UK payrolls edged up as Covid containment measures were briefly relaxed

Chris Scicluna

Asian equity markets sharply weaker today as elevated valuations leave market vulnerable
The S&P500 advanced 0.4% yesterday, erasing the previous session’s losses, assisted by a rally in tech stocks that drove the Nasdaq to a 0.7% gain and a new record high. The lift in stocks occurred even as new Senate Majority Schumer indicated that it would likely take a month and a half to pass a new fiscal stimulus bill, with his comments underpinning a rally in the Treasury market – taking the 10Y UST yield to a near 3-week low of 1.03% – and a modest lift in the greenback. US equity futures have moved lower since Wall Street closed, however, with S&P minis down about 0.7% as we write. And European stocks have opened weaker too, albeit with euro govvies broadly steady and BTPs only a touch weaker ahead of the expected resignation of Italian PM later today (see below).

Uncertainty about the quantum and timing of additional US fiscal stimulus appears to have contributed to what were heavy losses across a number of Asian equity markets today – particularly those markets that had rallied strongly yesterday and where stretched valuations are vulnerable to any negative news. Of particular note, China’s CSI300, as well as the Hang Seng and KOSPI, fell 2.0% or more, erasing their previous day’s advance. In local news, Chinese repo rates jumped after the PBoC withdrew liquidity via an open market operation and as newswires reported PBoC Special Adviser Ma Jun’s warning that keeping monetary policy unchanged this year in the face of asset bubbles would cause bigger economic and financial risks in the long term. In Japan, the TOPIX closed down 0.8% following another session devoid of first-tier data and with little reaction to the release of the minutes from the BoJ’s December Policy Board meeting, which touched on issues related to the ongoing review of monetary policy (see more on this below too). Australian markets were closed for a public holiday.

UK payrolls edged up in December as Covid containment measures were briefly relaxed
As Covid-19 containment measures were repeatedly adjusted at the start of the festive season, the UK’s labour market inevitably remained in a state of flux. However, with the reopening of non-essential retail nationwide for much of the month, and the government’s Job Retention Scheme extended to the end of April, this morning’s UK data suggested that the number of payrolls rose in December for the first time since the start of the pandemic, increasing by 52k from November. Nevertheless, that still left the number of pay-rolled employees falling 2.7%Y/Y (793k below the level in December 2019) and down 828k from last February’s pre-Covid 19 level. And the claimant count rate, which includes those working on low incomes or hours as well as those who are not working, edged up 7k in December to 2.644mn, with the equivalent rate up 0.1ppt to 7.4%. Moreover, the rebound in vacancies slowed towards year-end to about 578k in the three months to December, up 81k (roughly half the rate) from the prior quarter and still 224k below the level a year ago. And the ONS reported that their single-month figures showed a decline of about 10% from October to December.

Among the less timely data, the redundancy rate rose to a new record high of 14.2 per thousand in the three months to November, while the UK’s unemployment rate rose 0.1ppt to 5.0% in the same period, up 1.2ppt from a year earlier and 0.6ppt from the previous quarter. But with lower-paid workers more likely to have lost their jobs, growth in average total pay (including or excluding bonuses) in the three months to November jumped 3.6%3M/Y in nominal terms to be up 2.8%3M/Y in real terms. There remained significant variation between sectors, with average pay in the finance and business services sector up 5.4%3M/Y but falling 1.1%3M/Y in construction.

Conte to resign today but new Italian elections still not expected
With no top-tier economic data due out of the euro area today, attention will return to Italy’s political soap opera, with PM Giuseppe Conte expected to submit his resignation to President Matterella today after 2½ years at the head of two different coalition governments. While he survived his parliamentary confidence votes at the start of last week, he has not yet been able to pin down a new stable governing majority in light of the decision of former PM Renzi to withdraw the support of his Italia Viva party. But he will likely be given time by Matterella to try to form a new coalition, and will be able to count on the continued support of the Five Star Movement and Democratic Party in his efforts to do so. If he fails to form a new coalition, following consultations with party leaders Matterella would be expected to invite someone else – probably a neutral technocrat – to try to form a new National Unity government. And certainly, for the time being, we maintain our expectation that early elections are unlikely.

