Closing post
Time to recap…
The US economy added 147,000 jobs in June, a sign of continuing strength in the labor market amid Donald Trump’s trade war.
The number of jobs added surpassed expectations, as economists largely anticipated a drop in openings. In another boost, the unemployment rate decreased to 4.1%, down from 4.2% in May.
Job gains were seen in state government and healthcare, which saw increases of 47,000 and 39,000 jobs, respectively. Meanwhile, federal government job losses continued, with another 7,000 roles down in May, as the Trump administration continues to cut jobs. The total job loss in the federal government has been 69,000 since January.
Economists said the data cut the chances of an early interest rate cut from the US Federal Reserve.
The dollar strengthened, while US bond prices fell, pushing up yields, and Wall Street hit a record high.
UK government bonds have rallied after Keir Starmer backed Rachel Reeves to remain as chancellor for “a very long time” despite lingering investor concerns over a multibillion-pound hole in Britain’s public finances.
The yield – in effect the interest rate – on British 10-year government bonds, also known as gilts, fell on Thursday morning to trade close to 4.5%, reversing much of the rise on Wednesday sparked by feverish speculation over Reeves’s future.
The pound rose against other leading currencies, while a closely watched business survey showed that Britain’s dominant service sector recorded its fastest rate of growth in 10 months.
But….some of the gains were later pegged back after the release of the stronger-than-anticipated US job market figures, which fuelled a rise in US government borrowing costs as investors bet the Federal Reserve may delay cutting interest rates.
The boss of Currys, the UK’s biggest electrical goods retailer, has urged the government not to increases taxes on retailers this year, saying it would damage investment and force prices to rise.
The EU and US are closing in on a high-level “framework” deal that would avert 50% tariffs on all exports from the bloc next Wednesday, Donald Trump’s self-imposed deadline.
Richard Branson’s hopes of returning Virgin trains to the west coast mainline have been dashed after the UK rail regulator rejected its application amid concerns over delays and cancelled journeys.
The boss of P&O Ferries was paid £683,000 in the financial year after the cross-Channel operator outraged the public and parliament by dismissing almost 800 mainly British workers.
UK stock market closes higher
The London stock market has closed at its highest level for two weeks, lifted by UK-focused companies.
The FTSE 100 index of blue-chip shares has ended the day 48 points higher at 8823 points. Top risers included banks NatWest (+3.2%) and Lloyds (+3.2%) and Tesco (+2.3%), while mining companies were among the fallers.
AJ Bell head of financial analysis Danni Hewson says:
“Borrowing costs, which shot up yesterday as investors priced in her potential departure from Number 11, have reversed course today, with a number of big names openly stating that they added to their gilt stash in a bet the turmoil would be short-lived.
“There has also been better news from the UK service sector as the latest PMI figures came in hotter than expected, with both businesses and consumers feeling a little more confident about spending.
“For once London’s blue-chip index was dominated by improved domestic sentiment – banks, retailers and housebuilders all made gains whilst global mining stocks slumped.
“It was a similar story on the FTSE 250. External issues pulled down companies like Watches of Switzerland which is already seeing US retailers pushing through price hikes on its products.
“The deadline for tariff talks is fast approaching and with the White House laser focused on getting that ‘big, beautiful bill’ signed into law investors might be nervous that the clock will run out before deals can be struck.
EU closing in on ‘framework’ trade deal with US to avoid Trump’s 50% tariffs
In the world of trade, the EU and US are closing in on a high-level “framework” deal that would avert 50% tariffs on all exports from the bloc next Wednesday, Donald Trump’s self-imposed deadline.
Talks in Washington could go down to the wire, but diplomats and officials said the EU was willing to accept Trump’s 10% blanket tariffs. Negotiators will only accept this, however, in exchange for an extension in talks and possible concessions on a 25% car tariff, which is hurting the German car industry, sources said.
European Commission president, Ursula von der Leyen, has pointed out today that it is “impossible” to agree a final EU-US trade deal before July 9…
A permanent risk premium could be attached to UK bonds following yesterday’s sell-off, warns Kathleen Brooks, research director at XTB:
In the UK, the bond market is recovering on Thursday after Wednesday’s sell off. The Prime Minister has confirmed that Rachel Reeves will remain in place as Chancellor, however, bond yields have not fallen back to the levels that we saw before bonds started to sell off 24 hours ago. The 10-year yield had been down 10bps at one stage, however, this has been eroded, and yields are only down 5bps at the time of writing. A sharp rise in US yields is dragging UK yields higher as we move through Thursday.
