Unemployment drop increases rate hike expectations
Today’s sharp drop in UK unemployment to 7.1% brings market expectations of a UK rate hike that much closer and once again highlights the difficulties of managing market expectations surrounding the path of future interest moves. UK gilt yields rose sharply to 2.9% but still remain below the highs at the end of last year at 3.07%
Today’s numbers certainly increase the pressure on the Bank of England at next month’s rate meeting with respect to their forward guidance. Be that as it may we aren’t at the Bank of England’s 7% rate threshold yet and it could be some time before we do hit it or even drop below it.
Since late summer UK unemployment has dropped from 7.7% in August to 7.1% in November. That's a sizeable drop but let's not forget we are looking at a three month rolling average and the single month figure for August was 8%, while September came in at 7.1% and October came in at 7%.
The figures this morning saw that 8% number drop out of the figures while November’s single month figure came in at 7.4% so next month with the December numbers we could well see a slight rise from the 7.1% number seen this morning.
While this morning’s data undermines once again the Bank of England’s forecasting models it seems unlikely that we will see much change to policy at next month’s meeting apart from a slight tweaking of the guidance language and a reiteration of concern about the recent appreciation of sterling.
In the short term, unless economic conditions change radically it seems probable that we could well see a stabilisation in the ILO numbers, just above the 7% level given the sharp drops seen in the past couple of months.
As long as inflationary pressures remain on a downward path the Bank is likely to be fairly relaxed about the current levels of interest rates, despite concerns about over borrowing by consumers.
If last week’s blow out retail sales numbers came about as a result of increased consumer credit numbers then we can expect further concerns to be expressed about these risks, but while inflation continues to decline the central bank looks likely to remain on the sidelines.
As far as the pound is concerned as long as we are able to stay above $1.6250 then there is a good chance we could well see further gains towards 1.6605, the highs at the beginning of this month and even 1.6750 the highs last seen in 2011.
Against the euro we could well see further gains towards 0.8150 and one year highs.
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