You could see the panic in U.K. Finance Minister Rachel Reeves’s face during Wednesday’s Parliamentary Question Time. She was under growing pressure over the government’s actions to reform welfare. Even as worries about her leadership began to percolate, market reactions showed both excitement and confusion about what her impact might be. London’s FTSE 100 index soared 0.4% in early trading, as U.K. government bond yields soared.
Reeves’ emotional display coincided with heightened scrutiny of the government’s approach to welfare reforms, which have faced criticism from various sectors. The turbulent situation led many to speculate that her time in the role was numbered. Consequently, UK bond prices and the British pound have seen wild swings in recent weeks. On the other side of the pond, British Prime Minister Keir Starmer greeted the news with calm affirmation. In best D.C.
These 10-year yield on U.K. government bonds just fell 1 basis point to 3.303%. While small, this difference conveys that it’s become a bit cheaper to borrow money. Yields for both long and short-duration gilts shifted down 2 bps. The continued drop in yields indicates that even amid heightened political tensions, investor sentiment is modestly optimistic.
The pan-European Stoxx 600 index jumped with a 0.3%, confirming this trend for the better. All sectors and all the major bourses finished the day with gains. Analysts noted that the recent market rally appears directly related to rumors of Reeves’ impending departure. At the same time, government bond prices firmed up after leadership calmed fears.
Maybe most importantly, economists can’t wait to see what U.S. economic data start pouring in. They’re most intent on the nonfarm payrolls report, due later in the calendar trading day. For June, economists are looking for an increase of 189,000 jobs, a bounce back from May’s increase of 139,000. But they expect the unemployment rate to tick up to 4.3% from 4.2% in May.
Bruna Skarica, an economist at the Center on Budget & Policy Priorities agreed that the intended impacts of the proposed welfare reform changes are scary.
“Changes to the welfare reform plans imply £5 billion worth of a fiscal headroom hit. Combined with the possible OBR growth downgrades, recent policy decisions mean that in the absence of tax hikes or alternative spending cuts, fiscal rules would be broken in the autumn,” – Bruna Skarica
This warning underscores the tightrope walk that the new U.K. government must perform as it responds to fiscal policy constraints while responding to political demands. The long-term consequences of these reform plans could be disastrous for economic growth and the delivery of essential public services.
In international news, the U.S. recently announced a 20% tariff on goods imported from Vietnam, reflecting ongoing tensions over trade policies. Additionally, the Trump administration has lifted restrictions on chip design software sales in China, signaling a shift in approach that could have broader implications for global markets.