Further to this morning’s release from the ONS of its Labour Force survey data, wealth managers and investment specialists have been sharing their reactions with us at Wealth DFM.
According to Tomasz Wieladek, chief European economist at T. Rowe Price, today’s Strong labour momentum boosts BoE hike risks as he comments:
“UK labour market data improved further this morning, with the unemployment rate in December falling to 3.8%, continuing its declining trend. Employment in December also significantly exceeded consensus expectations. A second important piece of data released this morning was the Average Weekly Earnings (AWE) index for December, which appears to be somewhat sticky at levels significantly above what would be consistent with the inflation target for the Bank of England (BoE).
“The forward-looking survey data show a pickup in the UK economy. This suggests the labour market will strengthen further and the unemployment rate will probably continue to move lower. There is a significant risk the AWE rate will settle between 4-5%, rather than the 3-4% required to reach target, as the unemployment rate continues to fall further away from the BoE’s estimated natural rate of unemployment of 4.5%.
“For the BoE, the news today supports further caution concerning rate cuts. If the economy continues to accelerate, as we expect, and the labour market continues to improve, there is a rising risk the first rate cut will happen in August – rather than June as financial markets are pricing today.
“However, the most significant risk to UK financial markets is if labour market momentum remains this strong for the rest of the year. There is a small, but rising, risk the BoE may have to hike again this year on the back of the strong data. This is not a risk financial markets are considering today, but there is no indication the current momentum in the economy is about to cool.
“If the strong rise in demand is maintained and wage growth remains significantly above levels consistent with target for most of the year, the BoE could conclude policy is not restrictive enough to return inflation to 2%. I only think this is possible if the momentum in the data remains as strong as it is today for the rest of the year. However, given the fiscal easing in place already and what will likely happen in the March budget, markets are completely discounting this possibility at present.”
Lindsay James, investment strategist at Quilter Investors said:
Today’s release of February’s ONS jobs data unveils the complicated dynamics of the UK’s labour market. This new data finally gives the Bank of England (BoE) a better and hopefully more accurate picture of how its policies are actually impacting the workforce. The Labour Force Survey (LFS) data has now been integrated into the data set again providing a fresh perspective on the employment landscape after months of relying on “experimental data” from the ONS.
The unemployment rate from October to December was 3.8%, a drop of 0.2% on the previous three-month period, while the number of payrolled employees crept up by 0.1% between November and December 2023, but with a jump of 1.3% between December 2022 and December 2023. These figures represent an apparent strengthening of the labour market in recent months and represent the pulse of a labour market under the microscope, especially given the recent shift back to traditional data collection methods. This does however indicate a slightly tighter market than originally thought.
That said, wage growth does continue to tell the story the central bank wants and annual growth in regular earnings (excluding bonuses) decreased to 6.2% in October to December 2023 from 6.6% in the prior three month period. Importantly, annualising the pattern over the past three months indicates that this is now falling quite quickly, with the annualised nominal growth rate of regular earnings running at just 2.2% – very close to the Bank of England’s target, providing them with some reassurance that this inflationary pulse is weakening.
Today’s data underscores the complexities the BoE faces amidst an evolving economic landscape. The external market is on the lookout for signs that the BoE’s monetary policies are making headway against inflation, and we have those signs in this release. Yet, one swallow does not make a summer and the risk remains that maintaining elevated interest rates could inadvertently apply undue strain on the economy and on the labour market, exacerbating economic challenges rather than alleviating them. Muddied data over the last few months does not help things either but hopefully we are now turning a corner with the data more reliable.“
Hugh Gimber, global market strategist at J.P. Morgan Asset Management comments on this morning’s UK labour market print as follows:
“After a torrid 18 months – where surging energy costs saw inflation significantly outpace wage gains – it’s no surprise that the more recent combination of easing price pressures and still tight labour markets has driven UK consumer confidence to its highest level in two years. This morning’s UK labour market data will therefore be welcome news to consumers, showing wage growth above inflation for a seventh consecutive month.
“But the Bank of England will be viewing this data through a different lens. The recent trend lower in inflation, while good news, has largely been driven by a collapse in goods prices. The key watch item for the Bank lies in whether consumption reaccelerates as consumers find their feet. This would be good for growth but would also present upside risks to inflation, particularly in services sectors where prices tend to be more closely linked to wages. As a result, with today’s print pointing to some signs of slowing in a still strong labour market, significantly more evidence of cooling is likely required before the Bank is ready to consider cutting rates.”
Danni Hewson, AJ Bell head of financial analysis, comments;
“We are still in the peculiar position where some good news is still taken as bad news by markets. The fact that the UK labour market is proving a whole lot more resilient than had been expected does seem to tie the hand of UK rate setters trying to keep a tight grip on inflation.
“During ‘normal’ times falling unemployment is a positive thing but a tight labour market means greater competition for workers, something which forces employers to up the ante when it comes to wages.
“Wage growth might have slowed considerably from that summer peak, but at 6.2% regular pay growth is still uncomfortably high for the Bank of England and in cash terms it puts an extra 1.9% into workers’ pockets.
“With inflation thought to have ticked up again last month, money markets are having to reassess their earlier exuberance. Expectations of a spring interest rate cut have fallen once again this morning and that uncertainty is already having a real-world impact on mortgage rates. But things are not straightforward – there are threads that need to be pulled.
“Vacancy numbers are still falling; business confidence has taken a big knock and many recruiters have reported that they’re seeing a serious slowdown in hiring intentions.
“Redundancy rates are up, and there doesn’t seem to be a week that passes which doesn’t include headlines about companies falling into administration or jobs being cut. Then there’s the record number of workers on long-term sick leave and an increase in students rounding out those economically inactive figures. What happens to the picture when and if they rejoin the labour force?
“Add to all of that uncertainty the fact that the data itself has been called into question. Updates are often subject to revision but until later in the year when new measures are implemented there are concerns about how reliable today’s numbers really are.
“On the flip side though there are clearly some cracks beginning to show in the UK labour market the economy has managed to keep plodding on which does suggest that recession might have been avoided, even if only by a very narrow margin.”
