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The September jobs report offered a mixed bag of signals on the health of the UK labour market.
On the one hand, unemployment jumped from 4.0% to 4.3%, a much sharper rise than the 0.1pp that economist consensus had been looking for. On the other, pay growth also exceeded expectations, with weekly earnings growing by 4.3% 3m/YoY, some way above the 3.9% anticipated by markets. That all being said, there is good reason for policymakers to look through both sets of surprises.
As such, we continue to think that the MPC will continue with their one-cut-per-quarter easing pace, with the next cut to Bank Rate likely coming in Q1 2025.
Looking first at the unemployment rate, this is likely to grab the attention of many, given the magnitude of the upside surprise. A 0.3pp jump is large historically outside of downturns, meaning that today’s beat will cause some consternation in markets. It remains below the BoE’s estimate of neutral for the UK labour market, however, which should assuage some fears amongst the MPC. More importantly, given data quality troubles with the Labour Force Survey, we are inclined to think that this latest jump in the readings will likely be discounted by policymakers once again – a point made as recently as last week’s BoE policy meeting. Instead, it is wage data that should take on the greater emphasis amongst rate setters once again.
Here, whilst the latest data did show a large jump in the headline wage growth print, once stripping out bonuses the reading only exceeded expectations by 0.1pp, falling from 4.9% 3m/YoY in August, to 4.8% in September. Private sector regular pay, meanwhile, stabilised at 4.8% on a 3m/YoY basis – in line with estimates for the BoE’s November MPR, which also projected Q3 private sector regular pay at 4.8% 3m/YoY.
In fact, Bank staff forecast that private sector regular pay now rise into year end, peaking at 5.1% in Q4.
Given this, a rise in the single-month reading from 4.6% YoY to 4.9% in September, fully reversing last month’s drop-off, is also in line with Bank staff projections. Even this is not quite as concerning as it first appears, however. In cash terms, weekly earnings rose from £644 to £647 between August and September. The period prior saw an increase from £642 to £644. Rather, the uptick in wage growth seen in the latest figures stems from base effects – between August and September 2023, wage growth fell from 8.1% to 7.5% YoY on a single-month basis, and increased only marginally in cash terms. A similar dynamic is set to ensure another hot reading next month too, given that average private sector regular wages actually fell between September and October 2023. With this already factored into Bank staff forecasts, there is little in today’s data to upset overly trouble rate-setters.
For now, markets appear to be largely taking this latest set of labour market data in stride.
Sterling has softened marginally in light of the higher-than-expected unemployment rate and wage growth details that are softer than they first appear. Even so, with the data unlikely to shift the thinking amongst policymakers, sterling weakness should remain contained by the lack of scope for movement in short-run Bank Rate expectations.
Author:
Nick Rees, Senior FX Market Analyst