UK jobs data move BoE one step closer to a rate hike, but moderation in wage growth suggests December policy decision remains in the balance
Since failing to raise rates at its policy meeting earlier this month, the BoE has made clear that its near-term policy decisions will be determined primarily by assessments of developments in the labour market, and specifically the impact of the end of the furlough schemes on unemployment and pay. So, this morning’s labour market data were closely watched. And overall, the figures were largely firm, tallying with Governor Bailey’s assertion yesterday that there appears so far to have been little additional unemployment caused by the end of the Government’s support schemes. But it’s not clear yet whether most of the workers on furlough returned to work on a full- or merely part-time basis. And wage growth moderated somewhat, with the underlying rate of pay growth – which might be expected to have a non-negligible bearing on the inflation outlook – remaining very unclear. Nevertheless, on balance, this morning’s figures probably take us a further step closer to BoE tightening although December’s policy decision still remains in the balance.
With the furlough schemes having concluded at the end of September, most notable were the data for October. Payrolled employees rose 160k last month to be up 1.14mn (4.0%) from a year earlier and 235k (0.8%) from the pre-pandemic level in February 2020. Admittedly, this total likely includes employees who are working out their notice period after being made redundant. However, data on redundancies and surveys suggest that only a small share of those on furlough (perhaps some 3% of the million-plus workers on government support schemes in September, according to the most recent ONS survey) have since lost their jobs. And the balance of labour demand relative to supply appears to have remained very strong – the number of job vacancies in the three months to October hit a new high of 1.172mn, up 388k from the pre-pandemic level, with 15 of the 18 sectors at record levels. Meanwhile, the claimant count rate, which includes workers on very low incomes as well as those unemployed, fell 0.1ppt to 5.1%, 2.0ppts above the pre-pandemic level. The number of claims was down for the eighth successive month in October, albeit by just 14.9k, the lowest drop of the sequence.
The data for the three months to September, just ahead of the end of furlough, were unsurprisingly firm too. For example, the employment rate increased 0.4ppt on the quarter, to 75.4%. Notably, there was a record high net flow from unemployment into work as well as a record high of job-to-job moves driven by resignations rather than dismissals to suggest greater confidence among workers about future conditions. But there was also an increase in part-time work and numbers of workers on zero-hour contracts, and it remains to be seen whether the end of the furlough schemes has translated principally into a significant rise in involuntary part-time working, which will see such workers face a drop in overall income. In addition, the ILO unemployment rate fell 0.5ppt in Q3 to 4.3%, just 0.5ppt below the pre-pandemic trough at the end of 2019, while the inactivity rate remained unchanged at 21.1%.
Of course, to the extent that the BoE is primarily concerned about second-round effects from current price pressures on the inflation outlook, the wage data are also key to December’s rate decision. But here the picture remains unclear. The headline annual growth rate in average total pay (including bonuses) slowed 1.4ppts to 5.8%Y/Y while regular pay (excluding bonuses) slowed 1.1ppts, broadly in line with expectations, to 4.9%Y/Y. These declines in large part reflected an easing of base and composition effects that exaggerated the increases of recent months. But the 3M/3M annualised growth rate of regular pay slowed 0.4ppt to 2.2%, the softest in fourteen months, further suggesting a loss of momentum. Moreover, while the true underlying rate of wage growth remains impossible to calculate with any accuracy, the ONS suggests that it could be as low of 3.4%Y/Y, which would be close to the bottom of the range in 2019 and a rate that is unlikely to generate significant inflation further ahead. If so, that would seem to call for no change in rates just yet. Earlier this month, BoE staff estimated it to have risen above 4%Y/Y, a rate more likely to prompt action from the MPC. But the members of the Committee will likely wait for the next round of wage and jobs data – due two days ahead of the December policy meeting – before coming to their own view on underlying pay growth and hence whether or not to hike rates.
Japanese tertiary sector recovery seemingly underway in September
After yesterday’s disappointing (albeit not surprising) contraction in Japan’s GDP in Q3, today’s monthly tertiary activity data offered some tentative reassurance that the economy had started its recovery towards the end of the quarter. In particular, tertiary sector output – which accounts for roughly 70% of economic activity – rose for the first month in three in September and by 0.5%M/M. Despite the state of emergency being in place through to the end of the month, this reflected a rebound in living and amusement-related services (6.5%M/M) and retail trade (3.2%M/M), with transport activities up for the just the second month out of the past six. But this still left living and amusement-related services a hefty 29% below the pre-pandemic level, with a sizeable shortfall in transport activities too (12% below the February 2020 level). While some sectors are comfortably above the pre-pandemic level (e.g. financial services and medical care), overall tertiary activity remains 5½% below the pre-crisis peak. So, with pandemic restrictions having relaxed from the start of October, in the absence of a pickup in coronavirus cases, there appears to be scope for a more significant recovery in tertiary activity over coming months and into next year.
Euro area GDP growth likely to be confirmed at 2.2%Q/Q in Q3, as employment numbers expected to confirm solid jobs growth
Today’s updated euro area GDP figures for Q3 are expected to confirm the finding of the initial estimate that growth firmed very slightly from Q2 by 0.1ppt to 2.2%Q/Q (we will have to wait for the final release on 7 December for the official expenditure breakdown). We do not rule out an eventual upwards revision, however, not least given that the initial Spanish estimates looked too low. Today’s GDP figures will come alongside preliminary employment numbers for the third quarter, which are expected to report another strong quarter of jobs growth, likely leaving the number of people in work less than 1mn below the pre-pandemic level.
We have already seen the release of final French CPI data for October, which confirmed that the headline HICP rate rose to their highest level since the end of 2008, by 0.5ppt to 3.2%Y/Y. The national CPI rate was also unrevised at 2.6%Y/Y, up 0.4ppt from September. This pickup on the month principally reflected higher energy prices, which accelerated 4.8%M/M in October on the back of a near-6%M/M increase in petroleum prices and 12½%M/M increase in gas prices. So energy inflation jumped 5.3ppts to 20.2%Y/Y. While services inflation rose 0.4ppt to 1.8%Y/Y, manufactured goods inflation eased back slightly (by 0.1ppt to 0.3%Y/Y). As such, the national core inflation measure ticked higher by just 0.1ppt to 1.4%Y/Y. Final Italian inflation data are due later this morning (the flash estimate showed the HICP rate rising 0.2ppt to 3.1%Y/Y, similarly the highest since 2008).
US retail sales and IP set to have maintained recovery in October
In the US, today brings the most noteworthy releases of the week with October’s retail sales and industrial production reports. Daiwa America’s Mike Moran expects retail sales to have risen by 1%M/M (a touch below the Bloomberg consensus) supported by decent household spending on the back of recent jobs growth as well as higher prices of autos, gasoline and food. Meanwhile, Mike expects IP to have rebounded somewhat (+0.5%M/M) following the slump in September (-1.3%Q/Q). But shorter work weeks in manufacturing and mining will limit the increase and output from the utilities sector will be hindered by the unseasonably warm temperatures that month.