14 December 2022: Average earnings continue to rise


  • Claimant count, an indicator of a slowdown in economy
  • Headline inflation falls again
  • ZEW index shows higher economic activity soi far this month
GBP – Market Commentary

Real Incomes still falling

The employment report for November was released yesterday. The claimant count rose from a downwardly revised -6.4k to 30.5k. This is a definite indicator of a slowdown in the economy.

As the claimant count rises, fewer people are in work paying taxes while more people are claiming benefits, which reverses the flow of funds into the Treasury.

Average earnings, both including and excluding bonuses, rose but remain below the headline rate of inflation. This means that real wages are continuing to fall and adding to the cost of living crisis.

The economy is being hit by a wave of industrial action across several sectors as workers reject wage rises that are below the rate of inflation.

Train drivers are holding a pair of two day strikes this week, but they insist that their action is about working conditions, although they are also demanding an increase that is close to the rate of inflation.

Ambulance crews and nurses are both due to strike, having refused the Government’s pay offer. Their union has offered to suspend strike action if the Chancellor agrees to further talks on pay, but Jeremy Hunt has declined their offer, since he says that any increase in the current offer is unaffordable and will simply create a wage/price spiral that once entered will be difficult to reverse.

Today sees the release of the November inflation report. Headline inflation is expected to fall slightly from 11.1% to 10.9% in reaction to the forecourt price of fuel, while core inflation remains the same due primarily to the rises in both domestic and commercial rental values that are driven by the rises in interest rates.

The modest fall in inflation is unlikely to have any effect on the MPC, which will announce a further rise in short-term interest rates tomorrow. The doves and hawks on the Committee will maintain their current positions, which will lead to a fifty basis point increase.

Sterling rose for the fifth day in succession against the dollar in reaction to the latest inflation figures in the U.S. It reached a high of 1.2444 and closed at 1.2385.

USD – Market Commentary

Fed still likely to hike rates, but Jumbo likely off the table

The headline rate of inflation fell to 7.1 in November, down from 7.7% previously. It is now safe to say that inflation has topped out and the pressure on the Federal Reserve has fallen significantly.

Core inflation also fell from 6.3% to 6% while month on month rate also fell.

Today’s meeting of the FOMC will doubtless take notice of the data, although both the minutes of the previous meeting and the most recent comments from its Chairman, Jerome Powell, increase the likelihood that any increase announced today will be less than has previously been seen.

A fifty basis point increase is expected to be seen as the Fed continues to be tough on inflation, but notes the potential effect on the economy as demand is beginning to slow as interest rates begin to move into restrictive territory.

In his press conference, following the rate announcement, Powell is expected to comment that rates are likely to remain restrictive, possibly for the whole of 2023 as inflation falls back towards the Fed’s target.

President Biden, flushed from the relative success of his Democrat Party at the midterm elections, commented that the economy is now moving in the right direction as the poison of coronavirus has left the system.

Democrat members of the senate declared that the risk of a recession is receding rapidly, and average growth for next year will be around 2.5%. The official projections for the economy will be published later and are likely to be a little more conservative.

The dollar index had one leg of its support removed as inflation fell again. It collapsed to a low of 103.68 and closed at 104.02.

EUR – Market Commentary

But ECB still determined to defeat inflation

The Governing Council of the ECB will begin its meeting to decide the level of short-term interest rates today, with the announcement due at lunchtime tomorrow.

As inflation has fallen, the more dovish nations have begun to call for interest rate hikes to be paused. The rate of inflation for November in Germany, the region’s largest economy, was published. It showed that the headline was unchanged at 11.3%. This announcement may see the hawks reassert themselves.

At 2% currently, the short-term rates remain well below the fate of inflation and still in accommodative territory. The ECB was slow in beginning to tighten monetary policy compared to both the Federal Reserve and the Bank of England. This means that they are likely to continue to delay a taper to the size of increases well into the first quarter.

The recession that has possibly already started, is unlikely to be blamed on the rate increases as they have barely started yet, and they are not restricting activity or dampening demand yet.

The slowdown is due to the war in Ukraine and the price of energy. As long as this opinion remains, the more hawkish members of the Governing Council, Austria and Germany, will continue to push for rate rises.

It is expected that rates will be increased by fifty basis points tomorrow, although there will be a call for seventy-five since that will bring the headline rate to 2.75% which is considered by some to be on the cusp of restrictive.

Once rates have become restrictive, their effect of inflation will be magnified. However, the effect of demand will also increase significantly.

The euro received a boost from the fall in the dollar index yesterday. It climbed to a high of 1.0673, but fell back to close at 1.0627 due to a lack of follow on buying.

Have a great day!

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Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.