This suggests 2 things:
1: highly indebted western economies can see their sovereign debt markets move in unison, which is bad news for those who hoped there could be a full reversal in UK bond yields today.
2: there could be a permanent premium attached to UK yields as we move through the summer months to October’s budget. The premium this time is linked to Labour’s left having increasing control over Kier Starmer and pushing him for ever greater levels of public spending.
If the government wants to avoid an embarrassing and devastating fiscal crisis, they need the guts to cut public spending to more reasonable levels. The bond vigilantes are circling, and Labour could be forced to U-turn on the U-turns.
Back on Wall Street, Nvidia is on track to become the most valuable company in history.
The chipmaker’s market capitalization has risen to $3.915trn today, after its shares rose 2% in early trading, lifted by continued optimism about demand for high-performance chips to power artificial intelligence systems.
Tht gives it a slightly higher market capitalization than Apple’s record closing value of around $3.915trn on December 26, 2024, Reuters reports.
The US Department of Labor has given Donald Trump the credit for June’s solid jobs numbers:
The jobs report again shattered expectations, with 147,000 new jobs added in June! @POTUS’ America First policies continue to unleash historic growth and prosperity for our workers 🇺🇸 pic.twitter.com/VYDpginpfZ
— U.S. Department of Labor (@USDOL) July 3, 2025
The president has reposted this message on his Truth Social site, so I guess we can conclude it was the Trump economy in June rather than the Biden economy (which took the blame for GDP shrinking in January-March)
Ryanair and easyJet cancel hundreds of flights amid French air traffic control strikes
Today has been a rough day for some airline passengers in the UK.
Low-cost airlines Ryanair and easyJet both cancelled hundreds of flights due to French air traffic control strikes.
Ryanair said it was forced to make 170 cancellations on Thursday and Friday as the strikes affect flights to and from France – and also flights over the country to destinations such as the UK, Greece, Spain and Ireland – impacting more than 30,000 passengers.
Luton-based rival easyJet said it had cancelled 124 flights today and was scrapping 150 tomorrow due to the industrial action.
Ryanair chief executive Michael O’Leary renewed calls on EU Commission President Ursula von der Leyen to take “urgent action” to reform European Union air traffic control (ATC) services in light of the disruption, which comes at the start of the European summer holidays.
O’Leary said:
“Once again, European families are held to ransom by French air traffic controllers going on strike.
“It is not acceptable that overflights over French airspace en route to their destination are being cancelled/delayed as a result of yet another French ATC strike.
“It makes no sense and is abundantly unfair on EU passengers and families going on holidays.”
Analysts at ING predict that Donald Trump will have to wait until September for a cut to US interest rates.
Following today’s stronger-than-expected jobs report, they say:
The June US jobs report shows nonfarm payrolls rising 147,000 versus the 106,000 consensus with 16,000 of upward revisions to the past two months of data. Meanwhile, the unemployment rate surprisingly fell to 4.1% from 4.2% while the market was solidly backing the view that unemployment would actually tick higher to 4.3%.
President Trump has been calling for the Federal Reserve to cut the policy rate 200-300bp immediately and two of his appointees (Chris Waller and Michelle Bowman) had suggested that they could vote for a rate cut as soon as this month’s FOMC meeting. But the rest of the FOMC is far more cautious and today’s data indicates there will be no rate cut before the September FOMC meeting, especially with tariffs set to push inflation higher over the next few months.
US stock market hits record high after jobs report
Wall Street has hit fresh record highs, as investors hail today’s stronger-than-expected jobs report.
The news that the US economy added 147,000 new jobs in June helped the S&P 500 share index and the Nasdaq to both open at fresh record highs.
The Dow Jones Industrial Average rose 81.3 points, or 0.18%, at the open to 44565.75 points.
The S&P 500 gained 0.3%, and the Nasdaq Composite rose by 0.5%.
US trade deficit widens
In other economic news… America’s trade deficit has widened again.
The US trade deficit surged by 18.7% in May to $71.5bn, new data from the US Census Bureau and the US Bureau of Economic Analysis shows, up from $60bn in April.
