UK data paints ugly picture of economy, and Trump backs Powell

UK labour market data for the three months to May showed another decline in the number of payrolled employees, and a rise in the unemployment rate. The UK economy shed 25,000 employees in May and a further 41,000 for June, this brings the total number of UK job losses in the past year to 178k, which will be uncomfortable reading for the government.

This does not mean that people have left the workforce completely, they may be working off the books, setting up their own businesses, or working as contractors. However, in the 3 months to May, the unemployment rate rose to 4.7%, which is the highest rate since 2021. The relentless rise in the unemployment rate is a further sign that the UK economy is creaking and could become the sick man of Europe.

Broad-based jobs growth

Many sectors in the UK economy have reported job losses since June last year. The biggest job losses have been in the accommodation and food service sector, followed by job losses in administrative and support services, information and communication services, manufacturing and the construction sector. In contrast, finance and insurance and health and social work have registered the largest increase in payrolled employees over the past year.

Improvement in inactivity rate is rare bright spot

There is nothing in today’s report to suggest that the labour market will recover any time soon. There is a clear slowdown in the jobs market, but there were some bright spots. The inactivity rate has fallen to 21%, which is lower than last quarter and is lower than a year earlier. Although the inactivity rate is above pre pandemic norms, it is on a clear downward trajectory. At the same time as the inactivity rate is falling, the employment rate has risen on the quarter to 75.2%.

Strangely, the inactivity rate is falling at the same time as the unemployment rate is rising, however, it could be a sign that UK labour market activity is slowly starting to return to normal after the pandemic.

Wage data won’t get in the way of rate cuts

Wage data excluding bonuses fell slightly in May, wage growth excluding bonuses is expanding at a 5% annual rate, for the private sector it is 4.9%. This is the lowest rate since 2022 but remains elevated by historic standards. However, adjusted for inflation, wage growth is below the BOE’s 2% target rate for inflation, which suggests that today’s wage data is not incompatible with BOE rate cuts.

The dollar gains as Trump rules out firing Powell

The pound has slipped on the back of this data, however, it is fairly resilient compared to the rest of the G10 FX space, as the dollar continues to extend gains. The dollar has climbed after Donald Trump rolled back on his threats to fire the chair of the Federal Reserve Donald Trump late on Wednesday.

An ugly picture of UK economy as bond investors shun UK, yet again

European bond yields are rising today; however, the UK is an outlier, and bond yields are rising faster than our European peers.  Rising yields suggest that bond investors might be starting to shun the UK after economic data released in recent days paints an ugly picture of the UK economy. Falling GDP, rising inflation and a weak labour market could trigger more underperformance of the UK bond market compared to our peers over the rest of the summer.

Rising bond yields is not holding back stocks. European indices are higher across the board. Risk sentiment has been boosted by news that Donald Trump won’t fire the Fed chair, and that he will offer 150 countries tariff rates of between 10% - 15%, which is lower than some feared, even if countries like Canada and the EU face much higher tariff rates.