By Stefan Koopman, Senior Macro Strategist at Rabobank

New Deal? Big Deal

The UK Labour government pledged to introduce its “new deal” for workers within 100 days of being elected in July. As these first 100 days draw to a close this weekend, Labour will unveil its new Employment Rights Bill today. This bill is being touted as the most significant package of employment reforms in a generation. Key elements include increased protections against unfair dismissal, the removal of the three-day waiting period for statutory sick pay, and the banning of exploitative zero-hour contracts. It also aims to curb unreasonable ‘fire and rehire’ practices and ensure the right to flexible working. Trade unions will gain new rights for the first time in years.

This marks a significant shift towards strengthening workers’ bargaining power and tightening employment protection legislation. Such measures reduce workers’ exposure to negative shocks, which should eventually support consumption by allowing for lower saving rates. However, they also impact employers by limiting their ability to adjust the workforce flexibly in response to changes in demand, thereby raising both hiring and firing costs. The implementation of these measures will exert upward pressure on firms’ marginal costs, which, if demand in the economy is strong enough, can lead to an increase in markups and prices. This dynamic aligns with economic theory, which suggests that countries that tighten employment protection experience a steepening of their Phillips curves post-reform.

It is yet another sign that economies are making a huge departure from the old paradigm, where workers in developed countries saw their middle-class status eroded by decades of neoliberal policies. It’s also a sign markets usually miss, focusing instead on headlines that are more easily tradable. However, in terms of policy rates, it is exactly this type of reforms that separate countries where inflationary pressures could prove a bit more persistent and where not. That new deal also happens to be a big deal.

Labour hasn’t had the best of starts, but yesterday was probably their finest day since July 4. Conservative MPs have eliminated the only leadership contender that Labour had any real concerns about. James Cleverley, who had surged ahead by apologising for the party’s past mistakes and proposing a somewhat moderate Conservatism, has unexpectedly dropped out of the race. Whether through strategic blunders, underhand scheming, sheer political folly, or a mix of all three, the Tory MPs have managed to extinguish the leadership hopes of the one man who might have saved them from disaster.

Now, party members must choose between Robert Jenrick and Kemi Badenoch, both right-wingers. While this aligns with the membership’s desires, it leaves voters struggling to distinguish between the Conservatives and Farage’s Reform Party. Essentially, this will pit Reform against ‘Reform 2.0’, splitting the right-wing vote and significantly boosting Labour’s chances of another term in office. And that’s another big deal for UK assets.

Chinese stocks surged once more after the People’s Bank of China unveiled a mechanism to enable institutional investors to purchase more stocks. This move grants the Chinese government some time, as the market waits for a finance ministry press conference scheduled for Saturday. The ministry is expected to unveil the specifics of the fiscal stimulus package, under the banner of “intensifying counter-cyclical adjustment of fiscal policy.” However, should this title imply that Chinese authorities view the nation’s economic challenges as “cyclical” rather than “structural,” the market could be setting itself up for yet another letdown.

As a weakening but still tremendously powerful Hurricane Milton slammed into Florida’s west coast, the FOMC released the minutes of its September meeting. Our Fed-watcher Philip Marey concludes that Bowman was not the only FOMC participant who preferred a 25 basis point rate cut in September. Although a substantial majority supported a 50 basis point cut, some participants would have preferred a 25 basis point reduction at this meeting and a few others indicated that they could have supported such a decision.

Looking forward, several participants said that reducing policy restraint too soon or too much could risk a stalling or a reversal of the progress on inflation. In light of the strong Employment Report for September that was published well after the September FOMC decision, the opposition may feel vindicated, although the CPI report published today will also be a factor. However, during the Q&A at the NABE Conference, Powell already indicated that he does not intend to make another 50 basis point cut and that we should expect 25 in November and 25 in December. This matches our forecast.