The increase was driven by a 4% drop in US exports during the month, while imports were flat.
The report also shows that the US trade deficit with China shrank by over a quarter in May, after the US imposed high tariffs on Chinese imports. The deficit with China decreased $5.7bn to $14.0bn in May, with exports down $1.7bn to $6.9bn and imports down $7.4bn to $20.9bn.
The report shows that in May the US also recorded deficits with the European Union ($22.5bn), Mexico ($17.1bn), Vietnam ($14.9bn), Ireland ($11.8bn), Taiwan ($11.5bn), Germany ($6.8bn), Japan ($5.8bn), South Korea ($5.4bn), India ($5.1bn), Canada ($2.8bn), Italy ($2.6bn), Malaysia ($2.4bn), and France ($0.5bn).
The US ran a trade surplus with the Netherlands ($4.8bn), Hong Kong ($3.6bn), South and Central America ($3.3bn), Switzerland ($3.3bn), the United Kingdom ($3.0bn), Australia ($1.5bn), Brazil ($0.5bn), Saudi Arabia ($0.5bn), Belgium ($0.4bn), Singapore ($0.3bn), and Israel ($0.1bn).
The jump in US bond yields today is feeding through to other markets, undermining the recovery in UK government debt earlier today.
Although UK 10 and 30-year bond yields are still down, they’re only around 3 basis points lower, which means only some of yesterday’s jump has been wiped out.
US jobs report: what the experts say
Today’s US jobs report shows that the labour market remains healthy, says Bradley Saunders, North America economist at Capital Economics.
The 147,000 gain in non-farm payrolls in June was reassuring after the fall in the ADP measure of employment reported yesterday. A deeper dive shows the strength was again concentrated in government and health care employment, reflecting the increasing narrowness of the labour market’s strength. Nevertheless, with the unemployment rate edging lower again, the report was better than expected and will give the more hawkish members of the FOMC reason to push back against expectations for imminent interest rate cuts.
The 147,000 gain in non-farm payrolls in June and slight upward revisions to earlier months’ data mean the three-month average rate now sits at a healthy 150,000.
Glassdoor’s lead economist Daniel Zhao says June’s job gains were ‘moderate’:
“The June jobs report feels more like a sparkler than a fireworks show—steady and slow-burning. While the labor market continues its gradual cooling, this report likely doesn’t reflect the full impact of upcoming tariffs, which could add pressure to hiring in the months ahead.”
Isaac Stell, investment manager at Wealth Club, argues the US economy remains as solid as a rock, adding:
It’s difficult to imagine what could cause the US economy to crack given tariff turmoil has done little to shake the foundations. As a result, hopes for a rate cut from the Fed in July have all but disappeared.
All thoughts will now turn to the next inflation report on July 15th. If inflation remains some way above the Fed’s 2% target, there will start to be questions about whether rates get cut at all this year. Today’s numbers will not help that case and this in turn will likely do nothing to appease an already agitated President. However, as demonstrated at the last Fed meeting, the President’s unstoppable wave of political pressure is likely to do nothing to the immovable object of the central bank’s resolve. Unless an early Fed chair nomination changes the picture that is . . .”
US dollar rises as rate cuts look unlikely
The US dollar is rallying, on the back of today’s better-than-expected jobs report.
The dollar index has gained 0.6%, as the greenback strengthens against a basket of rival currencies, amid declining hopes of early cuts to US interest rates.
This has knocked the pound lower; it’s now down 0.2% today at $1.3613, wiping out its small recovery this morning.
Here are more details of the US jobs report, from Liz Ann Sonders, chief investment strategist at Charles Schwab.
June nonfarm payrolls +147k vs. +106k est. & +144k prior (rev up from +139k) pic.twitter.com/rkg6Vo3za5
— Liz Ann Sonders (@LizAnnSonders) July 3, 2025
Payroll sector highlights (prior):
— Liz Ann Sonders (@LizAnnSonders) July 3, 2025
Government +73k (+7k)
Private education, health +51k (+83k)
Leisure, hospitality +20k (+29k)
Construction +15k (+6k)
Trade, transport +3k (+4k)
Financial +3k (+10k)
Temporary help -3k (-6k)
Manufacturing -7k (-7k) pic.twitter.com/S965Q6sTs4
2-year Treasury yields jumped following the release of the jobs report. The stronger-than-expected data should take a July rate cut off the table. pic.twitter.com/JQDYKqBRvA
— Kathy Jones (@KathyJones) July 3, 2025
US bond prices are dropping, pushing up borrowing costs, as traders bet that an early interest rate cut is unlikely.
