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Please see below commentary received from Brooks Macdonald yesterday evening, which provides analysis of the market’s response to political events in the UK and economic developments in the US.

A significantly weaker than expected US jobs report leaves markets baffled

Markets were left baffled on Friday as the US employment report sharply missed expectations, making a US Federal Reserve (Fed) taper of asset purchases in June less likely. Equity markets rallied, with technology performing after a difficult week for growth equities.

The market was expecting around one million new jobs to have been created in the US in April but the final number, 266,000, was far below those lofty expectations1. As commentators scrambled to explain the numbers, there are broadly two camps, one group concluding that this reflects difficulty in making hires, the other that the recovery has less momentum than hoped. The truth will likely lie between these two but President Biden cited the report as evidence of the need for the stimulus that the White House has planned for this year. One of the theories for why the jobs number was so weak is that fiscal support is so large, there is less incentive to take on work, effectively saying that fiscal spending is crowding out private sector employers. If this is the case, additional stimulus could make this imbalance even starker. This could of course just be another short-term demand and supply imbalance and one that will be resolved over the coming quarters, as things return closer to normality.

A strong showing for the Conservatives last week may open legislative policy options

Sterling has begun the week on a stronger note, as investors view the lack of Scottish National Party majority (just) as reducing the risk of an imminent independence vote. Pro-independence parties still have a majority in the Scottish Parliament, however the results, on the margin, reduce the urgency of this question for markets. Tomorrow sees the Queen’s Speech which, given the recent by-election successes from the Conservatives, may be more legislatively ambitious than previously imagined. 

US CPI is released on Wednesday and is expected to contain some substantial year-on-year gains

Friday’s employment report has led to much confusion, particularly as the two interpretations end with contrasting inflationary and deflationary conclusions. This week we will see the unveiling of the April US CPI number which is expected to creep up to 3.6% year-on-year on a headline basis and 2.3% on a core basis (excludes energy and food)2. We are entering the period where the year-on-year comparison is flattering the inflation figures, but it will be interesting to see if bond markets can hold their nerve in the face of these figures, even if they ultimately prove transitory.

We will continue to publish market updates and relevant content as the UK approaches a further relaxation of lockdown rules. Please check in again with us soon. 

Stay safe.