Sterling suffers as wages fall again

Employment Report confirms Economic woes

The U.K. is being buffeted from all sides. The economy is slowing, prices rising, real wages falling and political concerns continue.

Yesterday’s U.K. jobs report showed that the unemployment rate was unchanged at 4.6%. This data has long been the subject of questions as the Government tinkers with what is and isn’t included. However, it is the earning section provides the most interest. With inflation seen rising to 2.9% earlier in the week, average earnings grew at just 2.1% leading to the largest fall in real wages since 2014.

The MPC, which meets today, appears powerless to arrest the situation. Rising inflation in a slowing economy is an early sign of stagflation. Higher prices and higher unemployment is the “nightmare scenario” for Central Bankers. It is impossible to hike rates to curb inflation as it risks choking off growth. As the economy slows, unemployment rises.

Sterling rose against a weaker dollar but is struggling just below a seven-month low versus the Euro. 0.8850 continues to be strong resistance for the common currency. The pound is currently trading at 1. 2750 and 0.8800.

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Carney’s caution proved right

The concerns expressed by Bank of England Governor Mark Carney earlier in the year when there was a clamour for a rate hike to curb inflation are now seen as entirely justified. It is impossible to countenance that he foresaw the political turmoil that has engulfed the country in the past week. However, the effectiveness of any baby step in hiking rates would likely have been overwhelmed following the precipitous fall in Sterling after the Brexit referendum.

Today he will face Kristen Forbes across the table for the last time. The one constant voice calling for a rate hike leaves the MPC at the end of the month to return to the U.S. and academia.

Taking a more pragmatic view of the economy in that there is no precedent on which to base a judgement has been proven correct. To paraphrase the proverb, “we live in interesting times”.

The ECB faces similar problems in that there has never been a situation where a single body has been tasked with providing monetary policy for nineteen diverse economies each deciding their own fiscal requirements.

Rate hike overshadowed by data

As expected the FOMC hiked interest rates at the conclusion of its meeting yesterday. The target rate for Federal Funds (the rate at which the Fed lends to financial institutions) has been raised to 1.00% – 1.25%. There are still doubts as to the necessity of a further hike and now it is likely that sufficient time will be given for the hikes to feed through into the economy.

At the start of the year, as the Fed switched to a “tightening bias”, three hikes for the entire year was the base case. Now there is a risk to the Central Bank’s credibility as the core rate of inflation is just 1.7%, the fourth month in a row in which the rate of increase has fallen and its lowest since in two years.

There is an underlying view that the rate hikes are a tool to slow the growth of the stock market. The DJI is making new highs constantly as investors look for returns.

The Euro almost reached 1.1300 making a high of 1.1296 before falling back on profit taking. The dollar index continues to be in the doldrums unable to make any progress above 97.50.