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Whatever the market take was from Friday's surprisingly soft U.S. payrolls update has been overshadowed by the instant firing of the statistician responsible for them - leaving more questions than answers about the veracity of these numbers and all those in the future. The massive downward revisions to prior months' job totals were a bigger initial jolt than the slight miss to July payrolls or the uptick in the unemployment rate. But President Donald Trump's dismissal of Bureau of Labor Statistics boss Erika McEntarfer over what he called "rigged" data means investors now either dismiss the July report or assume future reports will be massaged to be more favorable to Trump. |
- Trump's firing of McEntarfer has prompted investors to revisit April's questions about damage to U.S. transparency and institutional integrity - qualities that, for many, have been at the heart of America's long-standing exceptional economic and financial performance. The early resignation of Federal Reserve Board Governor Adriana Kugler, also on Friday, now gives Trump the chance to put a third nominee on the seven-person Fed board - increasing his influence on the central bank while he is demanding steep interest rate cuts.
- The jobs data release on Friday has prompted market futures to price an 85% chance of a Fed cut next month - compared to less than 50% beforehand - and more than fully price two cuts by year's end. U.S. Treasury yields plunged to their lowest in over a month. Ten-year yields clocked the biggest one-day fall of the year and the 2-30-year yield curve widened to its steepest in over three years. The dollar swooned, giving back a chunk of last month's rally. Most of these moves were pared back slightly first thing on Monday.
- U.S. stocks ended down more than 1% on Friday, having already been jarred by the August 1 tariff announcements, and the VIX 'fear index' jumped above 20 for the first time since June - likely reflecting unexpected jobs market weakness and a duff earnings outlook from Amazon. Futures were back up more than 0.5% ahead of Monday's bell as another heavy week of earnings beckons and Palantir tops Monday's diary. With two-thirds of the S&P 500 having reported Q2 updates, the blended annual profit growth rate for the 500 firms is running at 11% - almost twice estimates one month ago and back roughly to where expectations were on January 1.
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Today I'll also discuss why Brexit may provide a useful roadmap for those looking to I'd love to hear from you, so please reach out to me at mike.dolan@thomsonreuters.com. |
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Brexit's parallels with Trump tariffs tell a tale |
In figuring out why the U.S. tariff shock hasn't sent the economy or financial world into a tailspin, Britain's exit from the European Union trade bloc provides something of a playbook - and without a particularly happy ending. Aside from vast differences in economic scale and global reach, the two episodes bear some comparison in how they upended years of deeply integrated free trade and possibly in how business, the economy at large and financial markets reacted. The 2016 Brexit referendum and Trump's tariffs this year were each widely billed as economic shocks that would send the financial world into paroxysms. They didn't, at least not at the outset. To be sure, both were followed by dramatic downward lurches in the two countries' respective currencies. But, to some extent, the steep drop in sterling after the referendum vote and the dollar's plunge on President Donald Trump's tariff plan this year helped offset some of the wider impact - at least on stock markets that are loaded with global firms with outsized foreign revenue. More broadly, however, the difficulty in isolating their immediate net impact means no "big bang" economic crisis unfolds to prove critics right - even if their enduring legacy turns out to be a slow burn of economic potential and lost output, often obscured by multiple other crosswinds. SLOW BURN In Britain's case, the seismic effects of the COVID-19 pandemic distorted any attempt to easily assess Brexit when it actually happened. Tortuous negotiations with the EU meant the UK's departure eventually occurred on the eve of the health crisis in 2020 and the new trade rules did not come into force until a year later. But in the four years between the referendum surprise and the pandemic, the UK economy never entered a recession nor recorded a negative quarterly GDP print - confounding pro-EU supporters at the time and bolstering the Brexit lobby. Emerging from the twin hits, however, the economy has almost flatlined since. |
Graphics are produced by Reuters. |
FTSE 100 stocks, helped by the weaker pound, kept pace with the S&P 500 and world indexes for about a year after the referendum before chronic underperformance set in. Since 2018, the UK market has lagged MSCI's all-country index by some 35%. What's more, it's taken more than eight years for the pound's effective exchange rate to recover its pre-referendum levels. |
Few mainstream economists now doubt that Brexit has taken a serious toll on the UK economy - even if blame for that gets sprayed in multiple directions - and oceans of ink have been spilled trying to disentangle the precise impacts. One academic study by a number of Bank of England economists earlier this year concluded that uncertainty following the referendum resulted in little change in goods exports and imports before the exit was finalized. But after the new rules hit, UK imports fell 3% and overall exports fell 6.4%, largely because of the 13% hit in exports to the EU. While this slump seems relatively modest compared to the official forecasts of the longer-term hit, the pain has been borne disproportionately by small businesses. Additionally, these findings exclude the Brexit hit to services and London's finance sector, which registered a much bigger economic dent. And the cumulative damage to London and the service sector over the next 10 years continues to worry the City. |
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Graphics are produced by Reuters. |
Feeling the heat? July was the third warmest on record worldwide - some 1.25 degrees Celsius warmer than the pre-industrial era average. |
- U.S. July employment trends (1000 EDT), June durable goods orders (1000 EDT)
- U.S. corporate earnings: Palantir, Loews, Tyson Foods, Coterra Energy, ON Semiconductor, Vertex, Waters, SBA communications, Diamondback Energy, Williams, IDEXX, ONEOK, Axon
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