Conference Board consumer survey the highlight in the US today
Today’s US economic diary features the Conference Board’s consumer survey for January, the Richmond Fed’s manufacturing survey for January and the FHFA and S&P home price indices for November. As far as the consumer survey is concerned, this month Daiwa America’s Mike Moran expects that worrying the developments in coronavirus cases will likely dominate the positive impact of rising asset prices, leading to a modest decline in the headline confidence index.

Japan services PPI marginally firmer in December, but underlying CPI inflation weakens; slump in earnings growth in November revised slightly
Today’s Japanese economic reports were of a second-tier nature. First up, the BoJ reported a 0.1%M/M increase in the services PPI in December, causing the rate of annual deflation to ease by 0.1ppt to 0.4%Y/Y (0.2%Y/Y excluding prices associated with international transportation). The main driver of the annual improvement was advertising services, which fell 1.6%Y/Y in December compared with the 4.3%Y/Y decline a month earlier. Price declines for real estate services made the largest downward contribution to the absolute decline in prices over the year, reflecting lower rentals in light of the pandemic-induced increase in the vacancy rate for office and other space. A little later in the day, following on from Friday’s CPI report, the BoJ released its updated estimates of underlying inflation. The 10% trimmed mean, which the BoJ regards as best correlated with the state of the economy, fell 0.3%Y/Y in December – down 0.2ppts from last month and the weakest reading since May 2013. Meanwhile, the net proportion of items recording a price rise over the past year fell to just 4.4%, marking the weakest reading since October 2013.

In other news, the MHLW released the final results of the Monthly Labour Survey for November. The preliminary report has revealed a much greater than expected decline in earnings due largely to an estimated 22.9%Y/Y slump in bonus earnings. Today’s revisions almost halved that decline to 12.8%Y/Y. However, average overtime earnings fell 10.8%Y/Y – 0.5ppts more than estimated previously. In addition, regular earning fell 0.2%Y/Y, compared with the 0.1%Y/Y increase reported previously. The net of these revisions is that total average labour cash earnings (per employee) is now estimated to have declined 1.8%Y/Y in November – 0.4ppts less than estimated previously, but still much worse than the 0.7%Y/Y decline reported in October. Finally, the number of people in regular employment increased an unrevised 0.6%Y/Y in November. However, as usual, revisions have impacted the composition of that employment with growth in the number of full-time employees now estimated at 0.9%Y/Y (revised up 0.1ppts) but the number of part-time employees now estimated to have been unchanged from a year earlier (compared with the 0.3%Y/Y increase in the preliminary report).

BoJ meeting minutes provide some clues to outcome of current monetary policy review
Finally, the minutes from the BoJ Policy Board’s December meeting provided some clues regarding the likely outcome of the current review of monetary policy that is scheduled to be published at the Board’s next meeting in March. With regard to ETF purchases, there did not appear to be a large constituency for great change with “a few” members saying that they remained necessary. However, “a few” members also acknowledged eventually some flexibility would be desirable depending on market conditions. With regard to yield curve control, ‘a few’ members also advocated for flexibility in how this is conducted, without providing further details (but presumably through widening the permissible range through which the 10Y yield is allowed to move). Understandably, members were anxious that any increased flexibility not be viewed as a change in the Bank’s commitment to over-achieving the 2% inflation target. Meanwhile, so as to lift the economy’s growth potential – especially amongst SMEs where members saw considerable room for productivity gains – ‘a few’ members thought it vital that corporate management was improved through measures some as digitalization. In addition, one member thought that the BoJ had a role to play here by helping to develop and encourage a deep corporate bond market to provide more investment funds to firms.

Kiwi services PMI up in December, still sub-50 but details better than headline
After falling sharply in November, the BNZ-Business NZ services PMI increased 2.5pts to 49.2 in December – a welcome improvement, but nonetheless remaining modestly in contractionary territory. The activity/sales index increased a more impressive 5.5pts to 51.3 but the new orders index slipped 1.4pts to 50.6. Signs of longer-term confidence returning were evident in the employment index, which increased 2.4pts to 51.7 – the first expansionary reading since February. Weighing on the headline index was the supplier deliveries index, which at 39.5 was only marginally firmer than last month.

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