UK labour market broadly stable

Chris Scicluna

Markets broadly steady in Asia today despite hit to tech stocks on Wall St
The sell-off in the Treasury market took a larger toll on Wall Street yesterday, especially in the tech sector where a tumble in stocks left the Nasdaq down 2.5% at the close. The S&P500 lost 0.8% – the largest decline yet in what is now a 5-day losing streak – and closed near its session lows, even with the 10Y UST yield finishing 3bps below its session highs at 1.36%. Treasuries appeared to gain little support from comments made by the ECB’s Lagarde, who said that her institution was closely monitoring the move higher in nominal longer-term bond yields – a development that will surely also attract comment from Fed Chair Powell when he presents the first leg of his semi-annual Monetary Policy Report testimony to a Senate committee later today. The reflation trade remained evident in metals and other commodity prices, while the greenback lost further ground against most counterparts, sending DXY to levels last seen in mid-January.

Turning to Asia, Japanese markets were closed today for a public holiday. However, investors received some potential good news with local media reporting that, in light of falling coronavirus case numbers, PM Suga would announce as soon as Friday the lifting of the state of emergency in six prefectures, including Osaka and Kyoto, a week earlier than planned. With Japan closed, cash Treasuries did not trade in Asia. Nevertheless, with Treasury futures moving sideways, US equity futures have recovered somewhat (S&P minis are currently up about 0.3%). Perhaps as a result, those equity markets that were open for trade in the Asia-Pacific region have mostly posted at least modest gains. The Hang Seng outperformed with a gain of more than 1%, while the ASX200 advanced 0.9% as Aussie bond yields fell slightly from Monday’s highs. After falling more than 3% yesterday, China’s CSI300 bucked the trend with further modest losses today. Meanwhile, the KOSPI edged down 0.3% to its lowest close in three weeks.

In Europe, meanwhile, equities have opened firmer while government bonds have opened on the back foot. Gilts are underperforming again (10Y yields are back up about 3bps to above 0.70%) after the latest UK labour market data were consistent with broad stability at the turn of the year despite ongoing lockdown measures. Indeed, total pay grew at the fastest pace in more than twelve years, only partly due to compositional effects (see detail below).

China’s home price inflation lifts in January
The only economic report in China today concerned developments in home prices, which appear to have begun this year on a firmer note. New home prices across 70 cities increased 0.3%M/M – the most since September – allowing annual growth to remain at 3.7%Y/Y. Existing home prices increased 0.4%M/M causing annual growth to lift 0.3ppts to 2.4%Y/Y. For both new and existing homes, price movements were largest in first-tier cities, with existing home prices up 15.3%Y/Y in Shenzhen, 8.7%Y/Y in Guangzhou and 7.6%Y/Y in Shanghai. By contrast, existing home prices increased just 1.8%Y/Y in third-tier cities. 

UK labour market broadly stable as Job Retention Scheme continues to provide support
The latest UK labour market figures released this morning were consistent with broad stability around the turn of the year as the government's Job Retention Scheme contiuned to provide major support. Indeed, despite the renewed nationwide lockdown measures, the ONS reported a small increase in the number of payroll employees for a second successive month in January. The rise of almost 83k, however, still meant that there were 730k (2.5%) fewer workers in payroll employment last month than a year earlier. In addition, in the three months to December, the unemployment rate continued to increase, albeit by a smaller-than-expected 0.1ppt on the month (and 1.3ppt from a year earlier) to 5.1%, the highest in almost five years. And the employment rate continued to fall, dropping 0.2ppt to 75.0%, the lowest since the three months to May 2017. 

Among the other labour market data released, the claimant count rate, which includes those working on low incomes or hours as well as those who are not working at all, fell for a second successive month in January by 20k, with the equivalent rate down 0.1ppt to 7.2%. However, the rebound in vacancies slowed towards the end of 2020 to about 578k in the three months to December, up 64k (less than half the rate) from the prior quarter and still 210k (26%) below the level a year ago.

UK pay growth at twelve-year high only partly due to composition effects
Strikingly, with lower-paid workers more likely to have lost their jobs over the past year, growth in average total pay (including or excluding bonuses) in the three months to December jumped a further 1ppt to 4.7%3M/Y (4.1%3M/Y excluding bonuses) in nominal terms – the highest in more than twelve years – to be up 3.8%3M/Y in real terms. There remained significant variation between sectors, with average pay in the finance and business services sector up 6.8%3M/Y but just 1.9% and 1.5% in construction and manufacturing respectively. Adjusting for compositional changes, the ONS estimated that underlying pay growth was still relatively firm at around 3%Y/Y, something that should reinforce the confidence of the BoE in its central projection of firm economic recovery and a rise in inflation back to target in the second half of the year.

