Strong Labour Market Data from UK Lift Pound Sterling
What’s been happening?
Pound Sterling – UK Markets
The data released by the UK’s Office for National Statistics on Tuesday revealed that the unemployment rate in three months to August and the claimant count rate in the same period both stayed unchanged at 4% and 2.6%, respectively. Further details of the publication showed that the wage inflation, measured by the average weekly earnings (including bonuses), rose 2.7% on a yearly basis to surpass the analysts’ estimate of 2.4%. “The employment rates for people, men and women have been generally increasing since early 2012. For the latest time period, June to August 2018, the employment rate for people was 75.5%, up from 75.1% for a year earlier, but lower than the record high of 75.7% for March to May 2018,” the ONS explained in its report. The market reaction to the data allowed the pound sterling to gather strength against the dollar and the euro despite the Brexit headlines that suggested a deal was unlikely this week.
Speaking to the press following a cabinet meeting, British Prime Minister Theresa May’s spokesman said that they wanted to reach a deal in autumn, and this week’s summit was a part of that process. Later in the day, the EU’s chief Brexit negotiator in a press conference explained that there were a lot of open issues related to the Irish border and added that they needed more time to find an agreement on Brexit. Finally, Irish Prime Minister Leo Varadkar stated that although he still believed a no-deal Brexit was unlikely, he was concerned about the lack of progress.
US Dollar – US Markets
The Board of Governors of the Federal Reserve System on Tuesday announced that industrial production increased 0.3% in September on a monthly basis in September with the capacity utilisation remaining steady at 78.1%. Although the greenback didn’t react to this data, it gained traction after the U.S. Bureau of Labor Statistics reported that the number of job openings reached its highest level of 7.1 million and beat the experts’ forecast of 6.9 million. “The number of hires in August reached a series high of 5.8 million. The hires rate was 3.9 percent. The number of hires was little changed for total nonfarm, total private, and government. Hires were little changed in all industries and in all four regions,” the publication read.
After dropping to its lowest level in 20 days at 94.79, the US Dollar Index retraced its losses and closed the day virtually unchanged above 95. The impressive rebound major equity indexes in the U.S. staged on Tuesday on the back of strong earnings figures from big financial institutions also allowed the USD gather strength against its peers.
Meanwhile, in an interview with Fox Business Network, President Donald Trump, once again, criticised the FOMC’s monetary policy as he called the Fed his ‘biggest threat.’ “Can I be honest? I’m not blaming anybody. I put Powell there. And maybe it’s right, maybe it’s wrong, but I put him there,” Trump stated.
Euro – European Markets
The sentiment report released by the Zentrum für Europäische Wirtschaftsforschung (ZEW) showed that the headline Economic Sentiment Index in Germany fell to -24.7 in October from -10.6 in September and fell short of the market expectation of -11.3 Moreover, the same index for the euro area slumped to -19.4 from -7.2. Additionally, the Current Situation Index in Germany edged down to 70.1 from 76. Commenting on the report, “Expectations for the German economy are dampening above all due to the intensifying trade dispute between the USA and China. The resulting negative expectations on German exports are now beginning to show in the actual development of exports,” ZEW President Professor Achim Wambach noted. “A further negative influence on economic and export expectations is the danger of a ‘hard Brexit’, which is becoming ever more likely. Last but not least, the situation of the governing coalition in Berlin is perceived to have become more unstable, which also weighs on economic sentiment.”
Other data from the euro area on Tuesday revealed that the trade surplus (seasonally adjusted) increased to €16.6 billion in August from €12.6 billion in July and beat the market forecast of €14.1 billion. Nevertheless, the trade data failed to help the shared currency shake off the selling pressure as investors stayed focused on the disappointing sentiment data.
What’s coming up?
UK: The UK’s Office for National Statistic will release the monthly Producer Price Index (PPI), Consumer Price Index (CPI), and Retail Price Index (RPI) data on Wednesday. Markets expect the annual core CPI, which strips volatile food and energy prices, to come in at 2.8% in September.
US: The U.S. Census Bureau will publish the housing starts and building permits numbers on Wednesday. Later in the evening, the FOMC will release the minutes of its September meeting, at which it decided to hike the policy rate by 25 basis points.
EU: The Eurostat’s inflation report will be featured in the European economic docket. Analysts forecast the CPI to remain unchanged at 0.2% and 2.1% in September on a monthly and yearly basis, respectively.