UK Labour report fails to impress the pound

The FTSE climbed higher across most of today’s session supported by a weaker pound, following a mixed labour report and the house builders following promise of a higher dividend by Taylor Wimpey.

The pound was unimpressed by the UK labour report despite their being several points to cheer. The unemployment rate remains at a multi decade low of 4.2% as expected, whilst the closely watched average wage growth figure was also in line with expectations, increasing by 2.9% in the three months to March, up marginally from 2.8% the previous month. Given that inflation in March was 2.5%, wage growth at 2.9% was greater. This is good news for the economy as it means that domestic inflation should start to creep higher, potentially keeping a BoE interest rate rise still on the table later in the year.

Despite in line wage growth and unemployment, investors were shaken by an increase in the number of people seeking the unemployment benefit. The claimant count rose by 31.2k against just 7.8k forecast, a significant increase, so much so that it changed the tone of the report to a distinctly negative one in the eyes of the market. Rising claimant counts is a negative signal for the future labour market, signalling a possible loosening of the market going forward rather than a tightening that the BoE is seeking to revive optimism of a rate hike.

The pound initially pushed higher before falling heavily as invested digested the higher claimant numbers vs in line wages growth. Sterling is trading back below $1.35 at fresh 4-month lows underlining just how sensitive sterling is at the moment to this labour report. Just last month slightly weaker than forecast wage growth triggered the 900 points sell off in the pound from $1.4370 to $1.3460. Whilst another sell off of this magnitude is extremely unlikely, I think it’s safe to say that the pound will be languishing here for a while, particularly given that there is no more high impacting UK data this week to pick the pound up from these levels.

US 10 year yields hit 3.05%

The dollar was notably stronger on Tuesday after retail sales hit expectations at 0.3% month on month and treasury yields climbed to 3.05%, the highest level since 2011. Higher yields whilst supporting the dollar unnerved investors, pushing US equity indices lower on the open. The Dow dropped 200 points in early trade with demand dampened by higher yields, reflecting higher interest rate expectations, which is not such good news for corporate borrowing.