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UK wages set to rise further, China’s economy stagnates in Q4

In the absence of US markets yesterday for Martin Luther King Day, European markets eked out a modest gain, helped by further weakness in European natural gas prices which fell to their lowest levels in 16 months.

It is these declines in energy prices, along with optimism that inflation has peaked and that the various worst-case scenarios that were being modelled at the end of last year won’t come to pass, that is fuelling the early year optimism that has driven the gains of the past 2 weeks.

Over the last 2 months the various rolling restrictions and lockdowns has seen the Chinese economy slow down markedly. This has been shown clearly, not only in the trade numbers, but also in a sharp decline in consumer spending, which has seen retail sales slide sharply.

The decision to drop the zero-covid policy in the face of rising opposition, while welcome, is likely to prompt an uneven recovery for the Chinese economy in the coming months. This is because of the unwelcome side effects of the inevitable explosion in infection rates and mortality in a largely unvaccinated population, which we’ve already seen in the aftermath of this relaxation last month.

This means any recovery is likely to be very uneven and explains why this morning’s December retail sales numbers were better than the November numbers, coming in at -1.8%, as people restricted their movements to avoid getting infected and bought online instead. This area of online retail sales rose by 17.2%, which helped push the overall number higher from the -9% that was being predicted.

While retail sales spending has slowed sharply over the last 3 months of 2022, industrial production has done slightly better, although even here it still had a poor December, coming in at 1.1%, down from 2.2% in November.

All this weak data has translated into a Q4 stagnation for the Chinese economy with growth of 0%, equating to annual GDP growth of 3%. On the plus side, it could have been far worse, but it was still well below the Chinese government’s target a year ago of 5.5%.

As we look towards 2023, we could see a sharp rebound over the next quarter as we look towards Chinese New Year in just under two weeks’ time.

One of the few bright spots as the UK grapples with the rising cost of living, and headline inflation of 10.7%, has been that wage growth has been shown to be strong, although we did see a small uptick on October unemployment to 3.7%.

Putting that to one side the number of payrolled employees for November rose by 107k to a new record high of 29.9m, which should be reflected in today’s ILO numbers, and could prompt a modest fall to 3.6%.

Wage growth also saw decent growth in October, pushing up to 6.1%, and the highest level outside the pandemic since 2001. This record looks set to be broken again today in the December numbers, with a rise to 6.3% ex bonuses, and 6.2% without.  

Looking behind the headline numbers for wages, we’ve also seen sizable, localised variations in wage increases, with some areas of the UK seeing average hourly pay rising by over 20% in some instances.

The increase in payrolled employee numbers in November, by 107k also appears to suggest that people are returning to the labour market as the rising cost of living alters the economic calculus when it comes to paying the bills. It is expected that December will see another 60k added to that total. .    

EUR/USD – last week’s move through the June highs at 1.0787, raises the prospect of a move towards 1.0950 which is a 50% retracement of the move from the 2021 highs to last year’s lows at 0.9536. A move through 1.0950 opens up a move towards 1.1110.

GBP/USD – ran out of steam at 1.2290 yesterday, with the risk that the move above 1.2000 level is running out of steam, despite the decent rebound from the 1.1830/35 area. The next big resistance lies at the 1.2350 area. We need to hold above the 1.2000 area for further gains to unfold.

EUR/GBP – slipped back further from 3-month highs at 0.8895 yesterday. Momentum remains positive while above the 0.8820 area, keeping the risk of a move towards the 0.9000 level. Below 0.8820 targets the lows last week 0.8770/80 area.

USD/JPY – pulled off the 127.20 area yesterday, just shy of the 126.50 area which is the 50% retracement of the up move from 101.18 to the highs at 151.95. Could squeeze back towards the 130.00 area. Below 126.50 targets the 120.60 area.


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