UK labour market data confirms ongoing recovery

Emily Nicol

Wall Street makes new highs but Asian markets weaker as virus worries continue to weigh
Yesterday Wall Street quickly shrugged off a raft of disappointing Chinese data, a much less buoyant New York Fed manufacturing survey and delta-variant virus worries, with the S&P500 advancing 0.3% to set yet another fresh record high. In the bond market, the 10Y note closed the US session at 1.26%, recovering from a low of 1.22% reached earlier in the day when Wall Street opened in the red. After declining sharply on Friday, the greenback firmed marginally.

Since the US close, US equity futures have traded several tenths lower with investors in the Asia-Pacific region remaining attuned to virus-related risks. In Japan, after declining 1.6% yesterday, the TOPIX again fell ½%, with Economy Minister Nishimura telling the country’s virus advisory panel that state of emergency conditions will be extended to an additional seven prefectures – adding to the present six – with the duration of the emergency to be extended to 12 September. According to local media, PM Suga will formally announce these changes in a news conference to be held at 9pm local time. Stocks are more noticeably weaker elsewhere, with losses over 2% currently been seen in Mainland China, and more than 1½% in Hong Kong, and markets also materially weaker in Taiwan, South Korea and Singapore.

Turning to the Antipodes, Australia’s ASX200 has led the region lower with a decline of almost 1%, weighed down by weakness in the energy and financial sectors. News of a further 452 new virus cases in New South Wales would not have helped sentiment, even as the country announced that it had vaccinated almost 280k people on Monday alone. A smaller number of cases continues to be reported in the state of Victoria and in Canberra, which remain in lockdown. Meanwhile, in recent hours New Zealand has announced its first case of virus in the community since February, which resulted in an PM Ardern announcing an initial three-day full nationwide lockdown, with this extended to seven days in Auckland. This has caused investors to ponder whether this might lead the RBNZ to defer the 25bps rate hike that was more than fully priced for tomorrow’s policy review, sending the Kiwi dollar down 1% and the 10Y NZGB yield down 10bps.

Japan’s service sector activity rebounds more than expected in June
As hinted at by yesterday’s firmer than expected Q2 GDP report, today the Japanese Tertiary Activity Index revealed a rebound in service sector activity in June that was larger than analysts had expected at the beginning of the week. Following a 2.9%M/M decline in May that was 0.2ppt worse than reported previously, the index increased 2.3%M/M in June – 0.5ppt above the consensus estimate. Given the very weak base created by the onset of the pandemic, activity was up 3.1%Y/Y. However, more meaningfully, activity was still 4.1% lower than in February 2020.

In the detail, unsurprisingly, the rebound was led by activity related to non-essential personal services, which increased 5.1%M/M, fully reversing the decline in May. Even so, activity remains almost 15% lower than in February 2020. Activity related to essential personal services increased just 0.6%M/M following a 2.0%M/M decline in May, while activity related to business services increased 2.5%M/M after a 3.5%M/M decline in May. By industry, also unsurprisingly, the largest increase was a 7.9%M/M rebound in activity related to living and amusement services, which had slumped 9.3%M/M in May. Activity related to transport and postal services increased 5.0%M/M following a 4.5%M/M decline in May.

Revised euro area GDP estimate to confirm strong growth in Q2, while employment also likely increased
The second estimate of euro area Q2 GDP is expected to confirm that the economy expanded by a solid 2%Q/Q, 13.7%Y/Y, albeit still leaving output 3% below its pre-pandemic level. While this release will again merely provide an aggregate output figure, this morning will also bring quarterly employment numbers, which, in line with stronger GDP growth and relaxation of lockdown restrictions are likely to report a notable increase last quarter, led by the services sector.

UK labour market recovery continues as restrictions eased, with employment, vacancies and hours worked higher
After the BoE recast its forward guidance at its meeting earlier this month to focus largely on the medium-term inflation outlook, today’s labour market report was unsurprisingly closely watched. With the final restrictions having been eased last month, the report predictably reported the eighth consecutive month of employment growth, with the number of payroll employees up 182k in July to 28.9mn, an increase of 576k (2.0%) compared with a year ago but still 201k (0.7%) below the pre-pandemic level. This in part reflected sizeable increases in the sectors that benefitted most from the final lifting of restrictions – i.e. accommodation and food services (32k) and arts and entertainment (13k), although the latter was still lower than the level a year ago. While official data suggested that 2mn people remain on furlough at the end of June (although surveys suggested that continued to decline through July), encouragingly, job vacancies in July rose above 1mn for the first time. On the (somewhat lagging) ILO measures, the unemployment rate dropped 0.2ppt in the three months to June to 4.7%, while the employment rate edged up 0.3ppt to 75.1%. And given the further easing of Covid-related restrictions, total hours worked increased over the quarter, while the redundancy rate declined and returned to pre-pandemic levels.

The headline rates of wage growth were again striking. Growth in average total pay (including bonuses) in the three months to June rose 1.4ppts compared to the three months to May to 8.8%Y/Y, with growth in regular earnings (excluding bonuses) up 0.8ppt to 7.4%Y/Y. However, these figures remain exaggerated by temporary factors, notably compositional and base effects, with median pay in April and May 2020 having declined sharply. Indeed, on the single-month measure, the ONS estimated that the equivalent growth in median pay eased for the third consecutive month in July to 6.4%Y/Y (down from the peak of 9.7%Y/Y in April). Moreover, an alternative measure, median of pay growth (which only measures those in continuous employment and therefore not directly influenced by inflows and outflows) stood at just 3.4%Y/Y in July, down 1ppt from the peak in May and only marginally higher than the rate in February 2020. This broadly tallies with the assessment of BoE staff too, which estimated that underlying wage growth was 3.3%Y/Y in May. Bank staff do however expect underlying wage growth to strengthen over the third quarter as a whole, to above 4½%Y/Y.

Retail sales and IP reports the main focus in the US today
A busy day ahead in the US will see the release of the retail sales and IP reports for July, together with the NAHB housing index for July and business inventory data for June. As far as the retail report is concerned, Daiwa America’s Mike Moran expects that a drop in auto sales will lead to a small 0.2%M/M decline in headline sales, but that ex-auto sales will increase 0.4%M/M. Meanwhile, Mike estimates a 0.4%M/M lift in IP in July with solid growth in the manufacturing and mining sectors more than offsetting a likely drop in utility output. Aside from the data, Fed Chair Powell is scheduled to hold a town hall with educators, although this seems an unlikely venue for market moving commentary, especially with the Jackson Hole symposium ahead next week.

RBA Board minutes provide no surprises; weekly consumer confidence index picks up
As expected, the minutes of this month’s RBA Board meeting, released today, failed to convey any additional information beyond that outlined in the subsequently released Statement on Monetary Policy and Governor Lowe’s recent parliamentary testimony. Meanwhile, on the data front, despite the extended lockdown in Sydney, and virus outbreaks and lockdowns elsewhere, the ANZ-Roy Morgan consumer confidence index rebounded 2.5% from the previous week’s 10-month low to 101.1, with respondents more positive about the financial situation over the year ahead and about conditions for buying major household items.

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