Clear signs of recovery in UK labour market

Chris Scicluna

Treasury yields rise off lows as FOMC meeting nears; Asian equities mixed today
Concerns about possible QE taper talk at the forthcoming FOMC meeting appeared to place upward pressure on Treasury yields yesterday, with the 10Y UST rising 5bps to 1.50%. Even so, a late rally allowed the S&P500 to eke out a further 0.2% gain, thus setting a fresh record high. The narrowly-based rally owed to technology stocks, which increased 1% even as the majority of stocks fell. In currency markets, the greenback was fractionally weaker against most currencies, but gained against the yield-bound yen.

Since the close, the 10Y UST has nudged a basis point lower while US equity futures are about ¼% firmer. Against that background, it has been a mixed day in Asia-Pacific equity markets. In Japan, a weaker yen helped the TOPIX gain 0.8%, even as the Tertiary Industry Activity Index confirmed a contraction in service sector activity in April. Ahead of this week’s BoJ meeting, citing the usual ‘people familiar with the matter’, Bloomberg reported that the Bank presently sees no need to act further to improve the functionary of the JGB market, with it being too early to judge the impact of the tweaks announced in March. The report also indicated that the Board is supportive of extending the special lending measures due to expire at the end of September, but had not yet decided whether to announce an extension this week or wait until the July meeting.

Following yesterday’s holiday, stocks also firmed in Australia with the ASX200 advancing 1.0% to a new record close. While Aussie house prices increased the most in Q1 since 2009, the RBA’s Board minutes indicated that the Bank’s QE programme would continue in some form beyond September (plenty more on this below). By contrast, stocks fell in both mainland China and Hong Kong, with the CSI300 down around 1%. Ahead of tomorrow’s domestic data dump the PBoC conducted its 1-year Medium-term Lending Facility at an unchanged rate of 2.95%, with maturing funding simply rolled over.

Japan’s service sector activity contracts in April
As had been expected, today’s Tertiary Industry Activity Index confirmed that the service sector begun the current quarter on a weaker note amidst a rise in coronavirus case numbers and the re-imposition of restrictions on activity. The overall index declined 0.7%M/M in April – just a notch below market expectations. Given the very weak base created by the onset of the pandemic last year, activity was up 9.9%Y/Y. More meaningfully, activity was 3.4% lower than in February 2020. Meanwhile, with activity in March now reported to have increased 2.4%M/M – much firmer than the 1.1%M/M rebound reported previously – activity in April sits 0.8% above the average for Q1. Of course, with restrictions on activity remaining in place through May and into June, activity is still likely to decline across Q2 as a whole following a revised 0.7%Q/Q decline in Q1.

In the detail, unsurprisingly, activity related to non-essential personal services fell 4.4%M/M in April – now down more than 14% since February 2020 – whereas activity related to essential personal services eked out a 0.1%M/M advance. The business services index increased a further 1.0%M/M in April, led somewhat surprisingly by a 2.1%M/M increase in non-manufacturing dependent business services. By sector, a 5.3%M/M slump in retail trade provided the largest negative contribution to service sector activity, while a 3.3%M//M decline in transport activity was also of note. At the other end of the spectrum, aided by the pandemic, activity related to the provision of information services surged 21%M/M to a new record high.

Clear evidence of recovery in UK labour market as economy reopens
With economic activity rebounding firmly with the relaxation of the most stringent pandemic containment measures affecting retail, leisure and hospitality, the UK’s labour market is also starting to recover. Payrolls increase for the sixth successive month in May and by 197k. That left them up 429k from the pandemic-era trough in November, albeit still some 553k below the pre-pandemic level. In addition, the number of job vacancies in the three months to May 2021 rose to 758k, just 53k below the level in the three months to February 2020 with the strongest quarterly increase registered in hospitality. On the ILO measure, employment rose 113k in the three months to April, the most since before the pandemic. And the unemployment rate edged down 0.1ppt for the fourth successive month to 4.7%, the lowest since August. We expect the positive jobs momentum to be largely maintained over coming months – the one-month postponement to further easing of restrictions (largely affecting large public gatherings, social distancing and continued working from home) is merely likely to have a near-term dampening effect on the pace of employment creation rather than any lasting impact.

