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Today’s jobs report should prove net neutral for the MPC when all details are considered. We think policymakers can look through a surprise drop in unemployment, keeping the Bank on track to cut rates 2-3 more times this year.
Data quality issues with the Labour Force Survey would likely have kept policymakers wary of reading too much into this latest unemployment rate reading in any case. But the Bank’s recent shift away from “data-point dependence” points to the MPC’s focus on broad trends in the data, and these suggest continued labour market cooling. With one further jobs report to come, alongside two CPI prints before the MPC next meets, the mixed signals in today’s data are unlikely to alter the balance of risks relative to the August policy meeting. We think a September rate cut remains in play.
As we see it, wage data likely remains the focus for the MPC.
Average weekly earnings growth continued to cool, dropping from 5.7% 3m/YoY in May to 4.5% in June, 0.1pp below economist estimates. That said, much of this sharp slowdown stemmed from base effects in public sector bonus pay, which had jumped markedly in June 2023. Once stripping out bonuses, wage growth fell to 5.4% 3m/YoY in June, albeit from a May reading that was revised upwards by 0.1pp to 5.8%. Perhaps more relevant for the MPC, this broad trend of softening pay growth was replicated once looking at private sector regular pay, which took another leg lower, falling to 5.2% 3m/YoY, down from 5.6%. On a single-month basis, private sector pay growth was 4.9% YoY in June, 0.1pp down on the 5.0% recorded the month prior.
This should be welcome news on Threadneedle Street, suggesting the impact of April’s National Living Wage rise has not proven sticky, removing a major upside risk to the Bank’s inflation outlook.
That said, despite continued normalisation in wage growth it is employment figures that are likely to steal headlines. Unemployment surprised notably to the downside, with the 3-month average rate falling 0.2pp to 4.2%, well below the 4.5% consensus prediction. Notably, this is also below Bank staff forecasts for Q2, published in the August MPR, which had projected the unemployment rate to stabilise at 4.4%. Meanwhile, the 3m/3m employment change was much stronger than expected too, with 97k jobs added in this latest set of figures, well ahead of the 3k anticipated and a notable acceleration from the 19k seen in the May data. Even so, we think there are two major reasons to look through this strength. First, are the well-documented data quality issues with the Labour Force Survey. Second, more timely claimant count data jumped in July, rising from 4.4% to 4.7%, while the change in jobless claims also rose significantly from 36.2k to 135.0k.
All told, we see today’s readings as broadly in line with our take on other labour market indicators, including the Bank of England’s Decision Maker Panel, and the REC Report on Jobs.
Wage growth continues to cool, while employment has seen a temporary uptick, though not one that is likely sustainable. Looking forward, we continue to expect further progressive softening in pay growth, projecting this to drop to around 4.0% by year-end, while further loosening in the labour market should see the unemployment rate rise to around the Bank of England’s 4.5% estimate of neutral. If we are right, the swap-implied odds of a September rate cut continue to look a little hawkish to us at 36%. We continue to see the upcoming meeting as a coin flip, expecting 2-3 rate cuts through the remainder of the year, leaving short-run risks for the pound tilted to the downside. Albeit, given that it will likely take another round of data to see a shift in market pricing, our base case remains a quiet August for sterling before a much busier September.
Author:
Nick Rees, FX Market Analyst