UK Labour Report Better than Expected - ING
Research Team at ING, notes that the UK labour report was much better
than it could have been, although with 1Q job creation around a quarter
of what it was at the end of 2015, the effects of referendum-related
uncertainty appear to be weighing on employment.
Key Quotes
“The UK labour report was certainly better than it could have been. In
the 3 months to March, the economy added 44000 jobs (in fact, the single
month increase was around 150k) and unemployment remained broadly flat.
This came in above market expectations, given that many had seen a risk
of a fall in employment and increase in unemployment as uncertainty
surrounding the EU referendum weighs on economic activity.
Survey evidence, not least from the Markit/CIPS PMIs and a recent
Deloitte survey, suggests that firms are holding back on
hiring/investment until the outcome of the vote becomes clearer.
Although this labour report appears to contradict this theory to some
extent, it is worth noting that the number of jobs added in the first
quarter was less than 25% of the amount added in the last 3 months of
2015.
Although the employment figures were better than expected, wage growth
was a little disappointing. The year-on-year rate of growth (ex.
bonuses) rose by only 2.1%, reflecting a small £1 fall in weekly
earnings on the month (taking the average to £468), despite the effect
of the National Living Wage, which had to implemented by April.
If the UK votes to remain in the EU, then our base case is that the next
Bank of England move will be to hike rates. However, as we noted last
week, the slowdown in activity in this quarter thus far appears to have
been deeper than we’d previously anticipated. Thus, although we expect a
rebound post-referendum as firms reinstate hiring and investment plans,
the lag involved in doing so means that a pick up in the data is
unlikely to materialise until the fourth quarter. Therefore, we feel
that the BoE will hold off on hiking rates until the first quarter of
2017. If the UK votes to leave the EU, then it is possible that the BoE
responds with a rate cut to shore-up confidence in the near-term.
FX Implications:
With just over 1M to go until the referendum, the market focus is
beginning to narrow on the Brexit event risk. Yet, GBP has remained
resilient of late, with both opinion polls and betting markets
continuing to assign a higher probability to the UK voting to stay in
the EU. The subsequent de-coupling from fundamentals has been
particularly evident in GBP/USD; the 2Y UK-US swap rate differential has
widen by around 15bps since the start of the month, though cable has
failed to materially push below the 1.44 level.
Any hawkish signal in today’s April FOMC minutes, coupled with ongoing
signs of a slowdown in UK economic activity (note we have retail sales
out tomorrow), could see some of this pent-up GBP weakness manifest.
Hence, we prefer to fade any GBP upside on the back of today’s less
detrimental jobs report and continue to look for a near-term GBP/USD
move down towards 1.4100/50. Indeed, with the pre-vote purdah starting
on 27 May, we note that Treasury officials will be releasing their
analysis on the short-term implications of a Brexit soon and this is
likely to keep the domestic spotlight firmly on the forthcoming EU
referendum.”
