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| | Hi Friend, The Labour Market is Cooling ... "No Gangbusters Growth" ...
Mixed news for policy makers in the labour market data this week. The economy is slowing down, not "going gangbusters" after all. Unemployment is increasing, the number of vacancies is falling. Unemployment increased to 1,486 million at the end of March compared to 1,320 million at the end of December. The jump of 166,000 over the period was matched by an increase in the unemployment rate from 3.8% in December to 4.3% by the end of March.
The number of vacancies in the economy fell to 898,000 in the three months to April compared to 929,000 in December. Not a huge drop, a reversion to trend perhaps, marked by significant recruitment difficulties in health, social care, accommodation, food, retail, distribution and professional services.
Our standard models suggest, for an unemployment count of 1.5 million, the level of vacancies should be around 820,000. The variance (near 80,000) a measure of recruitment difficulties in the economy, adding pressure to wage rates and earnings.
Average earnings (total pay including bonuses) averaged 5.7% in the three months to March. This down from a peak of 9.3% single month in July last year.
Markets are braced for the April data which will include the near 10% hike in the minimum wage. Of itself not a huge kicker but watch out for the "compression effect" as lower paid workers seek to maintain differentials in the coming wage rounds.
Huw Pill Strikes Dovish Tone ...
The Bank of England's top economist has boosted hopes of lower borrowing costs after saying it is "not unreasonable" to expect the Bank to consider cutting interest rates over the summer.
Huw Pill, the Bank's chief economist, told an online event organised by ICAEW, the Bank could consider cutting rates if inflation continues to ease off.
Pill has been actively discussing the potential for interest rate cuts during the summer in various media outlets this week. His comments have sparked considerable interest among investors, markets and commentators.
He acknowledged the recent indicators showing a slight increase in unemployment and a deceleration in wage growth, which could suggest a slowdown in regular pay growth in the months to come.
Despite these signs of easing, he emphasised the British labour market remains tight by historical standards. This context is crucial. It influences the BoE's decisions on monetary policy, particularly interest rates.
During his presentation to the Institute of Chartered Accountants in England and Wales (ICAEW), Pill mentioned that it was a reasonable assumption for the BoE to consider rate reductions during the summer months.
However, Pill also cautioned against cutting rates too soon, warning that inflation could become "embedded" if the Bank tolerates high wage growth and service sector prices rises. "The direction of inflation is moving correctly, the BoE must remain vigilant to ensure that inflationary pressures do not become entrenched."
"The Labour Market Is Rebalancing", says Greene
The labour market is rebalancing and inflation is on a "benign"" path, Megan Greene has said this week, boosting hopes that interest rates could come down next month.
Megan Greene, an external member of the Bank's rate setting monetary policy committee, said the supply of and demand for workers was better aligned, having been out of balance for the past two years. She said that this would constrain pay growth and would suppress inflation.
Markets now expect a first rate cut in June with two further rate cuts possible before the end of the year. Strong growth figures in the U.S. in the first quarter, imply there will be no Fed rate cut in the Summer months.
The Governor has explained, "There is no law which says the Fed must move first and everyone else moves afterwards". It's just usually like that!.
And so it may be after all ... In the U.K., June may just be a bit too soon ...
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| | | U.S Rate Cuts Could Come In September ...
Traders appear increasingly confident, the U.S. Federal Reserve could start cutting interest rates as early as September, as inflation data cooled more than expected in April.
Jerome Schneider, head of short-term portfolio management at PIMCO, said on Thursday, the latest U.S. inflation data confirmed to investors the potential for a near-term rate hike was now off the table. The next move will be down.
John Authers, Points of Return, Bloomberg this week explained the market dilemma.
"There was white smoke over the Bureau of Labor Statistics on Wednesday morning. The key measures of consumer price inflation for April confirmed expectations for a slight decline, and alleviated growing anxiety over a possible re acceleration.
[Inflation CPI basis eased to 3.4% in April from 3.5% prior month.]
The numbers could easily have been worse, and after a month in which prices had discounted growing risks of inflation, the direction of travel on markets made total sense. Bond yields should come down a little in these circumstances, while equities are reinforced. It is, however, reasonable to question whether these numbers were any kind of a turning point in the battle against inflation.
To start, this "beautiful" chart generated by Bloomberg Economic Analysis breaks CPI into four major components; food, fuel, other goods, and other services. Two years ago there were major shocks to the prices of goods, food and energy, all of which have now dissipated. That's why inflation is much lower now. The problem is that services inflation remains stubbornly high, and accounts for substantially all of headline inflation at this point."
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| | "The
Atlanta Fed's sticky price index, concentrates on goods and
services whose prices take a while to change and seldom fall. This is inflation that's particularly difficult to reverse, and so any
rise will make the central bank uncomfortable. It is coming down, but
very slowly, and it remains above 4% level.
Taken together these
confirm that disinflation is still happening while there is no sign of
an outright acceleration. So rate hikes look very unlikely. But cuts in
the near term can also be ruled out as several key measures are sticky
and remain too high."
Markets expect the first U.S. rate cut in
September, with two possible rate cuts before the end of the year. It
remains to be seen if the Bank of England will move ahead of the Fed ...
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| | That's all for now. Have a great weekend break ...
John
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| To understand the markets, you have to understand the economics ...
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| © 2024 John Ashcroft, Economics, Strategy and Financial Markets, experience worth sharing.
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