Euro area final inflation data to confirm record jump at the start of the year
The final estimate of euro area inflation due this morning is highly likely to align with the flash release and confirm that the headline CPI rate jumped to 0.9%Y/Y in January, from -0.3%Y/Y previously, while the core inflation rate rose a record 1.2ppts to 1.4%Y/Y. The leap in inflation in January was broad-based. But it also largely reflects temporary factors, including a reweighting of the price basket to reflect changes to consumption patterns during the pandemic, the reversal of Germany’s VAT cut, the introduction of Germany’s carbon tax, the timing of France’s winter sales, Spain’s freak snow storms, and shifts in oil prices. Some of those effects, such as the German tax changes and oil price movements, will persist – and indeed magnify – over coming months. So, euro area inflation is likely to remain elevated throughout 2021, and will probably rise above 2.0%Y/Y in the second half of the year.

Fed Chair Powell’s testimony the focus in the US today
Today most interest is likely to centre on Chair Powell’s delivery of the Fed’s Semi-Annual Monetary Policy Report to the Senate Banking Committee. While this testimony is always a focus for markets, in present circumstances investors will doubtless be especially interested to hear Powell’s thoughts on the sell-off in bond markets to divine how the Fed might, if at all, react if yields continue to move higher over coming weeks. 

Aside from Powell’s testimony, there are also a number of data releases today. Of particular note is the Conference Board’s consumer survey for February, which Daiwa America Chief Economist Mike Moran expects will report a lift in confidence due to the receipt of stimulus payments and recent new highs in stock prices. Today will also bring the release of the S&P/CoreLogic and FHFA home price measures for December and the Richmond Fed’s manufacturing survey for February.

Australian merchandise exports up 13%Y/Y in January, driven by metals
The main economic report of note in Australia today was the release of preliminary merchandise trade figures for January. According to the ABS, merchandise exports fell 9%M/M in unadjusted terms during the month – a smaller decline than typically seen in January given the summer holiday period – but were up 13%Y/Y. Exports of non-rural goods (which make up more than three-quarters of all merchandise exports) increased 10%Y/Y, with growth more than explained by a 53%Y/Y leap in exports of metal ores. Exports of non-monetary gold were down 5%M/M but were up 86%Y/Y. Meanwhile, imports fell 10%M/M in January and were down 7%Y/Y. All of that annual decline was attributable to imports of intermediate goods, which fell 17%Y/Y (in turn, about two-thirds of that decline was due to lower imports of petroleum). Imports of capital goods increased a modest 3%Y/Y, whereas imports of consumer goods were unchanged from a year earlier – a notable softening from the strong growth rates seen at the end of last year. All up, the preliminary figures indicate an unadjusted merchandise trade surplus of A$8.8bn in January – about A$0.4bn smaller than last month but a whopping A$5.5bn larger than a year earlier. Taken together with likely developments in services trade, this suggests that next week’s full trade report will report a record seasonally-adjusted surplus of over A$10bn.

In other Aussie news, the ANZ-Roy Morgan consumer confidence index fell a modest 0.6%M/M to a 5-week low of 109.2 last week. The main drag was a reduction in the number of respondents holding a favourable view regarding buying conditions for major items – the relevant index falling to a 3-month low – despite a lift in sentiment regarding the economy’s longer-term prospects.

Kiwi retail spending volume down in Q4, giving soft start to GDP calculations
The focus in New Zealand today was on the official retail sales report for Q4 – the first major partial indicator released ahead of the National Accounts on 18 March. After rebounding a stupendous 28%Q/Q in Q3 following the prior quarter’s pandemic-induced store closures, the value of spending fell by a modest 1.2%Q/Q in Q4. In volume terms, the decline in spending was 2.7%Q/Q – a bit larger than the minimal pullback that consensus estimates had suggested – although this still left spending up 4.8%Y/Y. With foreign tourists still absent, the volume of spending on accommodation was down almost 20%Y/Y while spending on food and beverages services was down over 3%Y/Y. However, the volume of spending on electrical and electronic goods increased 21%Y/Y and online sales were up more than 17%Y/Y. Meanwhile, strong housing activity was reflected in a 15%Y/Y lift in the volume of spending on hardware, building and garden supplies and a 10%Y/Y lift in spending on furniture, floorcoverings and other houseware.

Retail spending only makes up about 40% of total household expenditure. However, today’s news does suggest that economic activity likely took a modest step backwards in Q4 after an unexpectedly strong 14%Q/Q rebound in GDP in Q3.

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