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UK wage growth expected to remain subdued

a handful of £20 notes

Having come off the back of four successive weekly gains European markets got off to a subdued start to the week yesterday, and while we just about managed to eke out a gain, what did it tell us about the outlook for the global economy.

Investors appear to be undergoing a bout of cognitive dissonance when it comes to the risks facing the global economy. Yesterday’s Chinese economic data for industrial production and retail sales in July showed an economy that was low on confidence, and where growth over the rest of the year is expected to be sub-optimal, due to a refusal to relax its controversial zero-covid policy.

While the sharp fall in oil prices grabbed most of the headlines yesterday, the same cannot be said for gas prices, which finished the day sharply higher, and that is where the main headwind is for markets in Europe.

US markets also managed to claw their way back into positive territory after a poor start, despite a horrendous Empire Fed manufacturing survey, with the main focus this week set to be on the US consumer, ahead of retail sales data for July, as well as the latest quarterly numbers from US consumer bellwethers Target and Walmart, after their recent profit warnings.

This US rebound looks set to translate into a positive open for European markets this morning.

Today’s focus turns to the UK economy with the latest unemployment and wages data for June, followed by tomorrow’s inflation numbers for July.

Despite relatively low levels of unemployment in the UK the natives have started to become restless in the past few weeks, as the spiralling cost of living prompts increasing anxiety, as well as industrial unrest.

With prices rising steadily on a month-to-month basis it is maybe fortunate that unemployment is so low, however that doesn’t mean it can’t go lower. We’ve heard a lot about how tight the UK labour market has been over the past few months, with hundreds of thousands of job openings that are currently unfilled.

What is perhaps a little less reported is that the number of people in the labour market is lower than it was pre-pandemic, however there is some evidence that some of those who chose to retire early are starting to come back into the work force out of necessity, as the cost-of-living increases. That said there is scant evidence that this is forcing wages higher, which is perhaps surprising given how strong inflationary pressures have been and are likely to continue to be.

We’ve already started to see evidence of return to the workforce after the May unemployment data showed that hiring in that 3-month period rose by 296k, although the rate remained steady at 3.8%. This trend is expected to be slow slightly for the three months to June to 268k.

While this is welcome news, it is not having the desired effect on wages that it might be, although we did see a modest rise in weekly earnings from 4.2% to 4.3% for the same period. This is expected to see an increase to 4.5% for the three months to June

Where we are seeing some strength is in the data which includes bonuses, where employers appear to be leaning towards making one-off bonus payments to employees in an attempt to mitigate the effects of the cost of living squeeze that way. This way is less inflationary as it doesn’t feed into a permanent wage price spiral and works on the premise that energy prices are likely to come back down again, thus easing the squeeze in the cost of living, over the longer term. 

In May, wage growth including bonuses slipped back to 6.2% from 6.8% and is forecast to fall further to 4.5% for the three months to June later this morning.

In the US, the latest housing data is expected to see another decline in housing states and building permits for July with starts expected to fall by 2%, and building permits set to fall by 3.3%.   

EUR/USD – while below trend line resistance from the January highs at 1.0340, the risk remains for a lower euro, having broken below the 1.0220 area, and now targeting the 1.0150 area, with the previous lows at 0.9950 the next key support. 

GBP/USD – unable thus far, to break above the possible inverse H&S formation at 1.2270. A break through 1.2300 targets a move towards 1.2600. Interim support at the lows last week at 1.2000 and the 1.1960 area.

EUR/GBP – still looking soft with resistance just below the 0.8500 area. We currently have support at the 0.8400 area. Below 0.8400 targets the 0.8340 area.   

USD/JPY – still finding support in and around the 131.60 and 132.00 cloud area. Below 131.60 targets the 130.20 area. Resistance at the 50-day SMA area.  


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