UK: Mayday in June

UK: Mayday in June

The June 8 general election could strengthen – or weaken – Theresa May's hand in managing Brexit; U.S. employment was mixed to solid last month; France's Macron has a firm grip on the country's agenda; Venezuela gets a discounted rescue

“The policy equivalent of watching paint dry”
Philadelphia Fed president Patrick Harker, on the FOMC's approach to reducing the Fed's balance sheet.

UK election: Mayday in June It's been said that 90 percent of success is simply showing up.  By that measure, Prime Minister Theresa May's decision to skip the televised debate in advance of the June 8 snap election she herself called may have contributed to financial markets jitters. The British pound fell some 1.6% against the US dollar and the euro between May 24 and 261 before recovering.  The June 8 election was intended to shore up support for Mrs. May in advance of the tough negotiations with the European Union over Brexit; however, if electoral support for her Conservative Party is eroded by strong showings for other candidates, it could weaken the UK's hand in what could well be a fractious two-year exit period ahead.

US employment: Off the bench, but… The jobs report for May was mixed; the headline unemployment rate fell to 4.3% from April's 4.4% but was short of consensus expectations; hourly wages rose 2.5% for the 12 months ended May 30, but still slightly shy of expectations; and non-farm payrolls also rose, but by 147k vs. an expected 175k, a clear miss.

Two closely-watched numbers were at odds with each other: the labor participation rate fell -0.2% to 62.7%, suggesting that some potential employees couldn't be called off the bench by the current wage environment. But the underemployment rate – workers who are working less than they'd like as well as those without jobs; fell from 8.6% to 8.4%, a new low for this part of the cycle and a level not seen since October 2007.

This report is the last one before the Fed's June 14 rate announcement – widely expected to contain a rate hike.  But it's still anybody's guess about how many more hikes – if any – will take place in the rest of the year. Speeches by Fed officials don't agree on the point; but one analysis of futures data suggests that the odds of another hike in the remainder of 2017 are about 50%.

France: Firm grip Newly-minted President Emmanuel Macron is off to a strong start. If polls are to believed, his  avowedly post-partisan, center-left  "La République En Marche!" party appears poised to win an absolute majority in the legislative elections scheduled for June 11 and 18th, displacing the center-left Socialists in the lower house. That result could make it possible to enact labor market reforms, which might include allowing companies to set wages and working hours individually rather than by industry-wide agreement. But changes in labor regulations can't be assumed to be the final word; the country's labor unions and agricultural sector have a history of taking their grievances to the streets during the summer, exerting pressure on even the most determined politicians.

Venezuela – Rescue or ripoff? The latest evidence of the government's growing desperation:  the government treasury's sale of $2.8 bn of bonds (face-value) of the government-owned oil company to raise desperately-needed cash. The price of the trade was reportedly 32 cents on the face value in dollars; that's a steep discount. But the reputational price was high for the buyers, Goldman Sachs and Nomura.  Venezuela's opposition-led Congress accused the banks of taking advantage of a desperate situation and at the same time supporting the current regime's continued rule. Given reports that up to 70% of Venezuela's population can no longer afford three meals a day, the $890 million cash raised via the sale of these so-called "hunger bonds" appears far from adequate to address the population’s needs and rebuild the country's oil infrastructure after years of underinvestment by the government-owned oil company. It's reported that the Treasury has more bonds to sell; time (and price) will tell if the desperation discount will change.



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