Mixed bag of labour market data, keeps bond yields in check, as Trump sends the Dollar surging

The UK labour market has temporarily taken the limelight from the new Trump Presidency. However, make no mistake, Trump is central for financial markets right now. He got straight to work after the inauguration on Monday, and we will have to see if he will take a break from executive orders on Tuesday. The dollar has been the key beneficiary of Trump’s initial moves as President, and we expect the dollar to remain resurgent, at least in the short term. US stock markets were closed on Monday, however, futures are pointing to a stronger open on Tuesday, as the S&P 500 inches towards the all time high of 6,090.

Ahead of the US stock market open, the UK labour market data was in focus. The key metric in the labour market data was wage data. This has ticked higher, with average wage growth rising to 5.6% from 5.2% previously. Private sector pay growth was much larger than public sector pay in that period. Private sector pay growth was 6%, vs 4.1% for the public sector. However, the BOE may look through this data, since it was mostly down to base effects, since private sector pay fell unexpectedly in November 2023. Other elements of this data could also moderate the inflationary impact of this jobs report.

The unemployment rate ticked higher as expected to 4.4% from 4.3%. Added to this payrolls growth slowed sharply. In December, payrolls fell by 47k, the largest monthly decline since late 2020. This comes after November also saw a decline in payrolls. Thus, while wage growth remains a concern for inflation, there is obviously a softening in the labour market data, that could trigger a decline in inflation down the line.

The pound has remained stable on the back of this data, as the market focuses on the declining jobs number, which could focus minds at the BOE about recession fears. Although wage growth is a well above the BOE’s target rate, the labour market is a lagging indicator, so if payrolls growth is in decline, weaker wages could follow.

On the back of the labour market data, the market is pricing in an increased chance of a rate cut from the BOE next month. There is now a 91% chance of a cut, and we expect the BOE to fulfil the market’s wish. Added to this, the interest rate futures market now expects UK interest rates to end the year at 4.06% vs. 4.09% yesterday.

This data adds to evidence that the UK economy is rapidly weakening and will need BOE support to get out of its current malaise. Thus, we think that the market is underestimating the prospect for rate cuts from the BOE this year. This makes the BOE meeting next month extremely interesting, as the Bank could signal to the market that it is under-pricing the chance of deeper cuts on the back of weak economic data. This could weigh on the pound and limit any recovery, as GBP/USD remains tantalisingly close to the $1.20 level.

Trump gets to work, markets take note

The market impact from the labour market data has been mild so far, although that may be due to the overriding impact from Trump. The 47th President signed a flurry of orders last night. These did not include tariff plans, and he is expected to take a more gradual approach to these. However, there is a clear dichotomy in the White House’s approach to tariffs: Mexico and Canada will be early targets, while Trump is expected to take a more gradual and moderate stance towards China.

This has played out in the FX market. China’s yuan strengthened overnight, while the Mexican peso and the Canadian dollar are the weakest currencies today. The peso is lower by 1% vs. the USD, while the CAD is down by 0.8%, reversing course after yesterday’s stunning rally.

In the new Trump era, if you get on the wrong side of Trump, there is a cost. Right now, Mexico and Canada are targets. Canada also has a lame duck president. It could weigh on economic confidence in both of these countries and erode economic growth, as the market expects the Nafta deal, which will be renegotiated by 2026, will be less preferable to Mexico and Canada in the future. Thus, Trump fears could weigh on the Mex and the Cad for the medium term, and any recovery could be short lived.

Will tech stocks benefit from being close to Trump?

The fact that Trump has so far been quiet on Europe, is helping European stocks to stabilise. However, the euro and the pound are both weaker as Trump’s ascendancy to the White House has sent the dollar flying. We expect the markets to herald Trump’s arrival back in the White House with a strong dollar and strengthening US stocks. All eyes will be on tech stocks on Tuesday. Will there be large gains for Amazon, Meta, Tesla and Apple after their CEOs were front and centre at the inauguration? If yes, then it will be a sign that staying close to Trump could have an impact on stock markets in the coming months.