This has pushed up the yield, or interest rate, on two-year US Treasury bonds by 9 basis points.
Investors may be calculating that the Federal Reserve will be less inclined to cut borrowing costs soon, given job creation continued at a pretty robust rate last month.
US Treasury Two-Year Yields Sharply up After Payrolls; Last 12 Bps at 3.902%；Stock Index Futures Extend Gains.
— Ticker Wire (@Tickerwire) July 3, 2025
Rate Futures Now Price About an 80% Chance of a Fed Rate Cut by Sept, Down From 98% Before Jobs Report.
US jobs report, the details
Around half the 147,000 new jobs created last month were in the US public sector, specifically education.
Today’s jobs report shows that government employment rose by 73,000 in June, adding:
Employment in state government increased by 47,000, largely in education (+40,000). Employment in local government education continued to trend up (+23,000).
But, there were 7,000 job cuts in June in the federal government – where employment is down by 69,000 since reaching a recent peak in January. (Employees on paid leave or receiving ongoing severance pay are counted as employed in the establishment survey, the BLS points out, which makes it harder to see the impact of DOGE job cuts).
Health care added 39,000 jobs in June, including 16,000 in hospitals and 14,000 in nursing and residential care facilities
Social assistance employment rose by 19,000.
However, there was little change in employment in other major industries.
US economy beats forecasts with 147,000 new jobs in June
Newsflash: The US economy added more new jobs than expected last month, a sign that economic growth wasn’t chilled by Donald Trump’s trade wars.
The US non-farm payroll, the closely-watched measure of America’s jobs market, rose by 147,000 in June, better than the 110,000 new hires expected.
The unemployment rate has dipped to 4.1%, down from 4.2% recorded last month – and lower than the 4.3% which economist had forecast.
The U.S. Bureau of Labor Statistics reported that “Job gains occurred in state government and health care. Federal government continued to lose jobs.”
In another encouraging signs, the two previous month’s jobs report have been revised higher too.
April was revised up by 11,000, from +147,000 to +158,000, and the change for May was revised up by 5,000, from +139,000 to +144,000.
Updated
Economists predict that today’s US jobs report, due in about 30 minutes, will show that America’s labour market slowed in June.
The consensus forecast is that the US non-farm payroll rose by 110,000 jobs last month, which would be a slowdown on the 139,000 new hires recorded in May.
The US unemployment rate is forecast to rise to 4.3%, from 4.2%.
World stock markets at record highs
Today’s rally in London has helped to push global stock markets to record levels.
MSCI’s main index of global shares has touched a new record high today, as investors await the latest US jobs report in just under an hour’s time.
News that the US and Vietnam have reached a trade deal has lifted the mood in the markets – under it, Americans will pay a 20% tariffs on imports from Vietnam, while the US will get tariff-free access into Vietnam’s markets.
The UK stock market is higher today too.
The FTSE 100 index of blue-chip shares is up 33 points, or 0.4%, at 8807 points.
The smaller FTSE 250 index of medium-sized companies has gained 0.6%.
Joshua Mahony, chief market analyst at Rostro, explains:
European markets are on the rise today with the FTSE 100 attempting to regain lost ground as a sharp rise in borrowing costs raised fear of another Truss/Kwarteng moment yesterday.
The watered-down version of the Labour welfare reforms does mean we are staring at a fiscal black hole which like means greater tax hikes, with the pop in UK bond yields highlighting the fear of financial instability in the UK. With Reeves known to follow the premise that all day-to-day spending must be covered by tax revenues, the prospect of her losing her post had initially spooked markets.
However, Starmer’s efforts to calm markets appears to have paid off, with the PM pledging that she will “be the chancellor into the next election and for many years afterwards”.
FT: BlackRock and Schroders bought gilts during market slump
Today’s recovery in UK bond prices will be profitable for investors who bought gilts yesterday, after prices tumbled.
According to the Financial Times, those winners include BlackRock and Schroders, who both bought UK debt during Wednesday’s sell-off. Both firms bet that the uncertainty over Rachel Reeves’ future would not trigger a deeper rout in UK government debt.