Wage growth highest since 2007, flattered by composition and base effects
Wage growth continues to rebound too, with average total pay growth up 1.3ppts to 5.6%Y/Y, the highest since early 2007, and up to 4.4%Y/Y in real terms. Excluding bonuses, pay growth rose 1.0ppt, also to 5.6%Y/Y, the highest on the series dating back more than 20 years. However, the acceleration principally reflects base effects related to the weakness a year earlier (on a single-month basis, total pay was up 8.4%Y/Y in April). It also reflects compositional effects, i.e. the drop in the number and proportion of lower-paid jobs related to the reopening of the economy, which the ONS estimates to have added about 2.5ppts to total pay growth. The drop in the share of workers on furlough – from 21.8% of the workforce at end-April 2020 to ‘just’ 10% in the final two weeks pf April 2021 – also plays a role.

Euro area inflation
There were no surprises to this morning’s final German inflation figures, which confirmed that the headline national rate jumped 0.5ppt to 2.5%Y/Y in May, a near-decade high. On the EU-harmonised measure, meanwhile, headline inflation was up 0.3ppt to 2.4%Y/Y, its highest since October 2018. The increase in part reflected stronger energy inflation, which remain boosted by temporary factors relating to the CO2 charge introduced at the beginning of the year as well as base effects from the low energy prices a year earlier. But there was also a further uptick in non-energy industrial goods inflation – to its strongest since September 2018 – as well as services inflation, which largely reversed the drop recorded in April. As such, core inflation (on the EU measure) also fully reversed the 0.5ppt drop recorded in April back to 1.6Y/Y.

The French inflation figures also aligned with the flash estimates in May, with the EU headline measure confirmed at 1.8%Y/Y, up 0.2ppt from April, at its strongest rate since December 2018. The national rate was also up 0.2ppt to 1.4%Y/Y, the firmest since February 2020. Like in Germany, the uptick largely reflected higher energy inflation, while there was also a softer pace of decline in prices of manufactured goods. But services inflation edged slightly lower on the back of a decline in prices of wireless telephone services. And so, core inflation (national measure) slipped back below 1%Y/Y in May.

Retail sales, IP and PPI reports the highlights of a busy day ahead in the US
Today there are a number of economic reports due for release in the US as Fed policymakers convene for the start of their two-day FOMC meeting. Of particular interest will be the retail sales and IP reports for May. Daiwa America’s Chief Economist Mike Moran expects a drop in auto sales to lead to a 0.8%M/M decline in overall retail spending, but he expects ex-auto spending to have declined only 0.2%M/M. Meanwhile, a solid gain in factory sector employment and a pick-up in the rotary rig count point to a 0.7%M/M lift in introduction production during the month. Today will also bring the release of the New York Fed’s manufacturing survey for June, business inventories for April and the NAHB housing index for June. In addition, news on potential pipeline inflation pressures will come from the PPI for May. On that score, Mike expects a combination of pandemic-related adjustments, strong demand, and supply-chain disruptions to cause the core PPI to increase a further 0.5%M/M, pushing annual inflation close to 5%Y/Y.

ABS house price index surges 5.5%Q/Q in Q1; RBA Board minutes rule out ceasing QE at end of September, but all other options on the table, including reduced or slower purchases
Today the ABS released its House Price Index for Q1, which predictably pointed to a sharp lift in prices during the quarter. Indeed, the weighted average price across the eight capital cities increased 5.4%Q/Q. This marked the largest quarterly increase since 2009 and lifted annual growth in home prices to 7.5%Y/Y. Price increases were reasonably broad-based, with the largest increase (6.1%Q/Q) occurring in both Sydney and Hobart while the smallest increase (4.0%Q/Q) occurred in both Brisbane and Adelaide. Given strong demand for housing, rising housing prices and low interest rates, the RBA’s Board has been at pains to emphasise the importance of maintaining lending standards and carefully monitoring trends in borrowing.

Speaking of which, today the RBA released the minutes from this month’s Board meeting. Most interest centred on the record of a preliminary discussion of the Bank’s QE programme and 3-year bond yield target, which will be reconsidered formally at the forthcoming meeting on 6 July. Regarding QE, the minutes discussed the options of ceasing purchasing bonds in September (considered ‘premature’, and so effectively already ruled out); repeating $A100bn of purchases for another 6 months; scaling back the amount purchased or spreading the purchases over a longer period; and moving to an approach where the pace of the bond purchases is reviewed more frequently, based on the flow of data and the economic outlook.

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