This week we take a look at tight labour market inflationary pressure on wages, the decline in UK unemployment and Germany's considered support for EU debt issuance.
US non-farm payrolls point to ongoing labour market tightness despite rate rises
In the US, non-farm payrolls rose by 263,000 in September vs. consensus estimates of 255,000 whilst job openings declined and the unemployment rate fell to 3.5% vs. consensus forecasts of 3.7%. The tight labour market is placing inflationary pressure on wages, with average hourly earnings rising by 0.3% over the month in September, although there is some evidence that this rate has started to slow.
Despite the Federal Reserve (Fed) raising interest rates aggressively in order to calm inflation, the labour market has not slackened as much as some had anticipated. This makes further interest rate rises likely, along with a more prolonged period of higher interest rates. Whilst the ratio between job openings and job seekers fell to 1.7 in August, it remains far higher than it was before the pandemic when the Fed considered the labour market to be in an ideal position.
There will be further pressure coming from the US housing market: the steep rise in house prices over the past two years, combined with rising rates, has made the prospect of moving less attractive to many, thus reducing job mobility.
UK unemployment continues to fall, increasing calls for a steep rate rise next month
The UK labour market remains tight, with unemployment falling to a multi-decade low of 3.5% in the three months to August, a fall of 0.1% vs the three months to July, whereas consensus estimates had expected no change. Total pay growth rose by 0.5% over the same period to 6.0%, vs consensus estimates of 5.9%.
The volatility seen in bond markets and increased mortgage rates has recently put the UK financial system under stress, prompting the BoE to stabilise gilt prices through purchases. There are concerns that the BoE’s focus on curbing spiralling inflation contradicts the UK government’s focus on stimulating economic growth.
Although there has been significant government intervention, the ongoing energy price shock will place further pressure on households and businesses, meaning that wage growth and price increases are not expected to cool in the next three months. A 0.75% rise in interest rates is expected at next month’s Monetary Policy Committee meeting, with some analysts forecasting a 1.0% rise.
Germany considers joint EU debt issuance
The German Chancellor, Olaf Scholz, has been reported as saying that he may support the issuance of joint EU debt in order to support countries struggling with energy prices, conditional on the support being given in the form of repayable loans, rather than grants. The joint issuance would be designed to avoid putting significant pressure on sovereign bond yields and liquidity, whilst simultaneously allowing the European Central Bank to continue with its rate-hiking agenda.
If confirmed, the move would come after the announcement of a cap on gas prices in Germany which had faced a lot of criticism from other countries. Germany had opposed the introduction of a Europe-wide price cap, which would relieve some inflationary pressure on countries that were unable to implement the measure unilaterally. There were also concerns that Germany’s move would have implications for EY competition law, state-aid rules and level-playing-field for firms. The news of a potential joint issue saw the spread on the 10-year Italian sovereign bond tighten by 0.15-0.20% vs the bund.
Whilst the interest rate hiking cycle currently underway in the eurozone will have implications for sovereign bond yields, joint issuance would be an important signal affirming the strength of the European project and the EU’s determination to support counties particularly exposed to the effects of the war in Ukraine.
It was a positive week across all major equity markets, with the MSCI ACWI ending the week up almost 2%.
Energy prices were particularly strong following the announcement by OPEC+ of a cut in oil production, with the globally recognised benchmark for oil prices, Brent Crude, up over 11%.
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