UK labour data reaffirm domestic inflation pressures

OVERNIGHT

Asian equity markets are mixed following the unexpected decision by China’s central bank to cut interest rates, including its 1-year medium-term lending facility rate by 15bps to 2.50%. Chinese retail sales and industrial production data for July disappointed, adding to concerns the economic recovery is faltering. The Japanese economy, meanwhile, posted surprisingly strong growth of 1.5%q/q (6.0%q/q annualised) in Q2, with the detail showing that it was driven by exports rather than domestic demand. Elsewhere, the Reserve Bank of Australia’s minutes revealed a dovish tilt, although further tightening was not ruled out.

THE DAY AHEAD

The latest UK labour market data released earlier this morning provided further indications that domestic inflationary pressures will likely remain an area of concern for the Bank of England. Notably, headline wage growth continued to accelerate, rising to a new high of 8.2% in June compared with an upwardly revised 7.2% in May. That was partly a result of NHS one-off bonus payments. Excluding bonuses, regular wage growth also increased to 7.8% from 7.5%. Other aspects of the report showed an unexpected rise in the unemployment rate to 4.2% from 4.0% and a 66k fall in employment in the past three months, while job vacancies continued to decline but remained relatively high versus pre-pandemic levels. 

Staying in the UK, early tomorrow (07:00BST) sees the release of the July inflation report which is expected to show that the annual headline CPI rate fell sharply to 6.8% from 7.9% in June. That would take it to its lowest level since March 2022. However, that decline is mostly a result of a favourable annual comparison on energy prices between the sharp rise last year and 2023’s downward trend. In contrast, we forecast that core inflation (excluding food and energy prices) will have picked up to 7.1% (from 6.9% in June) matching May’s 31-year high. 

In the US later today, retail sales will also be a key focus and we expect a monthly rise of 0.4% for July which would be a signal that the economy is continuing to grow in Q3. In the Eurozone, this morning’s August German ZEW survey will be watched closely given that the bulk of the data for Q3 so far has suggested that growth is slowing.

MARKETS

US Treasury yields remained near recent highs as investors assess the inflation and policy outlook as well as high government debt levels. The 10-year Treasury yield has moved up above 4.2% this morning. The UK 10-year gilt yield closed up 4bps to 4.57% yesterday. This morning’s UK labour data provided a modest lift for the pound, with GBP/USD trading just above 1.27 and GBP/EUR touching 1.1650.