Yesterday’s markets were done by lunchtime following the UK jobs release and the Bank of England’s latest inflation report. Neither were good for the pound, and it slipped to a 4 week low versus the USD. The majority of economists were right in expecting the overall International Labor Organization (ILO) rate of unemployment would fall to 6.8% – the lowest since February 2009 and these figures show that we have seen the biggest quarterly improvement in employment since records began in 1971 over the past 3 months in the UK.
Unfortunately it has not come with a continued rise in real wages, with average earnings only rising by 1.7%, the same as last month. That this is a more profound disappointment than the fall in the overall rate of unemployment to 6.8% is cause for celebration. This lack of wage inflation will keep overall CPI lower in the short term and, more importantly, will allow the Bank of England to maintain low rate expectations into next year.
The Bank of England’s Quarterly Inflation Report was typically dovish with growth and inflation expectations remaining as they were in February. Overall emphasis was placed on the low level of inflation, low levels of real wage growth and doubts over the amount of slack in the UK economy in order to keep interest rates at 0.5% into 2015.
Arguments over slack will continue through the year. The Bank of England estimates that there is still around 1-1.5% of GDP’s worth of slack in the economy that will allow employers to increase employment without the necessary increases in wages. Until this remedies itself, the Monetary Policy Committee (MPC) will remain cautious. Overall the tone was very vague and really does put to bed any arguments about whether interest rates will rise in the UK before the end of the year; they won’t.
Japanese GDP surprised to the high side in Q1 of this year, it emerged overnight, expanding at the fastest rate since 2011. Growth rose at an annualised rate of 5.7% in the first three months of this year as consumers and businesses front loaded consumption to avoid the April 1st tax increases. The GDP reading is arguably old news however, and we have seen considerable data since the beginning of Q2 that the Japanese consumer shuddered to a halt.
Overnight data also confirmed that Japan’s consumer confidence index fell again in April, slipping back to a reading of 37, from 37.5 in March. Anything below 50.0 is a note of pessimism from consumers and this magnitude of unhappiness has not been seen since August 2011.
News from the eurozone this morning has been mixed with French GDP missing its already low estimates while Germany has beaten expectations through Q1. France stagnated in the first three months of this year, not growing at all, while Germany grew at 0.8% on the quarter. It’s not just the employment picture where we are seeing divergence in the Eurozone obviously. Italian GDP is due at 09.00 BST and the overall Eurozone figure at 10.00; it is expected to rise by 0.4%.
Alongside that announcement we will receive the final reading of April inflation from the eurozone. Eurozone CPI rose to 0.7% as a result of the Easter spending period with core prices – those without volatile energy and food prices – rising by a full 1% compared to this time last year. With core inflation at 1% we believe that this is roughly double what is needed to prompt some form of action from the ECB. We may see conventional measures from the ECB – talking the euro lower and increasing liquidity – but unconventional measures such as asset purchases or pushing deposit rates into negative territory look a long way off.
We say this despite yet more chatter that June will be the month that sees the ECB take the plunge. A Reuters article prompted a slight sell-off in euro crosses yesterday morning. According to the article, a June rate cut is “more or less a done deal”; so said one of the five sources who spoke to Reuters on condition of anonymity. A second source echoed that sentiment, and added: “This will be the first major central bank to move to a negative deposit rate. That would move the exchange rate.”
The need for action was shown once again yesterday as Eurozone industrial production continued the recent run of poor Eurozone data, falling 0.1% on the year through March compared to an expected 0.9% gain. Falls were seen in Germany, France, Italy and Spain – the four largest economies in the Eurozone – and highlights how poor the continent’s growth profile is likely to remain.
Today is an important day for the US dollar with this afternoon’s CPI measurement. Although the Fed’s preferred inflation measure is Personal Consumption Expenditures (PCE), a strong CPI number today will generate interest around the Fed’s rate raising cycle given Yellen’s comments towards the end of last week that price gains remain subdued. Initial jobless claims and industrial production is also due this afternoon and we foresee another test of the 1.37 level in EUR/USD.
