Yesterday’s UK jobs report went a way to further securing the recovery in the UK and kept sterling’s spine solid through yesterday’s session. Survey evidence from across the UK economy – in the form of PMIs and anecdotal reports from businesses – has showed a continuation of the recent improvements in people finding work and the overall fall in the unemployment rate to a 5-year low of 6.6% backs that up.
Labour market strength is the driving force behind those in the economic community that are looking for rate increases from the Bank of England sooner rather than later, and those figures obviously add fuel to their fire. Wage growth however fell to 0.7% vs 1.2% expected as last year’s bonus shift for tax reasons distorted numbers negatively, but the ex-bonus number of 0.9% is hardly encouraging. We are still looking for the Bank of England to hold policy into Q2 of 2015 – mainly courtesy of the lack of real wage increases – but today’s numbers do tend to suggest that the ongoing slack in the jobs market is being taken up at a faster pace than most had originally thought.
That said, short sterling markets – within which investors buy and sell contracts to express where they think interest rates will be in the future – barely moved yesterday and sterling gained, but remains well within ranges.
One currency that is breaking higher – and has risen the most in one session for 4 months – is the Kiwi dollar. The Reserve Bank of New Zealand increased interest rates by 25bps to 3.25% overnight as was widely expected but the accompnying statement was far more hawkish than the market expected. “It is important that inflation expectations remain contained and that interest rates return to a more neutral level,” RBNZ Governor Graeme Wheeler said in a statement.
Estimates of a neutral level of interest rates in New Zealand obviously vary but we would put the figure at close to 4.50% and they will be looking to achieve that as we move into next year. The bank did repeat the slightly strange comment that NZD remained “unsustainably high” despite the sharp fall in commodity prices in New Zealand dollar. Well, it’s about 1.2% higher this morning.
Its Antipodean cousin however has not fared so well overnight, losing around 0.4% on the session following an unexpected slip in employment of 4,800 workers. The market had expected that around 10,000 would be added. While the overall unemployment rate remained at 5.8%, the participation rate – those who are actively employed or looking for work at the moment as a percentage of the overall working age population – fell to 64.6%, a fresh record low. Once again, this shows considerable slack in a developed market’s jobs economy and output will remain capacity as long as this continues.
Iraq concerns have given some emerging market currencies pause for thought in the past 24hrs, in particular the Turkish lira. This comes after the taking of the town of Mosul by Al Qaeda affiliated insurgents. Regional instability is the hallmark of the area with Syria next door and Iran on the other side of Iraq but wider, market weakness is unlikely in the short term unless Iraqi oil supply is distorted and/or insurgents initiate an attack on Bahgdad. The Shi’ite community of Baghdad would be a far harder obstacle for these ISIS fighters and would lead, more broadly, to a full-blown civil war in West Asia once again.
Away from geo-political risks we are looking at the US retail sales report this afternoon for some market movements. A strong retail report would go some way to alleviating fears that the speed of recovery in the US is still not quite rapid enough. Q1′s disappointment is out of the system, but the Q2 bounce back remains in doubt. Retail sales are expected to rise by 0.6% for the month of May while initial jobless claims are expected to remain in the low 300ks this afternoon.
