23 Jan 2019: UK Jobs Data defies economic slowdown

UK Jobs Data defies economic slowdown

January 23rd: Highlights

  • Wage inflation remains well above 3%
  • ECB powerless to reverse “Eurogloom”
  • Fed’s rate pauses to last all year

UK Jobless rate falls to 4%

While the UK employment report is a little more reliable than the U.S. Non-Farm Payrolls, there is still a question of comparing apples and oranges when judging the level of employment today with historical reports. Yesterday’s jobs report in the UK was positive all round with overall unemployment falling to 4% from December’s 4.1%, and average earnings rising by 3.4%, up from 3.3% in December.

Wage inflation tends to be a similar indicator to producer or factory gate prices as a precursor of future consumer price increases and this will alert the Bank of England MPC, which meets on February 7th, to the need for vigilance over interest rates despite the uncertainty being created by Brexit.

With wages moving in the opposite direction to inflation and growth in the economy trailing off, traders will expect a slightly more hawkish tone from Bank of England Governor, Mark Carney. The MPC will find itself in the difficult position of having to deal with current economic activity yet be aware of the likelihood of a further slowdown if the current Brexit stalemate continues and no deal becomes an even more possible outcome.

Brexit is now appearing to have become distilled down into two scenarios. Either there will be a second referendum, the calls for which are gaining momentum, or no deal will happen due to the inability of MPs to find enough common ground to be able to present a suitable solution to Brussels.

The pound rallied on the back of the employment report but was unable to break through the 1.3000 level versus the dollar. It reached a high of 1.2976, closing at 1.2952.

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Eurozone drifting towards recession with ECB powerless to help

Italy will release it Q4 GDP data later this month and it is likely to show that for the second quarter in succession, the economy contracted. This is the “technical” definition of recession and it is probable that it will be followed by several other countries although an official recession across the entire region is still some way off.

That is a cause for concern in itself since it is impossible for the ECB to create monetary policy which is “all things to all men”, backed by ECB President Mario Draghi’s assertion that the ECB is charged with creating a background by which the entire region can enjoy controlled growth.

When the Eurozone emerged from the financial crisis and the extraordinary stimulus was in place it was assumed that the growth rates in excess of 2% being exhibited by many of the larger economies were the start of a period of steady growth and low inflation, the so-called “golden scenario”. However, as productivity has fallen and growth has declined, questions are being asked about what happens next. Pre-crisis, during the crisis and as the global economy emerged, the Eurozone has lagged other developed markets in most economic measures and questions are being asked about the euro as a necessary part of the closer ties that are being discussed in Brussels and Strasbourg.

Italy has produced a budget which defies Eurozone rules and France is on the way to copying them. There is no consensus yet on whether the region should introduce single fiscal policy and social welfare and until the ECB is able to work within a more complete framework it will remain powerless to stimulate the economy further.

The single currency remained in its recent range yesterday, reaching a high of 1.1381 and closing at 1.1352.

Data-Driven Fed to remain on the sidelines

Having defied both conventional wisdom and the President of the United States in his first year in office, Federal Reserve Chairman Jerome Powell looks likely to take more of a backseat over the economy in his second.

Having hiked rates four times in 2018, it appears that the brakes may have been applied just a touch too heavily even though the economy still appears to be growing at a reasonable level and asset prices are recovering from the tumultuous correction seen a few weeks ago. It is hard to tell an investor who was buying into the market just prior to the crash that a correction is a healthy sign but as the market recovers and the twin spectres of inflation and tighter monetary policy fade, the U.S stock markets should see better growth.

Next week’s employment report will be eagerly anticipated as usual but prior to that activity, indexes will be released which provide a more forward-looking indication of how the economy is faring.

At last year’s World Economic Forum in Davos, Switzerland, there was a public disagreement between President Trump and his Treasury Secretary over the direction of the Dollar. Steve Mnuchin favoured a weaker dollar while the President continued to believe in the “strong dollar policy”. Until Q4, Trump was getting his way. It is unlikely but not impossible that a similar scenario may emerge at this year’s forum which begins this week.

Yesterday the dollar index continued to tread water with little new evidence to drive it in either direction. It reached a high of 96.50 and closed at 96.28.

Have a great day!

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.”