Mixed UK employment data – weekly update 17 July

UK employment data continue to be mixed

The unemployment rate fell to a 42 year low of 4.5% (from 4.6%) in May, but weekly earnings, including bonuses, slipped 0.3% to 1.8% year on year (yoy). Whilst this was in line with expectations, the lack of wage growth is a concern, especially if the two are linked - that is, companies are only hiring more people because wages continue to be depressed, which could be a risk if companies resist increases to labour costs. However, there was some good news in the details - base earnings, which exclude bonuses, rose more than expected to 2.0% (1.9% expected, from an upwardly revised 1.8% previously).

Other global indicators were also mixed

The Eurozone continues to beat expectations as Industrial Production for May surged from 1.2% to 4.0%, exceeding punchy forecasts of 3.6%. US Industrial Production for June also beat expectations, up 0.4% month on month (mom), from flat previously (forecast was 0.3%). There were also signs of optimism in the earnings numbers, with Real Average Weekly Earnings increasing from 0.5% to 1.1% yoy in June, ahead of forecasts for 0.6%. We’ve highlighted before the need for real wages to start rising, and this is a trend we’re starting to see in this dataset, albeit helped by recent weakness in inflation. However, US retail sales were a source of disappointment, contracting -0.2% mom – an improvement on the -0.3% in May, but short of expectations for a 0.1% increase.

Last week’s other events

• US Federal Reserve Chairwoman Janet Yellen soothed markets with relatively dovish comments during her testimony to Congress, which contrasts with the more hawkish sentiment coming from the European Central Bank (ECB) and Bank of England recently. Chairwoman Yellen spoke about the transitory nature of recent disinflationary factors, but accepted there could be more going on, suggesting caution as being warranted
• Still in the US, The Fed Chairwoman’s comments were further reinforced by the latest inflation numbers that showed headline CPI fell further than expected, from 1.9% to 1.6% yoy (1.7% was expected), though Core CPI (excluding Food and Energy) was unchanged at 1.7% as expected
• Japan’s machine orders fell sharply from 2.7% to 0.6% yoy, seriously disappointing forecasts for an increase to 7.6%. The Eco Watchers Survey had better news with the outlook improving from 49.6 to 50.5 (50.3 was expected).

The markets

It was a bit of a risk-on week last week, but the magnitude remained limited, and US bonds rallied on the weak headline inflation numbers covered above.

One month performance of major asset classes

Equities

UK equities were the laggards, with the MSCI United Kingdom up 0.3% on the week, whilst US equities rose 1.4% (on the S&P 500), European equities rose 1.9% (MSCI Europe ex-UK) and the Japanese Topix rose 1.2%. Emerging markets had a very strong week, up 3.5% in local currency terms.

Bonds

10-year US Treasury yields fell -7 basis points (bps) to 2.33% on the weaker-than-expected inflation numbers. The equivalent UK gilts were unchanged at 1.31% whilst 10-year German bund yields were 2 bps higher at 0.59%.

Commodities

The commodity complex was stronger across the board. Brent crude oil was towards the top its recent trading range, rising to US$48.91 per barrel, gold rallied to US$1,227 per ounce and copper rose to US$2.68 per lb.

Currencies

Sterling was broadly stronger, particularly against the weakened US dollar. Sterling closed Friday at US$1.31, €1.14 and ¥147.

The week ahead

Both the ECB and the Bank of Japan have their monetary policy meetings on Thursday, and although in both cases no changes are expected, the language will be particularly closely watched given the shift in rhetoric from the ECB recently. We also have Eurozone inflation reported on Monday (1.3% yoy from 1.4% previously is expected), followed by UK inflation on Tuesday (no change at 2.9% yoy expected). Thursday has UK Retail Sales numbers updated for June, and markets are expecting a strong rebound to 2.5% yoy from 0.9% in May, so a surprise here could feed wider fears about the domestic economic outlook. Elsewhere:

Monday: Early in the morning, China releases a batch of data, which will include the first estimate for Q2 GDP (6.8% yoy expected) as well as retail sales, fixed asset investment and industrial production. Later in the day, as well as the Eurozone inflation data, there will also be the empire manufacturing index reported in the US.

Tuesday: As well as UK inflation, Tuesday gives us the ZEW business sentiment survey from Germany in the morning and import and export price data out of the US in the afternoon.

Wednesday: Japan reports machine tool orders first thing in the morning, followed by Eurozone construction output later on. In the afternoon the US reports on housing starts and building permits.

Thursday: A busy day, with two Central Bank meetings and the UK Retail Sales numbers. Apart from these events, we will also see trade data from Japan and consumer confidence from the Eurozone.

Friday: It’s a quiet end to the week, with only the UK Public Sector Net Borrowing for June of any note.