UK labour market weakens, as trade talk hopes feed stock market rally

The latest UK labour market update showed a softening in the jobs market last month and a drop in wage growth, most notable for private sector workers. The unemployment rate rose a notch, and the ONS reported that firms may not be recruiting new workers or replacing workers who have left. Overall, this is a grim labour market survey, and if this trend continues, it could spell worrying times for the UK economy.

NI increase taking its toll

Digging into the details a bit further, the number of payrolled employees slumped by 109k last month, most likely in response to the government’s increase in employers’ national insurance that went into effect the month before, it is down by 274k YoY, although this number is subject to revision. The unemployment rate also rose a notch to 4.6% from 4.5%, while the number of jobs created in the country in the three months to April was 89k, better than the 40k expected.

Wage growth: public/ private disparity widens

Wage growth was also the focus of this report. Average weekly earnings retreated to 5.3% in April, from 5.6% in March, private sector earnings fell to 5.1%. Public sector pay is now growing at a faster rate than private sector pay growth, at the same time as the UK government is trying to find budget savings. Thus, this could be a temporary phenomenon. There was a sting to this report, the number of people claiming jobless benefits rose by 33.1k last month. The annual number of people claiming jobless benefits is 1.735mn, according to the ONS. The inactivity rate remains high, but below the level of a year ago, and at 21.3%, it is also down on the quarter.

The pound has fallen on this report and remains near the lows of the session so far at $1.3520. Sterling remains fairly well supported above $1.35, and today’s move is part of a broader short-term recovery in the USD.

US/China trade talks in focus

As we start a new trading day, the focus remains on the US and China trade talks. The talks have been extended into a second day, which caused some scaling back of risk sentiment at the end of trading on Monday. The lack of positive headlines weighed on stocks and the dollar. The S&P 500 backed away from intraday highs but is still clinging on to the 6,000 level. The dollar was one of the weakest currencies in the G10 FX space at the start of the week, although it is clawing back some recent losses on Tuesday.

For now, the focus is likely to stay with the outcome of these trade talks. However, for the dollar to meaningfully retrace some recent losses, we do not think that positive headlines will be enough. A trade agreement with an actionable plan to get trade between the US and China flowing freely for the long term is the only way to stop the slide in the buck, in our view.

Liquidity and value were the main factors driving US stocks on Monday, which explains why consumer discretionary and tech stocks led US stock markets higher at the start of the week. If the S&P 500 is to extend gains above 6,000 then we expect these two sectors to be in the driving seat. The fact that these sectors led the US index suggests that the market still thinks that there will be a positive resolution to these trade talks. However, as time passes without an agreement, it could dent market sentiment, and volatility could spike if the talks don’t lead to a concrete agreement and plan for the future.

Investors are willing to grab on to any positive trade headline right now, as this is keeping hopes of a rally alive. As long as the US can agree trade agreements with its main trading partners before the end of the respite period in July, then the US and global economies could avoid a protracted recession, which is bullish for market sentiment.

US inflation may not show tariff impact

There was some good news for the dollar at the start of this week. It fell alongside US Treasury yields, which began to slide after the New York Fed published weaker than expected 1-year inflation expectations for May at 3.2%, down from 3.63% in April. For now, it does not appear that tariff disruption is putting pressure on inflation data, which may ease fears about prices spiking in the lead up to Wednesday’s CPI report. However, we would urge some caution. It is too early to tell how big the inflationary impact from tariffs will be. If trade agreements are not announced between now and July, then it will be the latter months of the year when the full impact from tariffs will show up in the data.

Commodity view: why oil is rising

Elsewhere, commodities are also in focus this week. Brent crude oil has surged by more than 3% in the past 5 days and closed above $67 per barrel on Monday. Brent is now comfortably above its 50-day sma and is moving towards the 100-day sma at $68.30, which is near-term resistance. There are some powerful drivers of the oil price in the short term. Firstly, the total number of open interest contracts on ICE diesel futures reached a record high at the start of this week. This suggests that traders are willing to stock up on cheap energy contracts, which have seen some steep falls this year.  Secondly, a report from Morgan Stanley oil analysts said that although Opec + has increased its production targets, actual output has not significantly increased. It is very hard to ramp up and ramp down oil production, which could stymie Opec’s chances of controlling the oil price. Added to this, hopes for a positive outcome in the US/ China trade talks is also fueling demand for oil.

A bit like a hippo and water, it’s not a good idea to stand in the way of hungry traders filling their boots with cheap energy futures contracts. Thus, the break above $65 for Brent is a bullish development that could trigger some short-term gains.

Silver surges as it catches up with gold

The silver price is also in focus. It is higher by more than 6.4% in the past 5 trading sessions, and its price has risen by 11% so far in June, vs. a 1% rise for gold. The silver price is own a touch on Tuesday, but we think there could be further to go in this rally. The price of gold and silver tend to be well correlated, so it is no wonder that silver is playing catch up with gold. It still has not surpassed its record high from 2011, and $50 is a psychological high for the silver price to try and beat.

Silver could benefit from whatever outcome we get the trade talks. On the one hand, it is a safe haven, and demand for precious metals remains robust. Secondly, if there is a trade agreement, then the silver price should still benefit. Silver is heavily used in industrial processes, and industrials could get a boost from trade flowing freely between the US and China again.