The nightmare before Christmas: UK real wage growth

We said that the pound was poised to stage a decent recovery this week, even after Monday's sharp sell off. We said that the driver would be better than expected labour market data, however, the labour market data was altogether "mewh", yet the pound initially rose above 1.32 after the release, although it is losing ground as the market digests the report.

On the surface the labour market report looked fairly decent: the unemployment rate stayed at an impressive 4.3% for the third consecutive month, there was only a 1.1k increase in jobless claims last month, and wages held steady at 2.2%, the market had been expecting a slight drop to 2.1%.

The clouds hovering over the UK labour market

However, this wasn't a stellar report that we have been used to receiving each month. The Office for National Statistics said that the number of people in work fell slightly, and the number of eligible adults not working or seeking work increased slightly. This pushed up the inactivity rate for the second half of this year, which may explain the knee jerk reaction lower in the pound once the data was released.

The nightmare before Christmas: UK real wage growth

The news on wages was hardly encouraging either. The ONS has reported that wages including bonuses fell by 0.4% compared to this time last year. The declining real wage story is not new, however, the fact that wages have failed to pick up all year is starting to impact the consumer as we lead up to the all-important holiday shopping season. Retail sales for October are expected to show a decline of 0.4% ex. Auto fuel when they are released on Thursday, suggesting that the important final quarter of the year for retailers has not got off to a good start.

The impact on the pound

The pound has fallen sharply on the back of this report after a strong start to Wednesday. We thought there was a touch of buy the rumour sell the fact, but the sharp decline in GBP/USD, down some 60 pips since the release, suggests that markets are less than impressed with the decline in employment growth and weak wage data. This reinforces 1.3210 as a temporary top in GBP/USD.

The main beneficiary has been the euro, which is back above 0.90 after the report. This could be technically driven, as 0.90 is a major psychological level in this pair. The pound is also at risk from the USD staging a rebound later if the US CPI report is better than expected when it is released later this afternoon.

Are UK retailers at risk?

It's not a great day for UK asset prices, the FTSE 100 is also lower, although this is mostly being driven by recent weakness in the oil price and the key miners are the biggest losers on the FTSE 100 so far on Wednesday. Consumer discretionary stocks are also laggards, however the major high street stores such as M&S and Next are moving higher today as investors' brush off any worrying signs emanating from the labour market. The FTSE 250 is also lower, as it is sensitive to the UK economy and any signs that the labour market may be losing momentum.

Focus shifts to US

Ahead today, markets will be watching US CPI data closely to see if the core rate of price growth can bounce above 1.7%, thus putting into focus the prospect of further rate rises in 2018. The futures market is also predicting a lower open for US stock markets. We have mentioned before that the lead indicators do not bode well for the US indices and they may be telling us that a market correction is on the cards. The Dow Jones Transportation Average has fallen since mid-Oct and is now through its 100-day sma, while the Russell 2000 has recently slipped below its 50-day sma. Rising inflation data could weigh on stock indices more broadly later today, which is why US CPI is our main focus this afternoon.

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