Despite weakening growth, UK labour market tightens further

Chris Scicluna
Emily Nicol

Asian stocks supported by Chinese tech hopes and easing HK Covid restrictions
After a mixed start to the week, Asian equities have had a much better day today, encouraged in part by a rally in Chinese tech on hops that regulators will soon ease up on the sector and as Shanghai reported three consecutive days of zero Covid community transmission. China’s CSI300 closed up 1.25%, and the Hang Seng is currently up some 3% as Hong Kong Chief Executive Carrie Lam confirmed that the city will ease pandemic restrictions from Thursday despite a continuous steady flow of new coronavirus cases. Japan’s Topix rose a more modest 0.2% despite some stronger tertiary activity data. European equities have largely opened up ½% or so, while US stock futures are trading higher too.

Gilts and euro area govvies hit by strong UK labour market data
The improvement in risk appetite has supported a rise in major government bond yields, e.g. with 10Y UST yields up 3bps to 2.91%, back in the middle of yesterday’s range. And European government bonds have sold off more substantively, not helped by some more strong UK wage data that flagged the risks of second-round effects on inflation amid ongoing labour market tightness. Indeed, the increased likelihood of a response from the BoE has pushed up 2Y Gilt yields by almost 10bps this morning to above 1.30%, with 10Y yields about 7bps higher at 1.80%.

Despite weakening growth, UK labour market tightens further
While UK economic growth slowed as Q1 went on, this morning’s data suggest that there has been no let-up in the tightness of the labour market, which is arguably now generating second-round effects on inflation via wages. Employment rose a further 83k on the quarter, pushing the respective rate up 0.1ppt to 75.7%. That’s still more than 500k and 0.9ppt below the pre-pandemic level of employment. However, the number of unemployed dropped 118k over the quarter, pushing the unemployment rate in the three months to March to 3.7%, down 0.1ppt on the month and 0.3ppt on the quarter, and the lowest since 1974. Indeed, on a single-month basis, the unemployment rate fell 0.3ppt on the month in March to 3.6%. In part, that reflects another rise in economic inactivity, of 65k and 0.1ppt to 21.4%, to be some 460k above the pre-pandemic level, making it clear that Covid (and probably Brexit too) continues to represent a highly adverse supply shock for the UK labour market. Importantly perhaps, the number of vacancies rose in the three months to April to a new record high of 1.295mn, firmly above the number of unemployed workers and thus pointing to a labour market of record tightness as measured by the Beveridge curve.

Buoyant wage growth flags likely to persuade MPC to raise rates again next month
Reflecting the extremely tight labour market, average weekly labour earnings growth surged in the three months to March, up 1.4ppts to 7.0%3M/Y in nominal terms to be up 1.4%3M/Y in real terms. While that principally reflects very strong growth in special bonus payments, regular wage growth ticked up 0.1ppt in March to 4.2%3M/Y (-1.2%3M/Y in real terms) to maintain a 4.8%Q/Q annualised rate in Q1. As for the jobless data, on a single-month basis earnings growth was even stronger in March, particularly in the private sector where total pay was up a whopping 11.7%Y/Y and regular pay rose 4.8%Y/Y. The BoE recently upped its forecast of average weekly earnings growth this year by 2ppts to 5¾%Y/Y. And today’s data will reinforce its view that – not least given the continued disappointing UK productivity performance – underlying growth in wages is now some way above levels consistent with the achievement of the inflation target over the medium term. So, while April’s CPI data are yet to come tomorrow, and the latest retail sales data on Friday are bound to be weak, today’s figures are likely to have gone some way to persuading the majority on the MPC to vote for another rate hike next month.

Japanese tertiary activity boosted by lifting of restrictions, but still down in Q1
Today’s Japanese tertiary activity data illustrated the rebound in the services sector in March following the relaxation of pandemic restrictions in the second half of that month, Indeed, output in the sector rose for the first month in three, by 1.3%M/M. This reflected a surge in activity at travel agencies (240%M/M) as domestic tourism resumed, with accommodation (6.8%M/M), eating out (3.4%M/M) and hair dressers (25.4%M/M) also seeing activity jump. Despite the 10½%M/M increase in living and amusement related services in March, it was still down some 6%Q/Q in Q1. Overall, tertiary activity – which accounts for roughly three quarters of Japan’s output – fell 1%Q/Q in Q1 to be still almost 4% lower than in February 2020. So, while manufacturing output rose (0.8%Q/Q), tomorrow’s GDP estimate is expected to confirm that the economy contracted in Q1, by around ½%Q/Q.

Euro area updated Q1 GDP to confirm growth of 0.2%Q/Q, employment estimates also due
In the euro area, today will bring an updated reading for Q1 GDP, which is expected to confirm that growth slowed slightly to 0.2%Q/Q, from 0.3%Q/Q in Q4, with euro area employment figures for the first quarter also due. Ahead of tomorrow’s final euro area CPI estimate for April, the equivalent data from Italy are due – the flash release saw the headline HICP inflation rate ease 0.2ppt to 6.6%Y/Y on the back of slightly softer energy inflation. Indeed, excluding energy and food, core inflation on the harmonised measure jumped 0.6ppt to 2.7%Y/Y, the highest since 2012. ECB President Lagarde will speak at an event in Germany this evening.

US retail sales likely to post modest growth in nominal terms, restrained by hit to real incomes; IP growth to have slowed slightly on supply constraints
Today brings arguably the most noteworthy US data releases of the week with April’s retail sales and industrial production data. While new vehicle sales will be supportive, lower petrol prices could lead to a decline in sales at gasoline stations. And although Daiwa America’s team expect a modest rise in nominal sales (by a below-consensus 0.6%M/M) not least due to higher prices, the associated hit to households’ budgets will be a constraining factor on spending. IP is forecast to rise for the fourth consecutive month in April (½%M/M). Below-average temperatures in April could lead to a pickup in utility output, but growth is likely to be softer than in February and March perhaps reflecting intensified supply bottlenecks. Meanwhile, Fed Chair Powell is set to be interviewed at a Wall Street Journal event, with FOMC members Mester, Evans, Harker, Kashkari and Bullard also all in action.

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