UK labour market momentum remained strong

Chris Scicluna
Emily Nicol

Wall Street steadies as bond yields drift lower ahead of today’s US CPI report; Asian bourses
Following five consecutive sessions of modest decline, the S&P500 closed with a 0.2% gain yesterday – a very modest advance, paced by energy stocks, considering that the index had traded up 0.8% at the open. After rising on Friday, bond yields backtracked somewhat as investors looked ahead to today’s US CPI report, with the 10Y yield closing down around 2bps at just under 1.33%. With little in the way of data or news, it also proved a quiet session in the FX market with the greenback erasing earlier modest gains to finish steady against its major peers.

US equity futures have traded a couple of tenths higher since the close – and UST yields have nudged higher – and so most Asian bourses have continued higher today. In Japan, the TOPIX firmed a further 1.0% while JGB yields are little changed. Other than a modest revision to the July IP report, there was no domestic economic data. However, in political news, as had seemed likely given his comments last week, the Yomiuri newspaper reported today that Shigeru Ishiba will not challenge for the LDP leadership at this month’s election. Furthermore, Yomiuri reported that Ishiba – second only to Taro Kono in recent public polling – would likely endorse Kono for the role, rather than contenders Fumio Kishida and Sanae Takaichi. Kono has since said that he will seek Ishiba’s help if he becomes PM, thus providing a very popular ticket for potential voters.

Turning elsewhere, ahead of tomorrow’s dump of domestic activity indicators, China’s CSI300 has bucked the trend with a 1.4% decline while Hong Kong’s Hang Seng is down at a similar rate. Troubled developer China Evergrande Group remained in the news after it issued a statement to the Hong Kong exchange saying that a significant drop in sales would likely worsen its liquidity and cash flow, with the stock falling more than 10% to another new low. However, stocks have rallied around 0.7% in South Korea and 0.3% in Singapore. In Australia, the ASX200 also posted a modest gain with the NAB business conditions index rebounding somewhat in August, thus consolidating at levels well above its long-term average despite the ongoing lockdowns. The weekly consumer confidence index also firmed to its highest level since July. However, AGCB yields have edged lower, with RBA Governor Lowe stating in a speech today that he struggled to reconcile his view of the policy outlook with the market pricing of rate hikes beginning next year or early 2023. In virus news, Canberra announced a one-month extension of its lockdown until 15 October.

Japan’s IP contraction unrevised at 1.5%M/M in July
The only economic release in Japan today was the final IP report for July, which revealed even smaller revisions to the preliminary estimates than is usually the case. Indeed, total production declined an unrevised 1.5%M/M, with fractional downward revisions to production of durables (now down 5.5%M/M) and capex goods (now down 0.7%M/M) not enough to change the overall outcome. Elsewhere in the report, the decline in shipments was revised to just 0.3%M/M from 0.6%M/M previously. As a result, inventories declined 0.7%M/M rather than the 0.6%M/M decline estimated previously. As always, the brand new content in today’s release concerned capacity utilization, which in aggregate declined 3.4%M/M in July but was still more than 14% above last year’s pandemic-depressed level. After increasing last month for the first time since the onset of the pandemic, firms’ productive capacity declined 0.1%M/M in July and so was down 1.1%Y/Y.

UK labour market momentum remained strong over the summer despite slowing of GDP
While UK economic growth all but came to a halt in July, this morning's data showed that momentum in the labour market remained positive over the summer. In particular, following three months of increases of almost 200k, the number of payrolls jumped 241k in August, to return back above the pre-pandemic level for the first time at 29.1mn. Perhaps unsurprisingly, with the economy having largely reopened, the largest increases in payrolls were seen in those sectors that had previously been most acutely impacted by the pandemic – e.g. accommodation and food services, arts and entertainment, and wholesale and retail.

