With unemployment levels continuing to point to a tight labour market, UK wage growth rose above expectations as investors consider the inflationary impact on the wider economy. Average earnings excluding bonuses rose from 6.8% to 7.2%, surpassing forecasts of 6.9%. Similarly, average earnings including bonuses rose from 6.1% to 6.5% also beating expectations of 6.1%.
UK Wage Growth Rises Above Expectations
When assessing the disparity between private sector and public sector, today’s data revealed that private sector wages excluding bonuses rose 7.6% against the public sector’s 5.6%. For the private sector this marked the highest pace of growth on record outside of covid.
With wages rising faster than expected, markets are assessing the extent to which this may impact the BoE’s tightening cycle. For example, ING wrote that “faster-than-expected wage growth points to a rate hike in June and potentially August and is a reminder that pay
pressures are likely to ease only gradually. That doesn’t necessarily suggest the Bank of England needs to raise rates as aggressively as markets expect, but it does imply that rate cuts are some way off.”
Presently, markets suggest that there is around a 70% chance of a 25bps rate hike from the BoE on 22 June with markets forecasting rates to hit 5.5% by the end of this year.
This morning saw UK unemployment data come in softer-than-expected indicative of how the country’s labour market continues to remain tight. Against expectations that the figure would rise to 4%, unemployment slowed to 3.8%, a 10bps fall from last month. This came as employment levels also rose to their highest levels since records began, hitting 33.9 million with 250,000 more people in work over the three months to May. This surpassed expectations of a 162,000 increase as more people entered the workforce. Health Conditions
With more people in work than ever before, the economic inactivity rate fell to 21% as the market continues to see a correction of the ‘great resignation’.
At 1330 this afternoon all eyes will be on US inflation as the Federal Reserve gear up for their rate decision tomorrow. Chiefly, FOMC members will be looking at month-on-month core inflation where the general market consensus is expecting to see a 0.4% print, in line with last month’s figure.
Meanwhile, headline inflation is expecting to come in at 4.1% as energy prices continue to subside. This comes as annualised inflation showed signs of slowing sharply in April, slipping to 4.7% as it marked its lowest level since October 2021.
The release of the Fed’s minutes from May’s meeting suggests while the several of the FOMC may be inclined to ‘skip’ a rate hike in June, given that “many participants focused on the need to retain optionality after this meeting”, the possibility of further rate hikes remains. While markets in early January were pricing in a terminal rate of 5% (by June 2023), persistent inflation has seen this upwardly revised. For example, money markets are now pricing in 75% chance of rates hitting 5.5% by 26 July though the general market consensus is expecting a skip in its tightening cycle tomorrow.
People’s Bank of China Cut 7-day Reverse Repo Rate
This morning, the People’s Bank of China unexpectedly cut their 7-day reverse repurchase rate by 10bps as policy makers look to support the economy, which continues to show signs of slowing. As Reuters notes “the cut to the lending rate signals possible easing for longer-term rates over the next week and beyond as demand and investor sentiment weaken, adding
to the case for urgent policy stimulus to sustain growth”. While their decision surprised many across financial markets, commercial banks have been cutting deposit rates in recent weeks. All eyes continue to be focused on staling growth across the world’s second largest economy as the yuan hits a six-month against the dollar.
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