UK labour market continues to slow as risk sells off into NFP

The UK labour market data for November and October paints a picture of further weakness in the employment market. The Unemployment rate rose to 5.1%, as expected, the highest level since 2021. The Office for National Statistics also said that employment fell by 22,000 in October and by 38,000 in November. This is adding to the evidence that the number of payrolled employees peaked in 2024, and has been falling since Labour took office.

The unemployment rate is higher for men compared to women, and the number of people who have been unemployed for 6 months or more is also rising, according to the ONS. One good piece of news is that the economic inactivity rate has slowly trended lower in Q3 and over the past year. There is still a long way to go, with the inactivity rate at 21%, however, this is down from 22% in 2024.

Private sector wage growth moderation to give BOE confidence to cut rates

Wage growth moderated slightly, led by the private sector. Private sector wage growth fell below the 4% handle to 3.9% YoY, the lowest level since 2020. Public sector wage growth continues to outpace the private sector, and average weekly earnings moderated only slightly to 4.7% from 4.9% in September. This was hotter than expected, but we do not see this as an impediment to a Bank of England rate cut later this week. The BOE will look more closely at pay growth in the private sector, and this is moderating to a more reasonable level at a relatively fast pace. This adds to evidence that UK inflation peaked in September, and should give the majority of MPC members the confidence to cut rates.

Pay growth protects GBP downside

However, stubbornly high pay growth was one of the reasons that protected the pound from further downside in the aftermath of this report. GBP/USD remains stable around $1.3350 in the aftermath of this report.

Retail sector in the doldrums

Ironically, even though the unemployment rate is rising, job vacancies remain historically high and moderated only slightly. In the past year, many job sectors have shown a decrease in payrolled employees, according to the ONS, with the retail sector showing the largest decrease followed by  accommodation and food services. The health sector and transport are sectors that have seen payroll growth in the past year.

European stocks to join global sell off

Overall, there is now a near 90% chance of a rate cut from the BOE later this week. While this labour market report may protect further GBP downside in the near term, we do not think that it will move the dial for UK stocks or more broadly for risk sentiment. European stocks are expected to join in the global stock market sell off later this morning, after hefty losses of more than 1.5% for Japanese and Chinese indices. US stocks gave back early gains on Monday, and closed lower, led by bitcoin linked stocks, and some big tech names. This suggests that the market remains uncomfortable with risk. After a strong run since April, investors may be taking money off the table earlier than usual, which is thwarting hopes of a Santa Rally. However, the outcome of today’s payrolls report

We could see stocks drift lower until we get the NFP report later today. This report has the power to determine the direction of risk sentiment for the rest of the year.