16 August 2023: Wage growth reaches a record high

The publication yesterday of the July employment report focussed the market’s attention, as predicted, more on the possibility of a price/wage spiral than the number of people in work.

Average earnings rose by a record 7.8% in the three months to June which will encourage the Bank of England to continue the chain of interest rate increases that began in December 2021.

The largest increase in average earnings since records began means that for the first time in a year, wages grew faster than prices. One spin-off of the rise is that the Government’s triple-lock on pensions and other state benefits will be in effect for 2024 with a rise like this year’s 10% probable.

The claimant count rose by 29k, up from 16.2k in June. This is an indicator that the Bank of England’s monetary policy tightening is beginning to influence employment, with jobs becoming less plentiful as the economy continues to adjust to Brexit.

The level of redundancies is growing as well as the workforce looks more to job security than “job-skipping.”

The unemployment rate rose marginally from 3.9% to 4%.

The Bank of England is unlikely to be able to consider stopping interest rate rises, even though inflation is expected to have fallen by over one percent when the latest data is released later this morning.

The size of the rise in average earnings may even encourage the MPC to consider another fifty-basis point increase.

The headline rate is predicted to have fallen to 6.8% last month down from 7.9% in June. The rise in average wages above headline inflation for the first time in a year, means that people can afford to buy more goods and services, giving a boost to the economy while it does hold inflationary implications in the medium-term.

The data releases over the past few weeks have seen the chances of a doom loop recede, although the economy is still struggling to produce sufficient growth to allow the Government to cut taxes before the next General Election.

The pound initially reacted positively to the data rising to 1.2752 against the dollar, but strong retail sales data from the U.S. saw the pound retreat to end the day 20 points higher at 1.2704.

Yesterday’s release of retail sales data for July saw an increase of 0/7% which was more than double the market’s expectations.

This is a further indication that the economy remains robust and is easily strong enough to withstand a further interest rate hike should the FOMC consider it to be necessary.

The next meeting is not until 19/20 September which will allow a total reassessment of trends within the economy since another set of employment figures and inflation data will be available.

Since the statement made by Jerome Powell following the previous FOMC meeting led the market to believe that not only will there be at least one more hike before the end of the year, but it is still far too early to discuss when the Fed will be able to consider rate cuts, speculation has begun about when a cut will be possible.

Prominent investment bank Goldman Sach was the “first cab off the rack” predicting that the first cut will take place sometime in the second quarter of next year.

From that point on it expects there to be gradual quarterly reductions notwithstanding the prospect of a Presidential Election next November.

Goldman’s view was supported by the former President of the Dallas Fed Robert Kaplan who also expects the FOMC to remain “on hold” in September. Kaplan is a former Vice-Chairman of Goldman Sachs, so his concurrence comes as no surprise.

Every data release over the past six weeks or so has pointed to a soft landing for the economy. As mentioned yesterday, the Fed Chair is still believed to favour one further hike which he is said to want to happen sooner rather than later to maximise its effect.

The dollar index reacted positively to the retail sales data, rising to a high of 103.27. It managed to cling on to most of those gains despite some profit taking from week long and closed at 103.20.

With no real news to guide it, the market has begun to speculate about whether ECB President Christine Lagarde has seen her authority denuded by her absence on holiday while the focus of the commentary during the past few weeks has seemed to favour an end to rate hikes at the newt meeting of the Governing Council.

The fact that there has been no “official” comment from either the ECB or any previously hawkish member of the Council has not been allowed to get in the way of a good story.

Lagarde, who is a past master at gauging “which way the wind is blowing, may very well rein in her more hawkish tendencies in the weeks leading up to the meeting once she, and the rest of the market, returns from holiday.

The ECB has been moderately optimistic about the inflation outlook, even if it doesn’t expect to reach its target of 2% until the first quarter of 2025.

That seems to disavow any thought of inflation turning to deflation although it is still considered a possibility in some Eurozone nations which have seen larger falls in price rises than the average.

In its most recent bulletin, published last Thursday, the ECB expects inflation to “decline but endure,” agreeing that it has been “too high for too long.”

Prices are still rising faster than wages as the war in Ukraine still has a major influence on the availability of certain foodstuffs.

Although there has been some evidence of a wage/price spiral beginning so far it is not seen as significant.

Greece, which is seen as a “shining beacon” of how an economy can reinvent itself recently, as its Government Bonds retain Investment Grade, has seen more significant price increases than the rest of the region.

Of the 21 categories that make up the “basket” on which Eurostat bases its inflation calculations, more than half were rising more quickly in Greece than in the rest of the Eurozone.

Its voice may well be lost in the “noise” made by the hawks of the frugal five, but Greeks have a reputation for militancy which will not take kindly to being ignored.

Friday will see the release of harmonised inflation data. It is predicted that there will be no change with the headline rate remaining at 5.5%.

The euro is still unable to regain the 1.10 level and each day that passes the Eurozone economy suffers by comparison to the U.S. There is a possibility that divergence in monetary policy may lend some support but as the U.S. economy powers ahead it is likely that the dollar will behave similarly.

Yesterday, the common currency was in a narrow range trading between 1.0952 and 1.0897. It closed unchanged at 1.0906

Have a great day!