The number of vacancies in August maintained a firm upwards trend too, recording the second successive month above 1mn and therefore leaving the ONS’s preferred three-month measure at a record high above 1mn for the first time. Despite the decent growth in jobs, the largest increases in vacancies last month were also seen in accommodation and food, as well as admin and support services. At the same time, the number of hours worked predictably surged in the three months to July (albeit remaining some way below the pre-pandemic level), while the unemployment rate dropped 0.3ppt to 4.6%, down 0.6ppt from the pandemic peak at end-2020, albeit still 0.8ppt above the pre-pandemic trough. And the (admittedly more volatile) single-month rate fell 0.1ppt to 4.4%, the lowest for a year.

Despite firm growth in jobs, wage growth moderated somewhat, with average weekly earnings slowing 0.5ppt to 8.3%Y/Y in the three months to July. Excluding bonuses, growth in earnings also slowed 0.5ppt to 6.8%Y/Y. The high rates of pay growth still principally reflect base effects associated with the initial drop in earnings at the onset of the pandemic last year. Distortions from composition effects also remain significant (i.e. lower earners were more likely to lose their jobs or experience a drop in hours worked at the onset of the pandemic). And the drop in the number of workers on furlough by some 3.8mn over 12 months to about 1.6mn in July, is also adding upwards pressure to measures of pay growth. However, the ONS estimates that underlying earnings growth might be somewhere in the range of 3.6-5.1%Y/Y. By reference, the peak in 2019 ahead of the pandemic was 3.9%Y/Y, suggesting some upwards pressure from labour and skills shortages in certain sectors. Among others, total pay growth in finance and business services was 12.2%3M/Y in July with the equivalent figures 11.8%3M/Y for construction and 10.1%3M/Y for wholesale, retail and hospitality.

Of course, the near-term outlook for the UK labour market remains uncertain, not least with the job retention scheme being wound up at the end of this month. But given significant skills mismatches, the level of vacancies is likely to remain high, and firms in many sectors are likely to continue to report difficulties in hiring for several months to come.

Bank of France survey suggests recovery momentum was well maintained in August, looks for GDP growth of 2.5%Q/Q in Q3
The Bank of France’s latest business survey suggests that economic growth was well maintained in August and that growth has likely remained positive in September. While the government introduced its “Health pass” from the 9th of last month, requiring proof of vaccination to enter restaurants, bars and some shopping centres, momentum in services was judged to have remained positive. Admittedly, however, the catering sub-sector was reported to have seen a loss of activity even as accommodation continued to recover. In manufacturing, growth was also reported to be solid, even as the share of companies experiencing supply difficulties edged up 2ppts to 51%. Nevertheless, firms also reported that stocks were recovering. A marginally higher share of firms in construction (up 0.1ppt to 61%) reported supply-side challenges, which were acting to restrain growth last month. Nevertheless, in light of its survey findings, the Bank of France estimates that French GDP was just 1% below the pre-pandemic level in August, and is likely to be down just ½% on the same basis in September. And it expects GDP growth of 2.5%Q/Q in Q3, up from 1.1%Q/Q in Q2.

CPI report the focus in the US as the next week’s FOMC meeting looms
At this point the Fed’s immediate policy decisions – which concern the timing of the QE taper – hinge more on developments in the labour market than inflation. Nonetheless, today’s CPI report will still have an important bearing on the medium-term outlook that the Fed will communicate at next week’s FOMC meeting. Daiwa America’s Mike Moran expects a 0.4%M/M lift in headline prices and a 0.3%M/M lift in the core – outcomes that would likely lower their respective annual inflation rates by 0.1ppt to 5.3%Y/Y and 4.2%Y/Y respectively. A 0.3%M/M lift in the core CPI remains firmer than the average monthly increase seen in recent years. However, such an outcome would still support the Fed’s contention that the truly exceptional CPI increases reported in Q2 were temporary adjustments to the price level associated with the reopening of the economy, rather than indicative of a sudden step up in the inflation trend. Aside from the CPI, the NFIB small business survey for August is the only other report of any note in the US today.

