Pound traders, huddle up! We’ve got another potential short-term market mover comin’ right up in the form of the U.K. jobs release this week. Here are the things you need to keep in mind if you’re trading this event, along with previous reports and the BOE’s policy stance to give the numbers some context:
- June claimant count expected to be at 10.4K vs. previous 7.3K reading
- Unemployment rate projected to hold steady at 4.6%
- Average earnings index estimated to slip from 2.1% to 1.8% as of May
Leading indicators showed hiring gains
In case you missed it, last week’s schedule churned out one disappointing report after another from the United Kingdom, leading many to speculate that the economy is no longer as resilient as it used to be.
PMI readings from the manufacturing, construction, and services sectors all pointed to a slower pace of growth for June. Now these figures are considered leading indicators of business conditions as firms adjust their production, investment, and hiring levels accordingly.
Interestingly enough, all three industries have reported gains in their respective employment components for June, so there’s a chance that the claimant count could come in better than expected. In particular, the services industry even reported a 14-month high in job creation.
Analysts are expecting to see an increase of 10.4K in the number of folks claiming unemployment benefits for the month, higher than the earlier 7.3K rise. However, a weaker than expected read could be in line with the theme of Brexit jitters finally taking their toll on economic performance and therefore be all the more bearish for the pound.
Spotlight on wage growth
For the past couple of months, market watchers have paid closer attention to wage inflation, trying to gauge whether or not consumers can be able to keep up with rising price levels.You see, pound weakness has contributed a lot to boosting domestic inflation as local businesses need to pay more pounds to purchase imported goods. But with household incomes rising at a slower pace, consumers usually feel the pinch due to lower purchasing power.
With that, the average earnings index or the three-month rolling average of wage growth could hog the spotlight once more. A drop from 2.1% to 1.8% is expected, which could be indicative of weaker consumer activity down the line. Bear in mind that the U.K. annual CPI currently stands at a four-year high of 2.9% as of May, buoyed by higher food and electricity prices.
BOE is turning hawkish
It’s no surprise then that BOE Governor Carney and his gang of policymakers are keeping close tabs on inflation and talking about potential rate hikes. The central bank might need to act and rein in price pressures before it winds up hurting consumer spending and overall growth.
This kind of monetary policy bias could make the pound’s reaction to the jobs figures less straightforward than usual. While strong headline results typically result to currency appreciation, market watchers might actually ramp up their BOE tightening expectations if wage inflation comes in weaker than expected.
During their latest policy meeting, more MPC members voted to hike interest rates than expected mostly due to the pressing need to keep rising inflation in check.
In his speech, policymaker Haldane emphasized the risks of tightening too late, adding that he sees a strong case for increasing rates this year. BOE’s deputy governor for financial stability Jon Cunliffe acknowledged that weak consumption stems from households’ real income being squeezed by higher inflation.
In a more recent speech, head honcho Carney himself said that they would need to adjust policy depending on the trade-off between supporting jobs growth and maintaining price stability. In other words, sustained employment gains (i.e. strong claimant count) could assure policymakers that the economy could survive with less stimulus while weak wage growth could make curbing domestic price pressures a more urgent matter.