Simon Blundell, co-head of BlackRock’s European active fixed-income team, has explained:
“We are overweight the gilt market, we did add to that yesterday afternoon.”
Because bond yield rise when prices fall, gilts bought yesterday will provide a higher rate of return than if you were to buy them today (as prices have recovered).
A UK interest rate cut next month is looking slightly more likely, City predictions suggest.
An August rate cut is now seen as an 81% probability, according to the money markets this morning. That’s up from around 75% earlier this week.
Reeves reaffirms importance of fiscal rules
Rachel Reeves has just spoken at an event to launch the UK’s new 10-year health plan.
My colleague Andrew Sparrow reports that Reeves is smiling a lot as she says the plan will get the NHS “back on its feet”.
And she says she has only been able to invest in public services by sticking to her fiscal rules.
She does not refer to what happened in the Commons yesterday at PMQs.
NEW: A beaming Rachel Reeves speaks at launch of govt's 10-year plan for NHS, in attempt to draw a line under speculation over her future.
— Pippa Crerar (@PippaCrerar) July 3, 2025
Chancellor also takes opportunity to remind everybody of her fiscal rules: "Our commitment to our fiscal rules means that we can boost…
Health secretary Wes Streeting praised Reeves at the event too, saying she has put an extra £29bn into the NHS.
Streeting said:
It is thanks to her leadership that we’ve seen interest rates in our country fall four times. It’s thanks to her leadership that we see wages finally rising faster than the cost of living. And it’s thanks to her leadership we have the fastest growing economy in the G7.
Andy’s Politics Live blog has all the action:
Morgan Stanley predicts tax hikes in the autumn
The UK government is more likely to raise taxes in the autumn budget than attempt spending cuts, predicts Morgan Stanley economist Bruna Skarica.
Skarica told clients this morning that the UK could potentially face a £30bn miss versus their fiscal framework in the autumn – £1bn from u-turning on winter fuel payments, £5bn from the delay to welfare reform, plus a potential £20bn hit if the Office for Budget Responsibility lowers its growth forecasts.
Skarica points out that “to govern is to choose”, and suggests three options:
Find alternative spending cuts. This, we think, would be challenging. Indeed, in our mid-year outlook we noted that our “our main concern going into the autumn is...that the existing departmental spending plans look very tight...It seems almost inevitable that current spending will be topped up”;
-
Raise taxes. Hiking income, corporation or value-added taxes would breach Labour’s manifesto commitments, but we estimate it would be challenging to amass revenues of more than £10bn from increasing other levies and surcharges.
In our mid-year outlook, we noted that the effective rate of income tax in the UK looks relatively low for median earners, implying that reversing the recently cut employee NICs could be one option for the Treasury to consider.
Fiscal rules could be altered. The rising risks of this option, we think, is what drove the adverse market action [on Wednesday]. UK fiscal rules are self-imposed and can be adjusted by the Treasury.
Elsewhere in the economy, demand for mortgages appears to be weakening.
British lenders expect demand for mortgages will fall over the coming three months, according to new data from the Bank of England.
The BoE’s quarterly Credit Conditions Survey shows that more lenders expect a drop in secured lending in the next three months.
Continued uncertainty dries up future lending demand over the summer holidays.
— Emma Fildes (@emmafildes) July 3, 2025
In the @bankofengland ’s Credit and Conditions survey demand for secured lending for house purchases and remortgaging was reported to have increased in Q2, and was expected to further growth in the… pic.twitter.com/Zmlk95B5PT
Uk 10-year bond yields have also recovered quite a lot of yesterday’s jump, as this post from Mohamed El-Erian (who we heard from earlier) shows:
Further to yesterday’s post, UK gilt yields have retraced a significant portion of yesterday’s sharp widening. This follows, and is in reaction to the Prime Minister’s strong public support for Rachel Reeves in last night’s interview with the BBC’s Nick Robinson.#economy #bonds… pic.twitter.com/F1zVIglepA
— Mohamed A. El-Erian (@elerianm) July 3, 2025
Prime minister Keir Starmer has “brought a sense of calm to markets” by backing Rachel Reeves, says Dan Coatsworth, investment analyst at AJ Bell.
