News & analysis

UK labour market data published this morning delivered yet another head scratching outturn, beating expectations to reinforce our call for no policy rate easing in the first half of this year.

Admittedly data quality concerns have meant that these official statistics have been deemphasised to some degree by the BoE in recent months, a fact that resulted in the temporary suspension of employment readings all together late last year, with today’s unemployment print the first on schedule release since last September. Even so, policymakers are unlikely to be able to discount these readings entirely, with wage data in particular having appeared to realign with other pay indicators over recent releases, making today’s expectations overshoot harder to ignore for policymakers. Average weekly earnings grew by 5.8% 3m/YoY in December, down on November’s 6.7% print, but still ahead of consensus expectations that looked for a 5.6% reading. Whilst trending in the right direction, this is still far too hot to suggest inflation sustainably cooling back to the BoE’s 2% target. Doubly so with unemployment moving in the wrong direction entirely. Data quality issues notwithstanding, having peaked at 4.3% in the period covering May to July 2023, the three-month unemployment rate fell to 3.8% in the October to December period according to this morning’s figures, down from 3.9% in the prior release.

All told, this adds further weight to our argument that the Bank of England is unlikely to join with other major central banks to cut rates in the first half of 2024. We continue to look for BoE policy easing to begin in August.

Looking through the details of the release, this largely serves to confirm the message from headline readings. Average weekly earnings, excluding bonuses, fell from 6.7% 3m/YoY to 6.2% for the period covering October to December. Perhaps more troubling for the BoE given the emphasis policymakers have placed on this measure as an indicator for underlying inflation pressures, private sector regular pay only fell 6.6% 3m/YoY in November’s release, to 6.2% in December. Moreover, on a single month basis this reading has now flatlined, having printed at 6.2% YoY, 6.3% and 6.2% in the most recent three readings, suggesting progress on slowing wage growth has stalled for now. We would note that the Bank of England’s latest Decision Maker Panel had pointed to plateauing wage growth at the end of 2024, before a renewed drop off in released wage growth in January. Nevertheless, private sector wage growth is now tracking above the 6.5% 3m/YoY reading for November that the Bank staff noted in the February MPR, and based on today’s overshoot, this suggests that the balance of risks is now skewed towards an overshoot of the Bank’s forecast of 5.7% for Q1 of this year.

Turning to the unemployment measures, as noted by the ONS, today’s data incorporates new population weightings, with time constraints meaning that only data from July to September onwards have been reweighted.

As such, we are conscious of drawing too strong a conclusion from today’s release relative to historic norms. That said, at 3.8% the unemployment rate is now a long way below Bank staff’s 4.5% estimate of the neutral rate of unemployment. Not only that, but job gains continue to outperform expectations too. Having been expected to print at 50k in December, the 3m/3m employment change actually landed at 72k. This was accompanied by January’s monthly change in payrolled employees which rose by 48k against expectations of a -18k reading, with December revised up to 31k from an initial print of -24k as well, all pointing to a labour market that continues to outperform expectations.

All told, today’s data points to a labour market that is holding up far better than expected under the weight of an elevated Bank Rate.

Whilst there are continued signs of cooling at the margin, progress is far from fast enough to suggest that rates cut in the UK are imminent. In our view, and in light of leading indicators such as the REC report on jobs and the Bank of England’s DMP, we do expect that wages will continue to slow over coming releases. But given the high base and recent slow progress, we suspect it will be the second half of the year before the MPC can feel comfortable beginning to cut policy rates. As such, we hold our call for a first rate cut in August heading into tomorrow’s inflation release, where we also expect services inflation to marginally overshoot BoE forecasts. Markets have largely drawn similar conclusions from today’s data too, with sterling gaining two tenths on both the dollar and the euro as traders fractionally pare back BoE easing bets.

 

 

Author:
Nick Rees, FX Market Analyst

 

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