UK labour market still broadly stable

Chris Scicluna

Asian equity markets on the back foot after overnight losses on Wall Street
Wall Street began the week on a softer note on Monday with a decline in technology and consumer discretionary stocks leaving the Nasdaq down 1.0% and the S&P500 down 0.5%. Perhaps also contributing to the weaker start was a bounce in Treasury yields, with the 10Y UST closing up 2bps at 1.60%. The small lift in yields did nothing for the greenback, which lost ground against its major counterparts to send DXY to a 6-week low, with additional weakness evident in today’s Asian session.

So far it has been a fairly mixed day in Asia. After holding up well yesterday despite building concerns about rising coronavirus cases numbers and possible implications for the Tokyo Olympics, today the TOPIX has declined 1.5% with former (admittedly DPJ) Finance Minister Azumi saying that a postponement or cancellation of the Olympics should be seriously considered. The strongest yen since early March did industrials no favours, while technology stocks and real estate also led the market lower. In China, where the PBoC fixed the 1-year and 5-year prime lending rates at 3.85% and 4.65% for a 12th consecutive month – fully anticipated given the stability seen in the Bank’s medium-term lending facility operations – the CSI300 followed yesterday’s 2.4% rebound with little overall change, while stocks also edged higher in Hong Kong and South Korea. Australia’s ASX200 fell 0.7%, with the Aussie dollar and ACGB bond yields rising despite the minutes of the RBA April Board meeting providing no evidence that the Bank is reconsidering its very dovish policy stance despite an improved economic outlook.

Japan’s Financial System Review finds ‘stability on the whole’
A short time ago the BoJ released its semi-annual Financial System Report, which detailed the Bank’s assessment of how the financial system is coping with the pandemic. Back in October the BoJ’s previous report had concluded that Japan's financial system “has been maintaining stability on the whole”, with the “smooth functioning of financial intermediation” maintained thanks to financial institutions robust capital bases and the large–scale fiscal and monetary policy responses seen in Japan and elsewhere. Unsurprisingly, with the economic outlook and investor sentiment having improved somewhat, today’s April update points to no change in the Bank’s broad assessment.

The focus of the April report appears to be on the analysis of domestic credit risk amongst SMEs and securities investment risk in light of the growing presence of non-bank financial intermediaries (NBFIs). According to the results of the Bank’s macro stress testing, even in the case of future resurgence of COVID-19, Japan's financial system is likely to remain “highly robust”. However, the Bank highlights three risks to the outlook that will be very familiar to readers of the October report; namely (1) the possibility of an increase in credit costs, especially in sectors directly impacted by the pandemic, in the event of a delayed recovery; (2) risks associated with possible future moves in global financial asset prices, especially given the growing influence of NBFIs; and (3) risks from a destabilization of foreign currency funding due to a tightening of foreign currency funding markets, mainly for the US dollar. So as to maintain financial soundness, the BoJ advises Japanese financial institutions to strengthen their management of these three risks. The offering of support and adequate loan-loss provisioning based on the sustainability of borrowers' businesses and sound capital planning under considerable uncertainty are also viewed as key to institutions maintaining their financial soundness. Finally, the Bank warns that even after the pandemic subsides, it is likely that the low interest rate environment and structural factors will continue to exert downward pressure on financial institutions' profits.

Japan’s Tertiary Industry Index up in February, but still on track for contraction in Q1
In other Japanese news, following yesterday’s final IP report for February – which indicated that manufacturing remained on track to contribute positively to GDP growth in Q1 – today the Tertiary Industry Activity Index confirmed that the much larger service sector is likely to have contracted. Reflecting the impact of the winter surge in coronavirus cases and associated restrictions placed on activity, the aggregate index is now estimated to have declined 1.0%M/M in January – a third consecutive contraction, but smaller than the 1.7%M/M decline that was estimated previously. Off that slightly better base, activity rebounded a slightly smaller than hoped 0.3%M/M in February. So while output was down 5.0%Y/Y, activity for the first two months of Q1 is now tracking just 1.1% below the average through Q4 – arithmetic that is unlikely to be altered greatly by next month’s release of data for March.

In the detail, after slumping 7.8%M/M in January, activity related to non-essential personal services rebounded 5.7%M/M in February but was still down almost 12%Y/Y. Activity in the living and amusement industry, which has been impacted by early closing times for restaurants and bars, rebounded 8.5%M/M and yet remained down over 23%Y/Y. Meanwhile, activity related to essential personal services increased 0.5%M/M and so was similarly above year-earlier levels. In contrast to the improvement seen in personal services, the business services index declined 1.3%M/M in February and so was down 2.8%Y/Y. This largely reflected a reversal of demand from the manufacturing sector, with January’s sharp 3.8%M/M lift followed by a 5.2%M/M decline in February.

UK labour market remains stable thanks to government support
The various UK labour market data published this morning pointed in different directions. However, overall, once again, they were largely consistent with stable conditions as the government’s Job Retention Scheme continued to provide essential support. The ONS reported a drop of 56k (0.2%) in payrolled employees in March to be down 813k (2.8%) from a year earlier. That followed three consecutive months of gains, so the level was still some 83k above November’s trough. Meanwhile, on the ILO measure, the number of people in employment in the three months to February dropped a smaller-than-expected 73k, roughly half the Bloomberg consensus forecast. And given a decline in labour force participation, the unemployment rate unexpectedly dropped for the first time during the pandemic, admittedly down just 0.1ppt in the three months to February to just 4.9%.

In terms of wages, growth in average total pay (including bonuses) among employees in the three months to February slowed 0.3ppt to 4.5%Y/Y. But, excluding bonuses, average pay ticked up 0.1ppt to 4.4%Y/Y. Given the dominance of compositional effects in driving recent swings in pay growth – with lower paid workers having disproportionally lost their jobs throughout the pandemic – the ONS estimates that underlying wage growth was still relatively tame, at around 2.5%Y/Y for both total and regular pay – hardly the kind of rate to generate significant inflation pressures.

RBA Board minutes indicate as yet no inclination to reassess the policy outlook
The domestic focus in Australia today was on the release of the minutes from this month’s RBA Board meeting. The minutes confirmed that members perceived the global outlook to have improved in recent months and that the strong recovery in Australia’s economy had continued, likely returning the level of activity to its pre-pandemic level sooner than expected. Regarding the labour market, it was noted that employment had returned to pre-pandemic levels ‘considerably’ faster than expected. And given the positivity seen in forward indicators, the Board considered that at least some of the job losses that likely followed the termination of the JobKeeper subsidy on 28 March would likely be offset by new hiring. Despite these positive developments, it was noted that wage and price pressures had remained subdued and were expected to remain so for several years, with the unemployment rate still too high to generate significant sustained upward pressure. So while the Board noted that markets were pricing that some policy tightening would occur in 2023, the minutes reaffirmed the Board’s prior view that the conditions required to necessitate policy tightening would likely not be met until 2024 at the earliest. The Board will have the opportunity to fine-tune its outlook when it releases revised forecasts in next month’s quarterly Statement on Monetary Policy. At this stage, it seems unlikely that the Board will significantly alter its view until more is know about how the economy is responding to the phasing out of some government support measures, notably the JobKeeper programme.

In other news, after last week increasing to the highest level since September 2019, the ANZ-Roy Morgan consumer confidence index slipped a negligible 0.1% last week, with respondents slightly less optimistic about financial conditions but nonetheless slightly more optimistic about the general economic outlook. 

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