Gaining Momentum

Unemployment is up, but is the UK headed for a jobs slowdown? The answer, like a Rorschach test, will depends on the perspective of the responder. Meanwhile, economic output (GDP) surpassed expectations, indicating a broad-based improvement is underway. Public sentiment on inflation seems to be calming too. The housing market has shown stability over the year. However, the outlook for mortgage costs will determine its future trajectory. After the Eurozone’s rate cut, US held fire last week. This week’s MPC rate decision is keenly awaited. It’s the last one before the election.

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What’s the latest in the UK?

Is the labour market cooling? The headline labour market data showed further slack, with employment growth slowing to -139k (consensus -98k) and unemployment rising to 4.4%. Forward-looking surveys too suggest a gradual easing in pay-growth towards the latter half of the year. However, payroll figures, subject to upward revisions in the past, show a decline of just 3k employees month-on-month, and vacancies, at 904k, remain high compared to pre-pandemic times. Redundancy rates also haven’t budged much, implying limited job losses. Wage growth remains robust at 6% year-on-year, with effects of National Living Wage Hike boosting incomes of lower earners. Arguably, the labour market appears to be perfectly set up for a Rorschach test for economists. Read more here .?

Unemployment rises, but promising signs in the job market. While the UK’s unemployment rate rose, the KPMG and REC survey reveals encouraging trends. Despite job placements declining in May, the rate of decrease has slowed, indicating a potential market rebound. Competitive pressures have driven pay rates higher for both permanent and temporary roles. Staff availability surged to its highest since 2020, influenced by increased redundancies and higher unemployment. Despite these challenges, there is growing economic optimism among employers, bolstered by anticipated easing of inflation and interest rates, hinting at a brighter outlook ahead. Read more here .?

UK's recovery shows broad-based progress. April's GDP surprised positively, holding steady month-over-month?against a consensus of -0.1%. The services sector led the charge with a 0.2% uptick, fuelled by non-consumer services like ICT and professional services, offsetting retail's weather-related slump. However, construction faced a 1.4% drop, as expected, amid lower output in both new work and repair & maintenance, due to the burden of high rates. Manufacturing output also fell by 1.4% in April but was affected by erratic sectors such as pharmaceuticals.? The UK's economy continues to gain momentum with most sectors showing growth in the last three to four months. Read more here .?

UK public inflation expectations is the softest for nearly three years. As per the Bank of England’s Inflation Attitude survey, the average British resident expects the rate of overall price growth to cool to 2.8% y/y in the year ahead vs 3% in February. More importantly, this was in line with UK public’s inflation expectation over the long term (2000-21 average to be precise). Why is this important? Inflation expectations affect both consumer spending as well as the wage bargaining process, hence a key factor in determining domestic price pressures. This will be music to the ears of the MPC members who meet next week to decide on the future of UK’s interest rates.?? Read more here .?

Housing market hinges on rates outlook.? Would-be homebuyers are once again being deterred by rising mortgage costs, leaving the housing market treading water. After a brief reprieve earlier in the year, surveyors report new buyer enquiries falling again in May. That coincides with further rises in quoted mortgage rate, up 20bps m/m to 5.19% on a 2-year 75% fix, versus 4.71% at the turn of the year. Little prospect of much revival in mortgage volumes then. Approvals remain one-tenth below 2017-19 levels. House price performance is similarly hamstrung, though surveyors remain hopeful of a return to growth over a twelve-month timeframe. Read more here .?

What’s the latest in the Eurozone??

The euro remains the world’s second favourite currency. ?As the 'euros' kick off, let’s look at the euro’s global reserve currency status. And remember, a currency’s strength is not its cost, but its use and ubiquity. The euro ranks second place, between the mighty US$, and the Yen. It’s been broadly stable for a decade, comprising c.19% of international financial reserves, exchange, debt and assets. That’s resilient. Especially considering that since 1999 the global share of euro area output as fallen from 17% to 12%. The share of reserve holdings of euro government debt declined in 2023, albeit marginally. Yet with debt-to-GDP ratios high in many key euro countries, being attractive to others kinda matters. ?Read more here .

What’s the latest in the US??

US CPI inflation was flat in May. Inflation has remained flat against a consensus of 0.1% and down from 0.3% in April. Annual inflation fell to 3.3% from 3.4% last month. Core CPI, which excludes volatile food and energy costs, rose by just 0.2% vs consensus of 0.3%, the weakest reading since August 2021. On an annual basis, core inflation fell to 3.4% vs 3.6% in April. Core prices ex-rent and core goods prices were flat in May, but primary rent and owners’ equivalent rent increased by 0.4%. The slowing trend was wide-spread. Alongside slowing wage growth., will it give enough comfort to Fed to make a move soon? Read more here .?

Is this a hawkish pivot by the Fed? The answer to the above question appears to be a no. ?Or at least that seemed to be the message to markets from the US Federal Reserve's latest interest rate meeting. ?Not only did they keep interest rates unchanged, they also published committee members' views on where the Fed Funds rate is likely to be at the end of this year and next. ?Whilst this "dot plot" used to show lots of cuts in 2024, the median forecast is now only for one, with the serious cuts having to wait till 2025. Much could, of course, still change in the second half of this year, but those waiting for a rate cut are having their patience tested. Read more here .

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