Wages Rise and unemployment falls
18th May: Highlights
- UK Government threatens to break Brexit deal
- Optimism returning to the U.S. Economy
- EU economy sees surprising Q1 growth
Solid data masks risk to come
As consumer prices continue to rise, the headline rate that will be released later this morning is expected to climb above 90%, businesses are being hit by slowing sales and increased costs.
The unemployment rate is at its lowest since 1974 at 3.7%. Basic wages grew by 4.2% and when bonuses are included that figure jumps to 7%.
The Government is certain to jump on this data briefly, concluding that jobs remain plentiful. However, today’s inflation data will take the shine off economic performance.
There are fewer people in work than before the Pandemic, and costs are rising appreciably faster than pay.
450k fewer people are in the workforce than before lockdowns started.
Real pay including bonuses rose by just 1.4% in April, while basic pay actually fell.
There is a growing trend in the UK which originated in the U.S.
The majority of new hires are workers moving from job to job in search of higher wages.
Employers are being forced into various practices to retain workers, since if they leave, the rate for the job naturally rises.
Jobseekers are holding all the cards as far as the jobs market is concerned. Despite this, the number of under 25s without jobs is higher than before the Pandemic, while in the 55-64 bracket, workers are not yet returning to the market.
The Trade Minister set out the new law dealing with the Northern Ireland Protocol in Parliament yesterday. Liz Truss insisted that the Bill is legal under international law, a fact that is disputed by both the Opposition and in Brussels.
The new Bill will make changes to, rather than scrapping, the entire legislation. Brussels has already commented that it will do everything in its power to combat the new law.
The Irish Foreign Minister commented that unilateral action damages trust, although that commodity has been in short supply for some time.
The pound rose to a high of 1.2499 yesterday and closed at 1.2464 yesterday as the dollar continued to correct.
Consumers remain unfazed
There have been several factors including rising inflation, higher interest rates and the effects of the conflict in Ukraine for consumers to deal with.
Sales rose by 0.9% month on month in April, following a rise of 1.4% in March.
Industrial Production was stranger in April, rising by 1.1% after a rise of 0.9% in March. Capacity Utilization also rose. This figure shows how much of the economy is actually being used and indicates the degree of short-term growth that is being seen.
Strong demand for motor vehicles and other manufactured products pushed output to unexpected levels.
Atlanta Fed President James Bullard spoke earlier in the day, ahead of the Fed Chairman.
Bullard believes that the Fed is correct to continue to hike in fifty basis point increments, since the economy, in his view, will continue to grow at a rate that surprises the markets.
He also believes that markets have already factored in interest rates rising to between 2% and 2.5%. The fact that asset markets have behaved is a sure indication that any correction will be shallow.
Speaking later in the day, Fed Chairman Jerome Powell said that he expects a softish landing for the economy as rates are returned to neutral and inflation abates.
Powell went on to say that the FOMC is studying all possible paths back to normality for the economy while having regard for the Central Bank’s twin targets of promoting full employment and ensuring growth in the economy while targeting inflation at 2%.
He agreed that there may be some further pain for the economy as the Fed grapples with inflation at four-decade highs.
Powell disagrees with Former Fed Chairman Ben Bernanke on the subject of stagflation.
The economy has moved on considerably since the seventies and its dynamics are completely different, particularly as far as reliance on imported energy is concerned.
The dollar index is continuing to correct following a recent test of the 105 level.
Yesterday it reacted to improved risk appetite and fell to a low of 103.23, closing at 103.40.
The Ukraine conflict has had less effect initially
While this is encouraging for the region, the fact that the conflict in Ukraine had not begun despite Putin’s threats, means that there could be a significant fall in Q2, given the poor data that has so far been released for April.
Germany recovered in Q1, having reported a contraction in Q4. Its economy grew by 0.2% following a fall of 0.3%.
The other larger economies also rose, although there is still a major concern about the pace of the slowdown in output.
Russia invaded on 24th February. It is estimated that the full effect of the crisis still hasn’t been seen, although its initial effects would have been in place before the end of March.
The rising cost of energy, together with sanctions on Russia which will eventually lead to a ban on imports of Russian energy into the European Union, are factors that will lead to a significant fall in output in Q2.
The expected hike in interest rates that is likely to take place in early Is also going to be a major factor for the region.
The Deputy President of the ECB Luis de Guindos interviews by the weekend press in Germany refused to be drawn on the likelihood of a hike in July, preferring to allow his colleagues to vote without influence.
Tomorrow sees the release of inflation data for the entire Eurozone.
It is expected that there will be no change from last month, with headline HICP remaining at 7.5%.
Core inflation with volatile items stripped out is also expected to remain unchanged at 1.1%.
Yesterday, the euro rose to a high of 1.0555 and closed at 1.0545.
About 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.”