Coatsworth explains:
“Starmer declaring his support for the chancellor has led to gilt yields pulling back and sterling rebounding after yesterday’s slump against the dollar. The initial sell-off in gilts and the pound was the market’s way of saying it was losing faith in the economic outlook and political stability.
“It was an electric shock for investors but today’s rebound suggests that crisis has been averted, at least for now. UK economically sensitive assets were in relief mode, including a rally in housebuilders and banks.
UK service sector posts strongest growth in 10 months
Newsflash: Britain’s services sector has grown at its fastest pace in 10 months, in a boost to the UK government.
Data firm S&P Global has reported that UK service providers have reported “a sustained expansion of business activity in June”.
Activity grew at the fastest rate since August 2024, lifted by growing improvement in order books, according to the latest poll of purchasing managers at UK services firms.
This lifted S&P Global’s UK Services PMI to 52.8 in June, up from 50.9 in May and the highest for 10 months. Any reading over 50 shows a rise in activity.
Companies attributed the pick-up to “generally improving business and consumer spending”, despite “subdued UK economic conditions, the impact of US tariffs and adverse geopolitical factors”, the report says.
Tim Moore, economics director at S&P Global Market Intelligence, explains:
“June data highlighted a modest rebound in UK service sector growth, fuelled by a turnaround in domestic business and consumer spending after a soft patch during the spring. Business activity expansion was slightly stronger than the earlier ‘flash’ estimate for June and the fastest seen since August 2024.
While total new work picked up in June, shrinking export sales were a constraint on service sector growth. Survey respondents cited headwinds from US tariffs and geopolitical tensions, which resulted in subdued demand conditions across global markets.
UK bonds claw back losses after PMQs
Britain’s 30-year bonds have almost recovered to their levels before yesterday’s sharp sell-off.
The yield, or interest rate, on 30-year debt has now dropped by almost 10 basis points (0.1 percentage point) to 5.31%, down from 5.4% last night.
At noon yesterday, they were trading at 5.29%, before worries over Rachel Reeves’s future sparked a bond selloff, pushing up yields (which rise when price fall).
Currys boss urges government not to raise taxes further
The boss of Currys, the UK’s biggest electrical goods retailer has urged the government not to increases taxes for retailers this year, warning it would “further dampen investment and increase prices.”
Reporting a 37% jump in pre-tax profit to £162m in the year to 3 May and the revival of dividend payment to shareholders after two years as sales rose 3% to £8.7bn, Alex Baldock, the chief executive of Currys said:
“We urge government not to make a further contribution to the tax burden as that would further dampen investment and increase prices in an inflationary way. I would urge government ot think very carefully before making the situation worse.”
He said that Currys had increased sales at established stores by 6% in the UK, helped by a 12% surge in sales of services including repairs, financing and mobile subscriptions.
Baldock said the wider electrical goods market had been flat in the UK and there were concerns about cheap electrical goods being dumped in the UK via online marketplaces amid new taxes on imports of such goods to the US and planned changes in the EU.
Baldock said he welcomed the government’s promise that it would look at the so-called de minimus rules, which allow tax breaks on low value goods worth sent directly to consumers, but would “urge some urgency” on making changes. In the UK, the threshold for import duty is £135, while items valued at £39 or less also do not attract import VAT.
Key event
UK gilts are “firming up this morning along with the pound” after the PM gave his chancellor much more vigorous backing, says Neil Wilson, UK investor strategist at Saxo Markets.
He says Reeves is probably the “the most market-friendly chancellor Labour could field”.
But, the government has a deeper problem – the market is getting nervous about its ability to make the sums add up whether Reeves is ‘market-friendly’ or not.
Wilson adds:
Despite the backing from the PM, or perhaps because of it, the question for investors right now is: will she leave? The market reaction should proclaim that she is required at No11 to avert a market response that delivers a death blow to the government; the prime minister is now giving her his full backing.
The PM can’t control his backbenchers, but maybe the bond market can. The reaction could keep her in the job. But doubts remain and we might see continued pressure on gilts as we head into the autumn. And often when a PM has to constantly state his backing for a minister the writing is on the wall.
Peel Hunt: three options for Reeves's future
The market’s attention is now turning to whether Chancellor Rachel Reeves is really as safe as Prime Minister Keir Starmer has suggested, says Kallum Pickering, chief economist at UK investment bank Peel Hunt.
