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This morning’s UK labour market data is unlikely to help give the Bank of England sufficient confidence to cut rates in June.
As we see it, a combination of robust pay growth and upside risks looming on the horizon should leave August as the most likely meeting for the MPC to begin easing policy. February’s data saw average weekly earnings show no progress in normalising on a headline basis. Having been expected to ease modestly, average weekly earnings instead flatlined at 5.6% 3m/YoY in February, unchanged from January’s reading. Granted, when excluding bonuses, pay growth fell by a fraction, down 0.1pp to 6.0% 3m/YoY in February. But this still exceeded pre-release expectations that had looked for a larger 0.3pp fall. Moreover, while there were signs of softening elsewhere in the release, specifically in the employment readings, we suspect BoE policymakers will be inclined to discount these given ongoing quality concerns surrounding the Labour Force Survey.
Moreover, with an increase in the National Living wage set to filter through to wages from March onwards, today’s numbers should inject a degree of caution into the thinking on Threadneedle street in ahead of the MPC meeting on May 9th.
Once again, the focus for policymakers is likely to be the details of the pay report. Here the private sector regular pay growth measure closely watched at the BoE fell to 6.0% 3m/YoY in February, down 0.1pp. However, looking at single month estimates, the reading was unchanged at 5.9% YoY when compared to January. Zoom out and squint, it does look like pay growth continues to soften at the margin. But after a sharp slowdown in Q3 last year, normalisation in underlying wage growth appears to have largely stalled. Indeed, February’s single month pay estimate is only 0.3pp lower than the 6.2% recorded last October. The one bright spot in the report comes from wage growth in wholesaling, retailing, hotels & restaurants. For this group, 3m/YoY pay growth fell to 6.3% in February, down from 7.1% the month prior, with single month estimates indicating wages grew by just 5.2% YoY. Even so, this is also the sector most exposed to April’s rise in the National living wage, which is set to jump by 9.8%, suggesting to us that any slowdown in wage growth for these workers is temporary, and should begin to rebound from next month. As a result, today’s data leaves a lot to be done in March for private sector wage data to undershoot the BoE’s projections of 5.7% 3m/YoY in Q1, an outcome that also points to underlying inflation pressures remaining sticky in the coming months.
Private sector pay growth normalisation has stalled over recent releases, a dynamic that should keep the BoE cautious next month
That said, employment readings all weakened by much more than expected. The three-month unemployment rate rose 0.3pp to 4.2%, much higher than the 4.0% expected by markets.
Similarly, the 3m/3m employment change showed a loss of -156k jobs through to March, far below the anticipated +74k increase. Clearly these are signs that the labour market is loosening, and if the BoE is intent on easing rates in the first half of this year, then admittedly this would be evidence in favour of such a move. Even so, given the reliability concerns around the Labour Force Survey, we think BoE policymakers will be inclined to discount this rise for now, with the unemployment readings still below the BoE’s estimate of neutral in any case. Instead, we think this points to an eventual softening in wage growth through the summer, as cooling labour demand begins to filter through.
For now though, the elevated rate of headline pay increases should be sufficient to see the MPC take a more cautious tone at the May policy meeting when compared to the dovishness seen in March, an outcome that would favour an August start to rate cuts rather than beginning earlier in June.
Markets appear to have drawn a similar conclusion based on this morning’s data, with traders modestly trimming BoE easing bets post-release. Odds of a June rate cut now standing at 40%, down slightly compared to the coin flip decision that was anticipated yesterday, a dynamic that is offering upside support for sterling, despite an initial knee-jerk selloff earlier this morning.
Author:
Nick Rees, FX Market Analyst