UK wage growth surprise, not enough to overcome inflation pressure

The UK’s employment report for September came in roughly in line, which is why, after an initial spike higher, the pound is roughly back to where it was prior to the release. There was a slight tick higher in the wage data, which rose from 2.1% to 2.2%, however, this is more than offset by the sharp rise in inflation last month. Thus, for yet another month UK real wages remain mired in negative territory.

The UK’s employment report for September came in roughly in line, which is why, after an initial spike higher, the pound is roughly back to where it was prior to the release. There was a slight tick higher in the wage data, which rose from 2.1% to 2.2%, however, this is more than offset by the sharp rise in inflation last month. Thus, for yet another month UK real wages remain mired in negative territory.

 

The unemployment rate remained at 4.3%. Some slightly disappointing news came in the form of a rise in jobless claims, however this was small at 1.7k for last month. Job growth has also slowed to 94k, which is lower than the 181k in the previous three months, however, this could be a natural slowdown as the jobs market tightens and unemployment remains low.

 

Could wage data keep the breaks on a rate rise?

 

Overall, this report is unlikely to move the dial for the Bank of England, where the interest swaps market is expecting an 80% chance of a rate rise next month. However, the prospect of raising interest rates when real wages are in negative territory will make this potential hike a tricky one for the BOE to justify. In fact, we believe that Carney’s very loose commitment to a rate hike in the coming months during Tuesday’s testimony to the Treasury Select Committee is reference to the difficult conditions facing the BOE: hike rates because inflation is high and unemployment is low, however, if you hike rates now you could put extra pressure on the consumer and a sharp break on the economy as we move into the end of the year. Although the market is convinced about a rate hike next month, there is still an element of doubt and the BOE may yet surprise us.

 

ECB’s delayed taper may not have expected consequences

 

 

The big news story of the morning concerns the ECB, with the FT reporting that the European central bank will keep purchasing assets well into 2018 and potentially beyond, confounding expectations that the ECB’s APP will end around the middle of next year. Ostensibly the ECB will blame persistently low inflation, which is below target at 1.5%, however, by maintaining its APP the ECB can attempt to keep a lid on euro gains. Unfortunately for those looking for a weaker euro, a slow taper is unlikely to have any impact on the currency at this stage.

 

German – US bond yield spread near nadir, which could limit euro weakness

 

The euro is actually higher vs. the euro this month even though the German – US 2-year bond yield spread is at its lowest level since 1999 at -2.28%. The question now is, how much further can this spread fall, has it reached the low already and will it actually recover from here, if so, then doesn’t that suggest a potential uplift for the euro, regardless of what steps the ECB does or does not take in the near future?

 

If the answer is yes to the above, then one has to question the logic of the ECB delaying its taper by 6 months’ or so, especially when it is unlikely to weaken the euro and instead could cause further distortion in the Eurozone bond market.

 

Good news is bad news for US bank shares

 

Not even good news for the US banks, with Goldman and Morgan Stanley beating Q3 earnings expectations, could lift their stock prices into yesterday’s close. In fairness, US banking stocks have had a good run of late and had returned, or were close to, their highest levels of the year. Thus, it could have been a case of sell the rumour, by the fact for IB stocks on Tuesday, and the financial sector was the weakest on the Dow Jones. The big challenge for the traditional IB’s is that their business model is breaking down, and they now need to emulate boring retail banks to survive. This explains MS’s move into wealth management and GS’s foray into a consumer-lending platform. The trouble for both MS and GS is that they don’t have huge retail deposits, which could make them less attractive than traditional banks in the long term. After opening 1.5% higher on Tuesday, GS was actually the worst performer on the Dow, down some 2.5% by the close.

 

Credit Suisse break up calls unrealistic, but good for share price

 

There are further calls for Credit Suisse to be broken up this morning, with its biggest shareholder, Harris Associates, agreeing with some points of the activist investor plan put forward by RBR Capital Advisors, which includes moving CS’s domicile from Switzerland to the US. These guys are putting a lot of trust in Trump’s tax plan, and that it won’t be reversed if the Democrats take over in 3 years’ time. Overall they believe that domicile in the US will reduce CS’s onerous capital requirements. While analysts are torn on the measures, with some calling it unworkable and costly, the stock price is reacting well. CS is higher again on Wednesday and reached its highest level since 2016 on Tuesday. If you want a catalyst for a surge in a share price, then a break up plan or acquisition plan usually gets a stock price going, thus there could be some further upside for CS for as long as this story has legs.

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