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The UK labour market is deteriorating, and this poses downside risks to the pound.
First up, if you're here for news about the pound, then you must take note of the significant global developments that are rocking markets today:
1) Tariff risks are rising as the U.S. and Europe 'front up' over Greenland. More on the winners and losers in FX of this dynamic here.
2) Japanese bonds were routed at a 20-year bond auction this morning, signalling growing concern about global debt levels. This could shake markets and hit risk, more on this here.
International pressures aside, the pound would probably be doing a lot better if Tuesday's jobs report was stronger. Sure, there was an initial bounce by pound sterling exchange rates, but this soon gave way in most pairs.
The details from the ONS show soft labour dynamics:
- PAYE tax data on payrolled employees points to a contraction of 43k in December
- December saw a fall of 66k vacancies
- LinkUp indicator on vacancies dropped precipitously in December (this has correlated well with the ONS series in recent history)
- Regular private sector wage growth slowed to 3.6% 3m/y in November
- This is aligned with the Bank of England's view of wage growth that is consistent with 2% CPI inflation
- Unemployment rate stays at 5.1%
Financial market expectations of a February rate cut are little changed following the data (i.e. effectively no cut is expected).
However, a cut is still expected by April and there's a sense that there's scope for further cuts to be 'priced in' as cracks in the labour market widen.
"Today's labour market data showed easing wage pressures, weak employment and rising redundancies. We judge this to be consistent with our view that the labour market continues to ease and has further to go in coming months," say economists at Barclays.
The Bank of England works on the assumption that rising unemployment takes pressure off wages. They believe that falling wages sucks purchasing power and demand from the economy, which brings inflation down.
Therefore, they feel they can assist the economy by cutting interest rates, judging that it won't boost inflation.
"The latest report provides further evidence that the UK labour market is loosening. The moderation in underlying pay growth will be especially encouraging news for at least some MPC members, particularly with HMRC median pay figures suggesting that these softer trends continued into the end of the year," says Nikesh Sawjani, Senior UK Economist at Lloyds Bank.
The rule of thumb says if the Bank of England cuts interest rates faster than its peers, the pound will come under pressure. On the basis of labour market trends, this is distinctly possible.
"We expect the Bank of England to remain on hold for at least the next couple of meetings, but today’s data may well encourage the MPC to lower rates in the spring," says Matthew Ryan, Head of Market Strategy at Ebury.