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Whilst this morning’s truncated labour market data release surprised to the upside on headline measures, the details of the report provide plenty of good news for policymakers on Threadneedle street.
Payrolled employees significantly exceeded expectations, showing 33k jobs added in October and 32k in September, with the former having been expected to print at -17k and the latter being revised up from a prior reading of -11k. So too did headline average weekly earnings numbers, printing at 7.9% 3m/YoY, far exceeding the 7.3% expected by economists. Nevertheless, policymakers will be relieved to see wage growth continue to ease, in particular on the private sector regular pay measure regularly highlighted by the MPC, which fell strongly on a single month basis. Given data quality issues that have plagued recent releases, a fact that has seen parts of the publication withdrawn by the ONS and the remainder deemphasised by the BoE, we suspect policymakers are unlikely to lean too much on today’s print. But, if the moderation in private sector pay growth is compounded by softer core inflation data tomorrow, today’s data will likely reaffirm the BoE’s decision to hold Bank Rate. Even so, the pound has seen a modest uptick to start the morning, with traders reacting to the headline beat.
The focus for markets heading into this latest release was naturally on wage growth given the links made by policymakers between pay and domestic inflation pressures.
Whilst headline wage growth surprised to the upside, once stripping out bonuses, weekly earnings fell from an upwardly revised 7.9% 3m/YoY growth to 7.7%, matching pre-release expectations. Notably though, much of the upside support for wages came from public sector pay, which rose from 6.8% 3m/YoY in August to 7.3% in September. Looking at private sector wages closely monitored by the BoE in contrast, pay dropped from an upwardly 8.1% in August to 7.8% in September on a 3m/YoY basis, exactly in line with Bank staff forecasts from the November MPR. This drop was even more stark when considering the more volatile monthly series, with this measure declining 0.7pp in a single month, taking it from 8.1% YoY price growth in August to 7.4% in September. This suggests that domestic inflation pressures are continuing to ease, which should be a welcome relief at the BoE.
Despite a hot headline reading, private sector pay continues to cool in line with Bank staff projections
Indeed, the continued softening in private sector wage growth confirms what has long been expected from alternative measures of labour market strength such as the REC report on jobs and S&P PMIs.
Both have pointed to easing labour market pressures that are expected to weigh on wage growth over coming months, a factor highlighted in recent BoE communications as a basis for bringing policy tightening to an end. Nonetheless, whilst today’s data dispels the prospect of further hiking, some continued signs of labour market tightness will prevent the BoE from shifting tone towards policy easing just yet. Experimental statistics placed the unemployment rate at 4.2% for the second month in a row, below the BoE’s 4.5% estimate of neutral, while growth in payrolled employees suggests the labour market isn’t rapidly loosening, even though marginal increases in employment are consistent with the run rate of immigration and are unlikely to cause any major alarm given that vacancies also slipped between August and October.
All in all, today’s release goes a long way to validate the BoE’s high for longer stance, though it is likely more emphasis will be placed by policymakers on tomorrow’s CPI data.
Whilst this morning’s data has seen a modest uptick for sterling on the headline beat, reaction has largely been muted with markets seeing little change in pricing for Bank Rate expectations heading into tomorrow’s release. We are inclined to agree. As such, we continue to expect the BoE to hold rates at 5.25% over coming meetings, with rate cuts most likely to begin in mid-2024.
Author:
Nick Rees, FX Market Analyst