UK labour market data were a mixed bag

Chris Scicluna

European stocks open higher after volatile Asian session spooked by talk of 75bps Fed hike; BoJ forced to buy record amount of JGBs to defend policy target; UK jobs data support European govvies
After yesterday’s torrid time for US stocks (S&P500 down 3.9%, NASDAQ down 4.7%), Asian markets unsurprisingly followed suit today, similarly spooked by WSJ reports that the Fed will consider a 75bps rate hike at its monetary policy meeting starting today. But while Japan’s Topix closed down 1.2%, the Hang Seng has erased its initial losses, while S&P500 minis are currently up more than 1% and European stocks have bounced higher at the open. In fixed income, with markets increasingly questioning the sustainability of its Yield Curve Control policy, the BoJ had to buy a record ¥2.2trn of JGBs at today’s unlimited fixed-rate purchase operation. And the yen has eased back through ¥134.5/$. With market turbulence raising question marks about the ECB’s readiness to push on with aggressive rate hikes after it has fulfilled its commitments for Q3, euro area govvies have opened firmer, with BTPs outperforming for a change, with 2Y yields down a few bps below 2.00% and 10Y yields down more than 9bps to below 4.00%. Gilts have also opened higher – some 6bps or so lower across the curve – following some softer UK labour market which suggest a turn for the worse at the start of Q4 (below). And UST yields are some 6-8bps lower across the curve.

UK labour market data suggest weak GDP might be starting to take its toll; no signs of wage-price spiral
The last top-tier UK economic data out before the BoE’s MPC meets to set rates again – this morning’s labour market report – were a mixed bag, but certainly suggested that weaker economic activity is now starting to take a toll. Indeed, the unemployment rate in the three months to April ticked up 0.1ppt from March to 3.8%. While that still left it down 0.2ppt from three months earlier, it marked the first increase since the end of 2020. And strikingly, the single-month rate for April jumped 0.7ppt to a five-month high of 4.2%, with the single-month level up 237k from March to the highest since August. Similarly, while the employment rate was unchanged on a three-month basis, at 75.6% it was still 1ppt down from the pre-pandemic level in February 2020, with the number of people in work down more than 350k over the same timeframe. And the employment rate was down 1ppt on a single-month basis with the number of people in work (admittedly a volatile series) down more than 250k on the month.

There were still some signs of strength in the data, e.g. the number of job vacancies in the three months to May rose to a new record high of 1.3mn. But the growth rate of vacancies slowed again and we question the reliability of such an indicator as a guide to the firmness of demand. Indeed, growth in employees' average total labour earnings slowed 0.2ppt to 6.8%3M/Y in the three months to April. With that figure skewed higher by bonuses, particularly in the finance and business sector, regular pay (excluding bonuses) rose a more moderate 4.2%3M/Y, unchanged from the prior month and suggesting no big cause for alarm about wage-price spirals. Indeed, in real terms, while growth in total pay remained positive at 0.4%3M/Y, regular pay was down 2.2%3M/Y. Overall, this week’s data suggest that the MPC is more likely to vote this week for another hike in Bank Rate of 25bps to 1.25% rather than the kind of hikes being contemplated by the Fed.

Drop in Japanese IP in April bigger than previously thought
Industrial production in Japan in April was even weaker than previously thought, as Chinese pandemic restrictions exacerbated supply constraints. Today’s final estimates revised the pace of contraction of IP by a further 0.2ppt, so that IP is now estimated to have contracted 1.5%M/M to be 0.6% below the Q1 average level. As firms faced up to intensified supply disruption, inventories dropped 2.3%M/M, well in excess of the drop of 0.3%M/M in shipments and following a drop of 0.4%M/M the prior month, pushing the inventory-shipment ratio to its lowest since the end of last year. Within the detail, output of production machinery was down 2.7%M/M, with electronic parts and devices down 6.6%M/M, and output of cars down 3.6%M/M to a level just marginally above January’s six-month low. More happily perhaps, firms forecast growth of 4.8%M/M in May and a surge of 8.9%M/M in June. However, such forecasts are rarely fulfilled.

Big rise in German inflation in May confirmed, ZEW investor survey due ahead of Schnabel speech
Most interesting today from the euro area might be a speech this evening at the Sorbonne from extremely influential ECB Executive Board member Isabel Schnabel, who over past quarters articulated the case for monetary policy normalisation in the most convincing fashion, helping swing the majority of Governing Council members in her favour. The comments will be watched for insights into the likely magnitude of monetary policy tightening in the second half of the year.

Data-wise, German final inflation figures for May confirmed the preliminary release according to which the EU-harmonised HICP measure rose 0.9ppt to 8.7%Y/Y with the national CPI measure up 0.5ppt to 7.9%Y/Y, the highest since the first oil crisis in the winter of 1973. Continuing to reflect price pressures associated with the war in Ukraine, the upwards shift was due principally to higher prices of fuel and food, with energy inflation up 3ppts to 38.3%Y/Y, largely reversing April’s drop, and food inflation up 2.5ppts to 11.1%Y/Y.

Like the Sentix survey, the German ZEW investor sentiment survey for June due this morning is expected to report a modest pickup in investor confidence (+9pts to -27.5), albeit with expectations still in recession territory (-7pts to -31.5).

US data focus on producer prices and (downbeat) small business sentiment
After Friday’s upside surprise to consumer prices in May, today’s producer price data will be watched for any intensification of pipeline pressures. The figures seem bound to be ugly, with the headline rate to be boosted by prices of energy and food (our colleagues at Daiwa America forecast a rise of 0.8%M/M in the total final demand index, to leave the annual rate close to 11.0%Y/Y, but 0.5%M/M and 8.6%Y/Y excluding food and energy). The US data calendar also brings the NFIB small business survey for May. In April, the headline index moved sideways at 93.2, a six-year low. A net 70% of respondent firms – just 2ppts down from the prior month’s series high – planned to raise prices, while a record net balance of 50% of respondents had a negative view of the economic outlook.

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