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UK unemployment set to fall, as rate hike bets increase

No lift for the pound from rate hike bets

European markets got off to a mixed start yesterday, while US markets, after initially looking in good shape, rolled over into the close to finish on the lows of the day.

While investors want to believe the narrative that stock markets can continue to move higher, this belief is bumping up against the reality of how the continued rise in energy prices, as well as supply chain pressures are likely to impact company profit margins, at a time when consumer incomes are likely to face increasing pressure as we head into the winter months.

The reality is that over the last few months stock markets haven’t gone anywhere, chopping in a broad range since early July.

As we look ahead to today’s European open, we can expect to see more of the same, with markets expected to open lower after last night’s late US sell-off, and this morning’s weakness in Asia markets, as once again concerns over rising energy prices outweigh optimism over the recovery in demand.  

It seems rather counterintuitive to be speculating that we may well see a rate hike from the Bank of England by the end of this year, at a time when the bank is still implementing an asset purchase program, but that’s where we are right now, with some warning of the risk of a policy mistake from the central bank. They do appear to be painting themselves into a corner, when it comes to a rate rise, which is always a dangerous place to be.  

Today’s latest UK unemployment data may well reinforce the rate rise narrative, and while a hike of 0.15%, back to 0.25%, may well be warranted in the months ahead, gilt markets are pricing in much more than that, although its notable the pound hasn’t risen in line with yields. This would suggest that the move in bond markets may well be overdone.   

The unemployment picture for the UK economy has improved considerably over the last few months, a trend that has been no better illustrated than with the decline seen in the claimant count rate since March, when it was at 7.2%. Since then, we’ve seen steady declines, falling to 5.4% in August, as businesses continued to reopen, even with the delay to July 19th

The ILO rate has also fallen steadily falling to 4.6% in July, and looks set to fall again for the three months to August to 4.5%, even as furlough continues to roll-off, with the Bank of England seemingly of the mind that we may not see a post furlough move higher.

With the various supply chain disruptions being seen across sectors it is becoming increasingly apparent that furlough has outlived its usefulness. Job vacancies in July rose to over 1m, with 182k new roles added as the UK economy reopened and the rest of the remaining restrictions were removed.

Wages are also on the up, and while some of the gains can be put down to base effects caused by the pandemic, they still rose from 6.6% to 7.4%, excluding bonuses in June, although we did slip back to 6.8% in July, and could slip even further today to 6%, for the three months to August.

Nonetheless, wages are still rising much faster than headline CPI, and this trend could well continue in the coming months as we head into year-end if the howls of anguish from businesses about labour shortages are in any way accurate.

This might still see the ILO measure edge higher, if struggling businesses decide to let any remaining employees go. If that happens the next few months could be difficult ones for the labour market, especially where there are skills mismatches which result in delays in returning to the labour force.  

German ZEW investor confidence has fallen sharply in the last few months, from record levels of 84.4 in May the last three months have seen expectations around the economic outlook plunge, hitting an eighteen-month low of 26.5in September, just prior to the recent German election result. While the outcome of the election wasn’t a surprise, the continued rise in energy costs is going to be a real challenge to German business, and in particular the Mittelstand.

All the while German politicians are set to spend the next six months arguing about who will form the next government as the Greens and the FDP try to square the circle of their different outlooks for the German economy with the SPD. Expectations are for another decline to 20.4, which would be the lowest level since March last year, and another 18-month low.

In the US the latest JOLTS numbers for August will merely serve to highlight even more starkly the challenges facing the US Labour market, after last week’s disappointing payrolls numbers. In July we saw another big increase in vacancies from 10.2m to 10.94m, and there is an expectation of a further rise to 11m.

EURUSD – fairly light trade after last week’s 14-month low at the 1.1530 area, the next key support. Last week’s high at 1.1640/50 is resistance with 1.1760 behind that, and while below here the bias appears to suggest further weakness.

GBPUSD – finding resistance at the 1.3670 area, with a break higher needed to signal a move towards 1.3750. Key support remains down near the 1.3400 area; although we also have interim support at 1.3540.

EURGBP – support currently at the 0.8470 area, with a break below targeting the August lows at 0.8450. We have resistance at the 0.8520 area, with a break above 0.8530 signalling a move back to 0.8570.  

USDJPY – still looks well supported pushing through 112.40 and the 2019 highs, and now on course for a move towards 114.00 and the 2018 peaks. Support remains all the way back at 109.80.

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