Risk sentiment sours, as UK employment picture darkens

Risk sentiment is deteriorating further as we move through Wednesday. The price of Brent crude oil is now above $102 per barrel, the sell off in European stock indices is deepening, and the gold price is lower by more than 1%. 

US equity futures are lower and US stock indices are poised to pull back from recent record highs. The sell off in US stocks is led by semiconductor names, which includes a 2% drop in Micron's share price in the pre-market. 

Micron hit by strike fears 

The decline in Micron's share price is worth noting. The Micron union in Taiwan has authorised a strike over a dispute regarding employee bonuses. This is also weighing on the share price on Wednesday. Typically, one thinks of union action as impacting the auto makers, but this could now disrupt the AI trade. Unions and workers can see how much chip values have surged, especially memory chips, so there could be more industrial action that impacts other chip makers that use Taiwan as a production base in the months to come. In the longer term, this could knock some of the recent froth off the AI trade as we move through the week. 

Dollar is king 

In the FX space, the dollar is acting as a countercyclical, attracting safe haven flows as other asset classes sell off. However, EUR/GBP reached a new 15 month low as the pound attracts some haven flows due to French fiscal fears. 

However, the sell off in sovereign debt has gathered pace as we move into the afternoon session. The head of the French central bank said that the ECB does not need to step in to stabilise French bonds, which is spooking investors and triggered this sell off. 

Although French and Italian bonds are at the epicentre of today's sell-off, UK yields are playing catch-up. The UK 10-year yield is higher by 10bps on Wednesday and the yield on the 30-year Gilt is back above 6%, although there are signs that this level is attracting decent buying interest. 

UK employment picture deteriorates further  

It's a risk off day, and there is mixed news for the UK. Although the pound has reached a multi-month high vs the euro, and the FTSE 100 is one of the better-performing indices in Europe, there has been some bad news on jobs. The Royal Mail announced earlier today that it is cutting 2,500 jobs, while HSBC is gutting its UK-based wealth management section and cutting up to 70% of its financial advisors in favour of AI.  

Although the UK is managing to grow at more than twice the rate of Germany, France and Italy, this growth has occurred even though jobs are being shed. The UK has seen a 145,000 YoY drop in payrolled employees in August, and recent headlines suggest further losses are coming. 

The bulk of losses stem from the service sector, and the ONS reports that the UK's service sector has had 2 years of continuous job losses led by higher payroll costs and rising input costs. 

UK job  losses mount 

Legal & General, Greggs and the BBC have also announced large job cuts in recent months, which could push up the unemployment rate, which stood at 4.9% in the three months to August. 

This data adds to the ominous backdrop ahead of this month's Budget, and highlghts the urgency for the chancellor to deliver growth and pro-business measures to keep a lid on the unemployment rate.

Interestingly, HSBC's share price is selling off today, and the share price is down nearly 4%, suggesting that the market is not entirely convinced by this switch to AI in favour of personal contact with clients. 

Could Gilts recover first? 

If growth stays strong, but employment falls this will lead to a unique headache for the BOE, one we expect them to address at upcoming meetings. The BOE does not have a mandate to maintain full employment, unlike the Fed, but if the employment picture continues to deteriorate then the BOE could slow the pace of hikes, which may help Gilts recover ahead of other sovereign bond yields.