4 MPC members voted to keep interest rates on hold last week. In the three months to June, public sector wage growth was 5.3%, while private sector wage growth slipped to 4.7% down from 5%, which is the lowest rate of growth since early 2021. This tells us two things: 1, that the public sector is outpacing the private sector when it comes to pay, and if the government wants to reign in public sector spending then they need to get wage growth under control, and 2, that adjusted for inflation, pay shrunk for both private and public sector workers.

Will the labour market turn a corner?

Interestingly, wage growth was strong in retail, hotels and restaurants, which is where jobs have been shed in recent months. This could suggest that consumer demand is robust enough to sustain an increase in employment, and it may be a sign that after 10 months of job losses, the UK labour market could be turning a corner.

Overall, the better-than-expected labour market data has boosted the pound on Tuesday, and bond yields are slightly higher. The 10-year yield is higher by 2.8bps, while the 2-year yield is higher by 2bps. GBP/USD continues to make gains, and has cleared the $1.3450 mark, which opens the door for a larger move back towards the 50-day sma at $1.35.

There is now less than one rate cut expected from the BOE for the rest of this year, a month ago another full rate cut was expected in Q4. As rate cut expectations get scaled back due to stubborn inflation, the pound is a beneficiary. We will have to see if the interest rate futures market recalibrates its expectations yet again post the GDP data for Q2 that is released on Thursday, and if a weak reading for the UK economy puts a stop to the pound’s strong run in August.

All eyes on US CPI

Ahead today, US CPI will be the highlight. Headline and core CPI is expected to tick up a notch, although pass through from tariffs is expected to be minimal at this stage. A stronger than expected reading could weigh on hopes that there will be more than 2 rate cuts from the Fed for the rest of the year, it could also boost the dollar, which is mixed as we lead up to the CPI reading.