News & Analysis

Following the Bank of England’s surprising November meeting, where policy members voted 7-2 to hold rates at 0.1%, speculation has been rife over when lift-off will occur. In this respect, the upcoming string of economic data will be decisive in determining whether the 15bps hike will occur at December’s or February’s meeting.

Out of all of the data, labour market metrics would prove the most important, as Bank of England policymakers placed increasing emphasis on heholding fire with their decision to hike rates in order to view the impact of the furlough schemes expiration. Today’s strong labour market print for the three months up until September is the first of two reports ahead of the December 16th meeting. Given its robust nature, it lays the foundations for a December rate hike to be the more likely option – as we expected prior to the November BoE meeting.

While the latest labour market report doesn’t highlight the full impact of furlough schemes expiry on the labour market, the data is strong across a variety of lagged and real-time metrics and therefore highlights a robust labour market heading into the transition period. In the quarter up until September, 247,000 jobs were added, driven by a record high net flow from unemployment to employment, while 213,000 of those jobs were added in September alone. Meanwhile, job-to-job moves also increased to a record high, driven largely by resignations as opposed to dismissals, highlighting strong employee confidence in seeking higher wages in a dislocated labour market.

When looking at the real-time data, the number of payrolled employees rose by a further 160,000 in October, while in the 3-months up until October the number of job vacancies continued to rise to a new record high of 1.172m. Despite PAYE data having a number of flaws –  including double counting those employed within multiple jobs, which is expected to rise as early signs from survey data suggests underemployment will be the more likely impact of the furlough scheme ending than redundancies – the further increase in payrolled employees is a positive. Combined with the low reported redundancy rate post-furlough in the latest Business Impact Survey, the rise in payrolled employees suggests the increase in labour market slack from the removal in fiscal support is more limited than many economists had expected, despite the number of those on furlough up until the September cut-off sitting above the Bank of England’s previous projections.

Overall, the data suggests that the labour market didn’t loosen dramatically following the expiry of the furlough scheme and should keep the Bank of England on track to hike rates at December’s meeting, should November’s release of October’s data follow suit.

Not only can markets now begin to price in a rate hike in December with greater confidence following the unwind in hawkish bets in the aftermath of November’s meeting, but they will also benefit from a short-term tailwind as the data beat expectations across a number of indicators ranging from net employment gains to the unemployment rate. Following the data release, the pound rose 0.3% against the dollar and 0.2% against the euro, but gains may be extended once bond and money markets fully open for the day at 08:00 GMT.

 

Sterling rises in early trading to lead the rally in the G10 space against the dollar following September’s positive labour market data

 

Author: Simon Harvey, Senior FX Market Analyst

 

 

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