Pickering suggests there are three possible outcomes, writing:
Reeves stays because Starmer realises that markets see her as less bad than the alternatives and because, put plainly, history shows that Prime Ministers who sack their Chancellors rarely last long either;
Reeves is replaced by a presumed safe pair of hands (such as Pat McFadden) once markets have settled – but to restore credibility her replacement will need to stare down and win a budget fight with the far-left fringe of the Labour Party, which now appears to be the tail that wags the dog on fiscal policy; or
Starmer may brief against Reeves to suggest she is the reason Labour promised not to raise the big three taxes (income tax, VAT and employee NI) before forcing her to raise one of them at the budget to get the finances on track, then sack her and let her to take the blame for the fiscal failures during the first 18 months in office.
Pickering also warns that the next few days and weeks may be choppy in the run-up to 9 July, when the pause on Donald Trump’s ‘Liberation Day’ tariffs is due to end.
Following on from my initial reaction yesterday, a few more thoughts on the situation in UK bond markets:
— Kallum Pickering (@KallumPickering) July 3, 2025
1. For all the talk about big market moves, we must not lose sight of the fact that GBP/USD is up 9% year-to-date (see chart) and a 4.6% handle on a 10-year gilt is pretty… https://t.co/FesrBjcmGu pic.twitter.com/KXW97yyz91
Updated
The drop in yields on shorter-term UK bonds will be a relief to households looking to take out a mortgage (or remortgage).
As the BBC’s Faisal Islam points out, those products are priced off the cost of UK government borrowing:
Gilt yields tumbling back down to where they were before PMQs after PM’s interview with @bbcnickrobinson giving full support to Chancellor.
— Faisal Islam (@faisalislam) July 3, 2025
Down 9-10 basis points (ie 0.1% points) across the board and so eg 5 year back below 4% (important for fixed mortgages)…
Rachel Reeves has the backing of the bond market, argues Kathleen Brooks, research director at XTB.
Brooks says yesterday bond market sell-off reflected concerns about what may come in the autumn budget; and is also a reminder to “the hard left of the Labour party that the UK economy cannot afford its benefits bill”.
Brooks writes:
After the watered down welfare reform bill, the focus was on the need to raise taxes and to potentially issue more borrowing to cover the cost of Labour’s plans.
However, the bond market revolt suggests that these two options are not viable when national debt is so high and the economy is so weak. The bond market is telling the Chancellor to get on with the job of reducing unsustainable levels of public sector spending, but will she listen?
The pound is pushing higher too!
Sterling has now gained a third of a cent against the US dollar, up to $1.366.
That means it has recovered roughly a third of yesterday’s tumble.
UK bonds rally as panic eases
The bond market is looking calmer this morning, as traders welcome Keir Starmer’s endorsement of Rachel Reeves.
The prices on UK government debt are rising in early trading, which pulls down the yield (or interest rate) on the bonds.
The yield on UK 30-year bonds has dipped by 0.8% in early trading, to 5.361%. Yesterday it had surged to 5.408%, from 5.234%.
UK 10-year bond yields have also dipped by around three basis points, to 4.55% from 4.58% last night.
These moves suggests the bond markets are relieved that Starmer is standing by Reeves, easing concerns that a new chancellor might be less committed to the fiscal rules, so might look to borrow more.
But while today’s recovery eases some of the pressure on the government, it doesn’t wipe out all of Wednesday’s jump in borrowing costs – traders will be wondering how the government will patch up the multi-billion pound black hole in the public finances.
Shorter-dated two-year and five-year bond yields have also slipped back, as prices recover some ground.
Updated
El-Erian: bond sell-off would add £1.8bn to government spending, if it sticks
The jump in UK borrowing costs yesterday will have added to Rachel Reeves’s fiscal problems, unless it reverses.
Mohamed El-Erian, chief economic advisor to insurance giant Allianz, has calculated that Wednesday’s rise in bond yields would add £1.8bn to government spending each year, “if it sticks”.
He told Radio 4’s Today programme that it’s “very hard” to take a risk premium out of markets, explaining:
The minute you put a risk premium in the marketplace, it’s very hard to take out. I suspect that we will see some moderation, but we will not go back to where we were 24 hours ago.
