News traders huddle up! Tomorrow at 9:30 am GMT the U.K. will print its labor market numbers for December and January.
Will this week’s reports convince the BOE to raise its rates before the second half of the year? Here are tidbits you need to know before you trade the event:
The report has three components
The release has two main components: the claimant count change and the unemployment rate. The former shows the number of folks who claimed unemployment-related benefits for the month, so a lower figure is generally good for the economy.
The latter measures the percentage of the labor force that is unemployed and actively looking for work so a declining trend usually indicates an improving labor situation.
Since the policymakers over at the Bank of England (BOE) are monitoring wage growth closely, the average earnings index also tends to catch investor attention. This is the three-month rolling average of the change in salaries, making it a leading indicator of consumer inflation and spending.
Pound bulls came out to play last month
In last month’s release we saw the U.K.’s unemployment rate hold its 42-year low rate of 4.3% in the three months to November. On top of that, the closely-watched three-month average earnings index maintained its 2.5% growth and met analysts’ expectations.
That’s about where the good news ended, however. The people who claimed jobless claims rose by 8.6K, which is more than thrice the 2.3K figure that many had expected.
Wage growth also continued to take hits, with real wage growth (growth adjusted for inflation) falling by another 0.5% year-on-year and marking the 10th consecutive month of negative wage growth. Yikes!
Thankfully for pound bulls, U.K.’s Brexit Secretary David Davis was also hitting the newswires around the time of the release and gave the bulls something to chew on when he shared his expectations of having a transition deal by March.
No big changes expected in December
One look at the forex calendar tells us that market players aren’t expecting big changes from the labor market from November to December:
- December’s unemployment rate expected to hold at 4.3%
- Average earnings in the three months to December projected to maintain 2.5% growth
- January’s claimant count expected to dip from 8.6K to 2.3K
Leading indicators show mixed numbers
Will the labor market numbers live up to analysts’ expectations? The leading indicators tell us…nothing definite.
Manufacturing, construction, and services PMIs clocked in mixed results in December, and their employment component trends aren’t any clearer.Job creation in the construction sector rose strongly on the back of optimism for greater workloads ahead, while the manufacturing sector saw a faster pace of job creation as manufacturers’ optimism rose to a two-year high.
The services sector missed the optimism train, however, as the rate of job creation slipped to a nine-month low for the month. Yikes!
Previous releases don’t show noticeable patterns
Looking at the charts below, we can see that there’s no obvious tendency for December releases in the unemployment rate and average earnings components.
The claimant count change – which takes January’s numbers unlike the unemployment rate and average earnings – shows more promise as it clocked in better-than-expected numbers in SEVEN of the last ten releases.
BOE is pretty optimistic over wage growth
In its Super Thursday release earlier this month, the BOE was unapologetically hawkish, saying that “monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent” if the economy performs as the members expected.
On the labor market, the Monetary Policy Committee (MPC) added that (emphasis mine):
“The firming of shorter-term measures of wage growth in recent quarters…suggests pay growth will rise further in response to the tightening labour market, give increasing confidence that growth in wages and unit labour costs will pick up to target-consistent rates.”
It also doesn’t hurt that a recent BOE business survey suggested that private sector employers are expecting pay settlements to be around 3.1% in 2018, up from to 2.6% in 2017.
The wage increases promise to be broad-based, with the construction sector the only segment not promising faster acceleration of pay raises.
How can I trade the event?
The mixed nature of the December PMIs support minimal changes in the unemployment and average wage components of the report. Meanwhile, a quick peek into January’s manufacturing, construction, and services PMIs tell us that it’s possible to get another upside surprise for the claimant count change part of the release.
What you need to watch out for, though, are any points that discuss wage growth. We already know that the BOE is optimistic on the labor market and expects wage growth to accelerate rather than stagnate or decelerate.
Better-than-expected results would fall into the “the economy is as expected” condition of the BOE and maybe push the central bank into raising its rates some time in the first half of 2018.
On the other hand, significant downside surprises from the labor market could convince Governor Mark Carney and his gang to wait a bit more before raising their rates, which would take the shine off the pound’s recent gains.
There you have it, folks! If news trading ain’t your cup o’ tea, then you can always sit on the sidelines during the event. Just make sure you stay updated on how the numbers turn out so you can make the necessary adjustments to your biases!