Sterling drove to the highest level on a trade weighted basis since mid-2008 yesterday following a very strong employment report. Bank of England Governor Mark Carney will be happy that the Bank of England switched from targeting an unemployment rate of 7.0% as part of its forward guidance plan and moved to a more qualitative approach or the calls for rate hikes would be deafening.
A figure of 6.9% is the lowest unemployment rate since March 2009, with the volatile one month reading of 6.6% pointing to further gains in the 3 month average to come. The 230,000 person gain in employment is the equivalent Additional encouragement can be found with youth unemployment also at the lowest level since 2009 and finally real wage growth for the first time since 2010, albeit by 0.1%. Consistent real wage gains have not been seen in the UK since the beginning of the global financial crisis. They do however, represent the silver bullet to killing off fears over the recovery.
Real wage increases come from optimistic employers, after all you don’t raise people’s salaries if you believe that business is likely to tail off. They also allow consumers to rebalance spending figures, paying down recent credit growth while, at a national level, increasing general output and allowing the central bank to normalise its monetary policy sooner rather than later. No wonder GBP/USD got on its bike.
The report has not shifted our rate expectations, in so much that we are still looking for a rate hike to take place around 12 months from today. Some analysts have shifted expectations wildly however. Unicredit, an Italian bank, believes that the Bank of England will now hike rates in November of this year given the improvements in the levels of slack in the UK economy that this report shows. Good news for importers and savers, bad news for the rest of us, especially new homeowners.
A speech by Janet Yellen once again fluffed up her dovish credentials yesterday evening, putting to rest the fears that since becoming Fed Chair that she had become some “6 month timeline” touting super-hawk. Progress against inflation targets may last even longer than originally forecast she warned with thoughts that the Fed may not see a solid 2% target of inflation seen until 2016. Chair Yellen also commented on the jobs market noting that the unemployment rate of 6.7% is 1.2% from what the Fed would call “full employment” and that there are a large amount of people who would rather full-time work compared to the part-time positions they currently fill.
Dollar stiffened a tad before Yellen’s speech following an improved industrial production number and a slight hint of haven flows as we enter the long weekend. We are looking for liquidity to draw down slightly as we enter 4 days of London being closed with considerable event risk from Ukraine to factor in.
Sterling has also moved on higher versus the euro following another disappointing inflation reading. Eurozone CPI has continued to progress lower as well this morning with the all-important core measure fell to 0.7% from 0.8%, a new cyclical low. There is little that the ECB can say about the Eurozone not needing some form of additional monetary support now but we must wait for the next CPI reading, the April flash number, at the end of the month.
Japanese consumer confidence has slipped to the lowest level since August 2011 in March, before the sales tax increase hit the Japanese public. March retail sales were 25.4% higher as consumers brought purchases forward at the cheaper tax rates; as much as that is a ramp higher a cliff for Japanese indicators must be round the corner.
Today’s session will largely be quiet we think with traders eager to leave the office for a sunny weekend of little effort. We hope you enjoy your Easter break too.
