GBP traders confused as jobless rate falls and wage growth slows

Summary:

• UK unemployment rate falls to its new record low while job vacancies climb their record high

• Wage growth disappoints along with productivity growth - contradictory signals for monetary policy

• GBP bounces off its crucial support steered mainly by the weaker dollar

The UK employment rate declined to its fresh record low (still the lowest since 1975) in the three months through June. On the flip side, the rosy outlook was blurred by a bit more than expected sluggish wage growth as well as stubbornly low productivity growth. Overall, the net fallout for the pound has been limited so far as the currency is trading just negligibly higher against the US dollar following the data.

While the jobless rate fell, the number of job vacancies reached their record high at the same time reflecting the tight labour market. Source: Macrobond, XTB Research

The data released by the ONS this morning showed that the unemployment rate falling to 4% from 4% previously, easily beating the consensus pointing to no change during the three months through June. Furthermore, the number of job vacancies grew to 829k during the same time from 828k recently underlining that the UK labour market is getting tighter. Notice that both gauges reached their new record levels (the lowest in terms of the jobless rate, and the highest when it comes to job vacancies) long time ago, and they have been essentially able to overcome these previous results almost each month. On the other hand, wage growth disappointed to some extent as average weekly earnings dropped to 2.4% from 2.5% in annual terms falling short of the median estimate assuming no change. This disappointment was, however, cushioned to some extent as weekly earnings excluding bonuses were revised up to 2.8% from 2.7% in the period ended in May whereas the period ended in June did not bring any change. As far as BoE’s monetary policy is concerned, lower wage growth might be viewed as a signal to not add fuel to the flames in the foreseeable future (notice that the BoE’s forecast points to a 3.5% pick-up of wage growth this year).

Having said that, productivity matters even more at this stage of the business cycle. The preliminary data showed that productivity growth, measured as output per hour, totalled 0.4% on a quarterly basis in the second quarter which left growth in annual terms of 1.5%. The rate of growth remains quite sluggish which in turn could encourage companies to increase prices to ease downward pressure on margins therefore the lower productivity growth - along with steady wage growth - the greater incentive for monetary policy authorities to run more contractionary policy in order to reduce potential cost-push inflation. To sum up, even as macroeconomic readings are always worth looking at, major attention is currently paid to politics as Brexit could play a major role till the end of the year while the BoE is expected to stand pat at the same time.