Wages finally move above inflation boosting pound

Average earnings jumped to 2.8% in the three weeks to January, higher than the 2.6% forecast. Given the inflation eased to 2.7%, this means that wage growth is finally outstripping inflation. 

This will come as a huge relief to the consumer who has suffered months and months of elevated inflation and falling wages in real terms. The easing of pressure on households as they no longer experience falling wages in real terms should, in theory encourage more spending on non-essential items, something which had declined dramatically across the end of last year and the beginning of this year. 

Suddenly the return of “good” inflation is a real probability, as opposed to the “bad” pound induced inflation which has plagued the UK since the Brexit referendum.

Traders will now look to the BoE for some much-needed clarity. Headwinds are starting to dissipate – a Brexit transition deal is in place, inflation from the devalued pound is working its way out the system and wages, which can be a stubborn beast, are proving to be resilient.

The pound, which had been edging higher towards the release, then jumped on the news. 

GBP/USD is trading 0.5% higher finding resistance at $1.4070, a meaningful move above this level could see GBP/USD target $1.41 in the near term.

King fisher hit by high street woes

A toxic combination of gloom on the UK High Street, in addition to a uninspiring performance in France, drove Kingfisher pre tax profits down an eye watering 10%. A ray of light in the otherwise dull figures, came from Screwfix in the form of a 10% increase in like for like sales. 

These figures support the transformation plans push in Screwfix’s direction, which now account for 600 stores. France’s continues to underperform as evidenced by a 3.5% drop in lie for like sales and a retail profit decline of 15%. 

Shares in Kingfisher are down over 6.5% to a 4 month low as investors vent their disappointment, putting an end to a 6 month rally, which saw the price rally 25% to its peak in late February.

Fed in focus

A cautious tone to trading is expected across the day as investors look towards the Fed rate decision at 18:00 GMT, followed by new Fed Chair Jerome Powell’s first press conference at the helm. 

The Fed is widely expected to hike by 25 basis points, increasing rates for the first time this year and the 5th time since the Fed started tightening policy in late 2015. The CME Fed Watch is pricing in a 94.4% probability of a rate hike, so this is as good as completely priced in. However, the question remains whether the Fed will hike 3 or 4 times across the year.

At the December meeting, policy makers indicated a preference of 3 hikes across 2018, any signs of an increase to 4 and the market response could be acute. 

Bond yields will be in focus, particularly after last months high yield inspired stock market sell off, which saw the 3 major US indices enter correction territory. 

Any signs of a more aggressive path to tightening we expect to also be played out in the dollar, pushing the greenback back over the key psychological level of 90.00.