By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA
UK jobs data this morning is a mixed bag on the face of it but a deeper dive into the numbers may give the BoE more cause for optimism than pessimism.
The earnings component of the report, while continuing to partly shield households from soaring inflation, is the part the MPC will be most concerned about. Getting inflation back to 2% on a sustainable basis simply won’t happen unless that wage growth falls dramatically and instead, it’s still rising, reaching 6.9% including bonuses and 7.3% without. The revisions to the April figures will not be welcome by the BoE either.
That said, there is plenty within this report to suggest the trend in wages will soon reverse which will give the MPC cause for optimism. Unemployment in the three months to May jumped to 4%, 0.5% from its low nine months ago and steadily rising. There are other signs too that labour market tightness is easing, like falling vacancies to unemployment and lower inactivity as people are drawn back into the labour force due to high inflation.
While this isn’t hampering wage growth yet, it almost certainly will as bargaining power shifts and inflation falls. Lower energy and food prices, alone, should drive inflation down considerably over the coming months and that will filter into wage numbers over time which will give the BoE some confidence that pressures will ease.
The pound has been quite volatile in the aftermath of the data which probably reflects the mixed nature of it. It is trading a little higher on the day still, even as yields are marginally lower. Markets still expect the BoE to hike rates by another 1.25% over the next few quarters, including a significant chance of another 50 basis point move next month. Of course, those expectations could be pared back if we do finally start to see progress on the inflation front.
Oil steadies after hitting one-month high
Oil prices are a little flat today after paring earlier gains. Brent hit a one-month high on Monday after breaking above the 21 June peak, bringing an end to a series of lower highs that had contributed to the consolidation we’ve seen in recent months.
While it is still trading around the range highs since early May, the break of the recent high could be viewed as a bullish step that could give it the momentum to break back above $80. It has now run into resistance again around the late-May and early-June highs near $79 but the rally still has momentum at this stage.
Gold edging higher ahead of US inflation report
Gold appears to have found some support again in recent days after rebounding twice around $1,900. The US jobs report was one possible risk event that could have triggered a big move in gold, one way or another, and the other is due tomorrow in the shape of the US inflation report.
It seems gold bulls are feeling a little more confident, although $1,940 still poses a test having been a notable area of support in late May and the first half of June. We could just be seeing a corrective move after such a strong pullback from the highs in May, although a strong inflation number again tomorrow could send it lower once more.