The latest UK labour market report for May/ June was more of the same: the unemployment rate remains at a record low of 4.2%, yet wage data stubbornly refuses to go anywhere. The bright spot is job creation, which continues to defy expectations. The UK economy has created more jobs than expected in the three months to May, with 137k jobs created, better than the 115k expected.
This is the third month in a row where job creation has been strong, suggesting that Q2 was a good month for employment, which gives a flicker of hope that wage inflation may be triggered down the line. Interestingly, jobless claims jumped last month to 7.8k; however, this is suspiciously similar to the -7.7k decline in May, so this blip in the labour market report can be ignored for now.
The easy explanation for why jobs are so plentiful
Wage data declined a touch to 2.7% from 2.8%, in line with expectations. The upside for low wage growth is that employers are likely to continue to hire if labour costs remain this cheap.
Why politics is keeping the pound in check
The market reaction was muted, with GBP/USD trading within a tight range this morning. GBP/USD remains just above 1.3250, however upside continues to be thwarted by politics. Although Theresa May narrowly won a Commons vote on her Customs Union proposal with the EU on Monday evening, there are still threats to her leadership. With the next round of EU negotiations not due until October, when the bulk of the UK’s exit from the EU will be hashed out, we expect the pound to remain out of favour in the FX world, and upside in the major GBP pairs to be limited.
The FTSE 100 is higher today after Monday’s torrid performance. We don’t believe that this is due to the labour market data, and is instead a reversal after yesterday’s decline and is due to a pick up in energy stocks, in particular.
UK data not moving the dial for the BOE
The pound is unlikely to move too much on the back of UK economic data unless we see some major positive surprises. Right now a rate hike in August is pretty much priced in, thus the BOE will have a limited effect on the pound in the lead up to the August 2nd meeting. Instead, the market is likely to look at this week’s data in terms of what it means for future rate hikes. So far, the data is not boosting the chances of a second rate hike before year-end, the market is pricing in only a 12% chance of rates being at 1% by year-end. This is lower than the 14% chance expected last week, suggesting that political noise from the Brexit negotiations is limiting rate hike expectations for later this year.
Due to the high bar for a second rate hike from the BOE, if the UK economic data this week is inline with expectations then we may not see too much excitement in the pound.
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