Australian business conditions and consumer sentiment improve despite ongoing lockdowns
As far as data was concerned, the key focus in Australia today was the NAB Business Survey for August. After declining 23pts over the past two months from the record high reported in May – yet remaining at an above average level – the closely followed business conditions index rebounded 4pts to 14 in August. This result comes notwithstanding the ongoing lockdowns in New South Wales, Victoria and Canberra and illustrates the considerable positive momentum in the Australia economy prior to the lockdown, not least due to very high commodity prices and stimulatory macro policy settings. The improvement in business conditions was driven by a rebound in the trading activity and profitability indexes. Ahead of Thursday’s labour force report, the employment index fell 2pts to 9, which nonetheless remains 7pts above the long-term average, while the capex index was little changed and so remained close to its long-term average. While down from the highs reported prior to the outbreak, firms continued to report upward pressure on labour and other purchase costs, while final product and retail prices were said to have increased at more than double the historical average pace – yet to be reflected in the CPI.

Meanwhile, ahead of tomorrow’s monthly Westpac survey, in a similar vein the ANZ-Roy Morgan index of consumer confidence rebounded 3.1% last week, with respondents significantly more upbeat about both the near outlook for the economy and buying conditions for major household items. This marks the highest reading in seven weeks, but still leaves the index about 9pts lower than prior to the onset of the virus outbreak in Sydney.

Aussie house prices increase at record pace in Q2; RBA’s Lowe reiterates that Australian recovery likely simply delayed rather than derailed
Turning to today’s other Aussie news, the ABS released its House Price Index for Q2, which in common with more timely monthly indicators pointed to a very sharp lift in prices during the quarter. Indeed, the weighted average price across the eight capital cities increased 6.7%Q/Q – the most since these statistics were first compiled in 2003 – lifting annual growth in home prices to an 11-year high of 16.8%Y/Y. Price increases were reasonably broad-based, with the largest increases of over 8%Q/Q occurring in Sydney and Canberra, while prices increased around 6%Q/Q in Melbourne and Brisbane. Given rising housing prices and low interest rates, the RBA’s Board has been at pains to emphasise the importance of banks maintaining lending standards, and regulators are carefully monitoring trends in borrowing.

Speaking of the RBA, today Governor Lowe delivered the Bank’s annual speech to the Anika Foundation on the topic of “Delta, the Economy and Monetary Policy”. As to be expected, the speech was consistent with the press statement released following last week’s monthly Board meeting, with Lowe arguing that the current virus outbreak had delayed but not derailed a recovery that had very strong momentum – one that had previously raised the likelihood of the RBA again revising up its forecasts of economic growth. So while the current outbreak has raised uncertainty, Lowe reiterated that the Bank’s central scenario is that the economy will return to its pre-outbreak path by the second half of next year. One of the factors supporting the rebound is rising household net wealth due to rising housing and other financial asset prices, thus creating an uneasy tension between the helpful consequence of higher house prices and the Bank’s prudential concerns. Given the outlook for wages and inflation, Lowe reiterated that the Bank does not expect to raise the cash rate before 2024, and expressed continued surprise at the market’s pricing of a lift in the cash rate before that.

Kiwi house sales slump in August as lockdown curbs activity, but prices continue to rise
In New Zealand, REINZ reported that nationwide house sales declined almost 22%M/M in August, with the level of sales thus declining to their lowest for an August month since 2014 (sales were also down 26.5%Y/Y). Of course, this reflects the curb on activity provided by the strict lockdown implemented during the second half of the month. Sadly, at least for the Government and the RBNZ, the decline in activity did not constrain prices, with the House Price Index rising a further 2%M/M and 31.1%Y/Y – likely reflecting the rush amongst buyers to purchase ahead of next month’s tightening of LVR restrictions and imminent increases in mortgage interest rates.

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