TRADING DAY Buoyancy trumping uncertainty

Reuters

3 days ago

ORLANDO, Florida, June 10 (Reuters) - TRADING DAY
Making sense of the forces driving global markets
By Jamie McGeever, Markets Columnist
I'm excited to announce that I'm now part of Reuters Open Interest (ROI), an essential new source for data-driven, expert commentary on market and economic trends. You can find ROI on the Reuters website, and you can follow us on LinkedIn and X.
Global markets remain buoyant, awaiting the outcome of U.S.-China trade talks in London and U.S. inflation figures on Wednesday, both of which could have a bearing on guidance from the Federal Reserve next week and investor sentiment more broadly.
In my column today I look at how the Trump administration's crackdown on immigration could cause labor market distortions and headaches for Fed officials. More on that below, but first, a roundup of the main market moves.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.
Today's Key Market Moves
Buoyancy trumping uncertainty
On the day The World Bank slashed global growth forecasts, warning of the "significant headwind" from tariffs and heightened uncertainty, global stocks clocked their fifth consecutive all-time high.
Britain's benchmark FTSE 100 is a whisker from reaching new peaks and Germany's DAX hit an all-time high last week, while on Wall Street the Nasdaq and S&P 500 are within a couple of percentage points of new record levels also.
Yet the reasons for equity investors to be fearful right now are plentiful - worries over growth, inflation, tariffs, long-term interest rates, U.S. debt and deficits, and the fact that China, the world's second-largest economy, is still mired in a low growth and deflationary funk.
Something not quite adding up, right?
Perhaps. On the other hand, the fiscal taps are being turned on in China and Germany, British finance minister Rachel Reeves outlines her multi-year 2 trillion pounds ($2.7 trillion) spending plan on Wednesday, and U.S. President Donald Trump's 'big beautiful bill' currently going through Congress is front-loaded with fiscal stimulus too.
None of that is really fresh news but the upshot is a lot of liquidity coursing through the global economy. Right now it is something investors appear willing to accept even if the price is increased debt, and for the U.S. and UK in particular, worse public finances.
Big corporate deals are being struck, like the OpenAI and Google cloud service tie-up and Meta Platforms reportedly paying $15 billion for a 49% stake in AI startup Scale AI, and implied equity and bond volatility is low. After a period of fretting more about deficits and spiking bond yields, investors may now be viewing the future with their glass half full.
Fiscal stimulus is coming and interest rates around the world are being cut. The monetary outliers are Japan and the U.S., but the Bank of Japan could be near the end of its tightening cycle and the Fed may be about to begin easing later this year.
On top of this, there's a general belief that Trump will back down from his hardline stance on tariffs and that a palatable deal with China will be reached, the so-called 'TACO' - Trump Always Chickens Out - trade.
Fresh news on that front, at least, should be forthcoming on Wednesday.
Trump immigration crackdown creates jobs distortions, Fed headaches
Seismic shifts in immigration are distorting the U.S. employment picture, making it harder for investors and policymakers to know exactly how much the labor market is actually slowing.
Assuming the Trump administration makes good on its pledge to reduce immigration, either by stopping the flow of people coming into the country or by deporting many already here, the labor supply will shrink.
The long-term impact of lower immigration is generally agreed to be negative, as new workers are needed to replace retirees, fill job vacancies and drive economic growth. Over time, fewer new workers will likely mean lower growth.
But in the short term, a smaller pool of workers results in a tighter labor market, which keeps a lid on the unemployment rate, albeit artificially and probably temporarily. This may already be playing out.
Figures released last week showed that employment in May fell by 696,000 jobs. That's the biggest single monthly decline since the historic losses seen during the pandemic in early 2020. Some economists argue that the recent drop is a consequence of Trump's immigration crackdown.
Nonfarm payrolls rose 139,000. Meanwhile, the unemployment rate held steady at 4.2%, which though higher than it was two years ago, is still historically low by any measure.
All else being equal, this points to a tight labor market, which should put upward pressure on wages and perhaps even warrant a more hawkish policy stance from the Federal Reserve.
But that is almost certainly a misreading.
When labor supply and the labor force participation rate fall, this brings down a country's so-called 'breakeven' job growth. That's the number of net new jobs the economy needs to keep up with growth in the working-age population and maintain a steady unemployment rate.
That figure is falling, and if the Trump administration toughens up its anti-immigration policies further, this decline is likely to accelerate.
According to economists at Morgan Stanley, breakeven employment growth averaged 210,000 jobs a month last year, and is averaging 170,000 so far this year. They reckon it will fall to 90,000 by the end of this year and 80,000 next year.
Ryan Sweet, chief U.S. economist at Oxford Economics, goes further, estimating that the breakeven rate is "quickly approaching" 50,000 jobs a month due to weakening labor supply growth, primarily because of reduced immigration.
"The unemployment rate can remain low, but for the wrong reasons," Sweet says.
If these projections prove accurate, monthly employment and job growth could continue to slow without raising the unemployment rate. The contradictory signals this sends could create confusion for both investors and policymakers.
In his press conference after the most recent Fed policy meeting, Chair Jerome Powell repeatedly told reporters that the labor market is "solid". The unemployment rate "remains low," and the labor market is "at or near maximum employment."
If these headline indicators are the gauge, Powell is absolutely correct. But he also stressed that policymakers are looking at the "whole huge array" of labor market indicators for a truer guide.
One of those inputs in the months ahead will no doubt be net immigration. And that could generate significant uncertainty, as there are huge gray areas and wide margins of error when trying to estimate net immigration and its impact on the labor market.
In January, the non-partisan Congressional Budget Office projected net immigration of 2 million people this year and 1.5 million next year, down from an estimated 3.3 million in 2023. With Trump seemingly hardening his stance on immigration, those projections could turn out to be far too high.
Morgan Stanley's economists just slashed their immigration forecasts to 800,000 this year and 500,000 next year. If these figures turn out to be closer to reality, we could soon be looking at a "tight" labor market with monthly payrolls gains of well under 100,000. Pity the poor Fed Chair who has to communicate policy in that environment.
What could move markets tomorrow?
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