El-Erian says investors have been reminded that the UK’s fiscal problem is “deep”; without growth, we face a “vicious cycle where every action you try to take is either economically problematic or politically problematic,” he adds.
He then warns that Reeves’s fiscal headroom of about £10bn (the margin before she breaks her fiscal rules) is “essentially gone”.
That means she must find at least £10bn of measures in autumn’s budget, and that bill will go up if growth slows or borrowing costs rise further.
And that money may have to come from taxes.
El-Erian explains:
So the area left are the two taxes that the Labour government ruled out in the election, income tax and VAT. They are your major sources of tax revenue.
No one likes them, but in a world like this, they will become better than the alternatives.
Pound calm as Starmer backs Reeves
After a tough day yesterday, the pound is calmer in early trading.
Sterling is marginally higher (+0.08%) against the US dollar today, at $1.3646, having dropped by a cent yesterday.
The calm follows backing for Rachel Reeves from Keir Starmer.
He told the BBC that the Chancellor has done a “fantastic job”, adding:
“She and I work together, we think together. In the past, there have been examples – I won’t give any specific – of chancellors and prime ministers who weren’t in lockstep. We’re in lockstep.”
That may reassure investsors worried that Reeves could be replaced, and that a new chancellor would be less enthusiastic about controlling borrowing.
Simon French, chief economist at investment bank Panmure Liberum, argues that “almost all other Chancellor options from within the parliamentary Labour Party” are less market friendly options.
French told clients:
Recent weeks have shown that large parts of the parliamentary Labour Party in the UK do not have the stomach for the tough fiscal choices required in a normalised interest rate environment, amidst sluggish productivity growth, with the tax burden at an eight-decade high, and with a deteriorating demographic profile.
The lack of a working majority for its economic plans leaves the Labour government with an intractable problem - its credibility with financial markets hinges on adherence to a set of fiscal rules that are incompatible with its manifesto tax commitments, and the plans outlined at the recent Spending Review.
Updated
Introduction: Bonds and sterling in spotlight after Wednesday wobble
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
All eyes are on UK bonds, and the pound, after both fell sharply yesterday amid speculation over the future of chancellor Rachel Reeves.
Wednesday was a turbulent day for the UK bond market; prices of British government debt fell heavily as investors were gripped by concerns of change at the top of the Treasury. The selloff highlights anxiety that the government’s u-turn on welfare reform has blown a multi-billion pound black hole in the chancellor’s budget plans.
Bonds slumped, driving up borrowing costs, after Keir Starmer failed initially to give his full backing to Reeves at prime minister’s questions, with a tearful chancellor alongside him.
The pound also suffered, falling by a cent against the US dollar as it slid from $1.3745 to $1.3636, making it the worst-performing major currency in the world.
Starmer has now defended Reeves, saying her tears were due to a “personal matter” and insisted she will remain chancellor “for a very long time to come”.
The bond selloff may actually have reinforced Reeves’s position as chancellor, highlighting that the markets would not welcome a replacement who might be less devoted to fiscal discipline.
Andrew Wishart, economist at Berenberg Bank argues that “Investors probably saved the Chancellor”, saying:
By selling sterling assets investors have probably kept UK chancellor Rachel Reeves in her post. Financial markets initially reacted little to the government failing to get approval for savings in the disability benefit budget from its own parliamentary faction. But when the Prime Minister failed to say that a visibly upset Reeves would remain in her job during Prime Ministers Questions, UK assets sold off.
The Chancellor has become synonymous with a fiscal rule of covering day-to-day spending with tax revenue.
https://t.co/UC9QmY0Lt1 UK selloff signals that fiscal rules are not just for show #reeves #fiscal #gilts #macro #ukeconomy #ukmacro pic.twitter.com/auvfYrWogD
— Berenberg Economics (@Berenberg_Econ) July 2, 2025
That fiscal rule may dictate tax rises in the autumn budget, as spending cuts could be too much of a political headache, judging by the massive rebellion against the welfare bill that has created a £5bn hole in the chancellor’s plans.
America’s economy may take the market spotlight off Reeves this afternoon, when the latest US jobs report is released. It will show whether trade war tensions have hit hiring at US businesses.
The agenda
9.30am BST: UK service sector PMI for June
10am BST: OECD Economic Survey of the European Union and Euro Area
1.30pm BST: US non farm payrolls employment report for June
