U.S. job market cools – what’s next?

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U.S.-Iran ceasefire ends

The second quarter ended with a pretty good week for stocks, but plenty of drama remains.

Tension remains despite oil prices falling significantly since the likelihood increased that the Strait of Hormuz would reopen. Iran harassed ships taking the southern route, which goes through Omani waters, and the U.S. responded by revoking a waiver on Iranian oil sales and striking 80 targets within Iran.

The two parties reaching an agreement remains challenging. The oil price rose but remains well below its recent peak.

Cracks in the capex story – or healthy consolidation?

AI infrastructure has become the modern market bellwether. While questions remain over the efficacy of hyperscaler capital expenditure (capex), there seems to be less controversy about holding the beneficiaries of that capex – the semiconductors and memory chip producers and associated electrical suppliers.

The remaining controversy refers to how long hyperscalers will keep pumping significant, upfront capital investment into their AI infrastructure. The most recent niggle of doubt comes from leaks suggesting Meta could lease computing capacity. That might be welcome as a source of revenue, but when Mark Zuckerberg has discussed it previously, he has described it as a solution if Meta was to overbuild.

The leaks came after xAI agreed to lease computing capacity to Anthropic, and with token costs (the per unit pricing of AI models) having slipped nearly 20% from their May peak, it created some nervousness that the world might already have enough computing capacity, which would obviously imply lower future orders. However, that would seem difficult to square with the lengthening backlogs revealed by other hyperscalers.

While chip stocks have eased back from their peaks, they look more like a healthy consolidation after an outstanding performance than a reversal.

From a technical perspective, market breadth has been picking up. This is encouraging at a time when the market seemed to rally despite a weak economy.

One important aspect is that the resumption of oil flow in the Strait of Hormuz has led to an easing of inflation pressure. Data on U.S. real income and spending growth has shown how higher inflation has been eating into real incomes, causing them to shrink marginally relative to last year. This means that Americans have reduced their savings to a historically low level. It’s not yet unsustainable, and evidence seems to indicate that immediate future spending growth is likely to be maintained. But some relief through lower inflation needs to come for real spending to be maintained.

U.S. jobs growth stalls as AI drives layoffs

The latest U.S. non-farm payrolls report was downbeat, with just 57,000 new jobs created in June. The labour market doesn’t seem strong enough to generate significant wage demands, although a shrinking labour force means that it isn’t too slack either.

Source: LSEG Datastream

The best outcome for the economy would be wage growth without inflation through faster productivity. Is that happening? The fact that the Challenger jobs report cited AI as the most common reason for layoffs throughout 2026 suggests that it might be. The report only covers a small fraction of the total layoffs in a given month, but if it’s indicative of a broader trend then it would seem to indicate that companies are beginning to make efficiency savings through AI.

Source: Challenger, Gray & Christmas

Germany accepts pensions reform package

Pension spending is a growing fiscal challenge across the Eurozone, and it’s set to rise by around 1% of GDP by 2035 as populations age.

Germany faces a particular challenge: its working-age population is falling faster than that of most peers, yet its pension system is almost entirely pay-as-you-go and unfunded. Its retirement assets equate to less than 15% of GDP, compared to around 80% in the UK and 150% in the U.S., according to Capital Economics.

The Merz government initially made things worse by extending the suspension of Germany’s sustainability factor until 2031 and expanding mothers’ pension entitlements. The ‘sustainability factor’ refers to a mechanism within Germany’s pension system that limits the pension level if there are more retirees than active workers paying in. The moves are estimated by Capital Economics to add 0.4% of GDP to pension spending by 2035.

However, this week, Merz’s coalition government accepted a reform package from an independent commission that improves things. Its two most significant recommendations are a six-month increase in the state pension age and the creation of a compulsory Defined Contribution (DC) scheme (modelled on Sweden’s premium pension system). This is expected to channel around €30 billion per year into capital markets including equities, venture capital and private equity.

It will take decades to realise the benefits. But the long-run implications are significant: the DC scheme could structurally increase institutional demand for European equities and create new flows for asset managers and private equity. It’ll build up slowly, but the concept seems sound.

Andy Burnham’s Labour leadership speech

Reform was also in the air during Andy Burnham’s speech last week, which established his intention to succeed Sir Keir Starmer as prime minister.

This would have been a bigger deal a few weeks ago but Burnham’s critical conversion to backing existing fiscal rules – abandoning his previous scepticism of bond market constraints – has been the primary source of market reassurance.

With fiscal policy constrained, the attention has shifted to reforms that may come with immaterial costs, such as devolution. It’s true that the UK has become more centralised over the past 20 years. What’s less clear is whether devolution will improve growth.

Research suggests that the critical form of devolution that would improve performance would be the devolution of revenue raising, rather than simply spending larger grants from central government.

Procurement reform is the most immediate corporate sector implication. Burnham explicitly commits to ending “chasing cut-price deals around the world” and applying social value weighting to all eligible public contracts, including defence. This is a material positive for UK-based manufacturers and suppliers in steel, defence and energy and food – and a risk for international incumbents.

Utilities are a clear watch item. The commitment to greater public control of water, energy and transport – modelled on Greater Manchester’s bus franchising –  is a directional warning for private operators of listed infrastructure assets. Having seemingly accepted that they can’t be brought into public ownership, stricter regulation seems more likely.

Housing and construction represent the most concrete fiscal and sectoral opportunity. A large-scale council house building programme using public land, framed explicitly as a fix for what Burnham calls the “ruinous impact” of the housing crisis on public finances, would be a significant positive for the construction sector. However, house building has been promised by previous governments and not delivered.

The most positive thing from the UK perspective has been the lack of a negative reaction from the gilt market. 

We expect that Burnham will feel constrained from radical policy by the fact that the mandate he’s inheriting was won based upon Starmer’s manifesto. He’ll need a significant bounce in the polls to be tempted to seek a mandate of his own. But the biggest single constraint on governments is the bond market’s reaction to any policies, which he’s managed to tame for now.

So, with significant tax benefits and a tailwind from the tentative reopening of the Strait of Hormuz, we continue to take advantage of high UK yields.

Coming up

Talks in the balance: As the literal smoke clears, the status of the peace talks between the U.S. and Iran will be in focus – with implications for oil, economic inflation and government bonds.

Defence spending pressure: U.S. President Donald Trump will attend the NATO summit in Ankara, Turkey on Tuesday.

China prices: The one region experiencing deflation over the last few years has seen a return to inflation in recent months.

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