Solid UK jobs data boosts pound, gives hope for future wage growth

The UK labour market report for June and July delivered some much needed good news. The unemployment rate dropped further to 4.4%, from 4.5%, the lowest level since 1975, but the good news doesn’t stop there.

The UK labour market report for June and July delivered some much needed good news. The unemployment rate dropped further to 4.4%, from 4.5%, the lowest level since 1975, but the good news doesn’t stop there. The economy is also producing job growth at a healthy clip, job creation in the 3-months to June rose by 125k, expectations were for a 97k gain. Most importantly for the consumer, wages also rose with average weekly wage growth up 2.1% for June, and May’s figure was also revised up to 1.9% from 1.8%.

GBP makes a comeback after labour market data

The data had an immediate impact on the pound, acting as a balm after a tough start to the week. GBP/USD reversed earlier losses and immediately jumped back above 1.29, EUR/GBP has also taken a battering after a Reuters report stated that the ECB’s Draghi will not mention any new policy changes at next weekend’s Jackson Hole conference; the UK data landed a second blow. EURGBP is back below 0.91, even though we expect this pair to eventually get to parity, price action like we have seen today is a sign that it may not get there in a straight line.

Real wages still negative, but for how long?

It is worth noting that even after yesterday’s decline in the UK CPI rate and today’s surprise uplift for wage growth, the squeeze on the consumer remains, although not as tight as it once was. As you can see in the chart below, which shows wages – CPI, real wages are still in negative territory at -0.5%. Although this is moving in the right direction, wage growth needs to be significantly higher to push real wage growth back into positive territory and back to the 2015 levels of 3%.

On the bright side, the pick-up in wage growth in June could be one reason why retail sales bounced at the start of the summer. Thus, a decent reading on Thursday for the July figures for retail sales could give us a clue about potential wage growth in July.

What does the BOE do now?

So, where does this leave the Bank of England? It predicts that real wage growth will be negative for the rest of this year, which is one of the main reasons why it has been reticent to follow the Federal Reserve and hike interest rates. However, although real wages remain in negative territory, if they recover faster than the Bank expects then we could see the BOE take steps to prepare the market for a rate hike sometime in 2018. However, today’s data is not enough to shift the dial on this one, we will need to sustained wage growth over the coming months for expectations to build that the BOE will hike rates.

Signs that wages could pick up further

There are signs that wage pressure could start to build. If you dig a bit deeper into the ONS data then you find that employment levels made another record high, the employment rate is at 75.1%. There has been a drop of 157,000 unemployed people in the UK in the last year, and the number of economically inactive people has also fallen by 90,000 in the past year. Although 883,000 people remain on “zero-hours” contracts, this has fallen by 20,000 in the past year. Although this is a fairly small decline, if more firms stop hiring people on zero hours contracts then we could see wage growth start to rise on a sustained basis.

The market impact was a swift move higher in the pound, the FTSE 100 is also higher this morning along with other European indices, while the UK 10-year bond yield has also jumped back above 1.10%, which could sustain a deeper recovery in GBP. So far this data hasn’t had any impact on UK consumer discretionary stocks like M&s or Next, we may need to get confirmation of decent July retail sales figures before these stocks make a move.

Chart 1: 

Source: City Index and Bloomberg 

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