Market Update – 12th July 2023.

12th July 2023

Data this week showed signs of a loosening labour market in the UK. From March to May 2023, the UK witnessed a rise in its unemployment rate, reaching 4.0%. This marked the highest level since the last quarter of 2021, surpassing market expectations of 3.8%. The number of unemployed individuals increased by 77,000 to reach 1.37 million, primarily driven by those who had been unemployed for up to 12 months. Other signs of a loosening of inflation pressure in the data included a fall in the inactivity rate, which measures people out of work and not looking for it, to its lowest since the onset of the pandemic in 2020.

Workers continue to seek higher wages to cope with the rising cost of living. Wages, excluding bonuses, experienced a significant growth of 7.3% compared to the same period in the previous year. This marked the largest increase seen outside of the COVID-19 pandemic and surpassed forecasts of 7.1%. Additionally, total pay growth accelerated to 6.9%, exceeding expectations of 6.8%.

In order for the central bank to consider an end to monetary tightening policymakers are likely to seek a decrease in the rate of wage growth. Whilst there are signs of a slowing labour market the latest data maintains pressure on the Bank of England to continue along its current course, to raise interest rates for the 14th time in a row at the next meeting in August.

Unemployment remains low compared to historical standards, so whilst there are signs of loosening in the labour market, there is still persistently strong wage growth.

The expectation of further rate increases has caused lenders to raise their rates charged to customers. Mortgage rates have now reached levels not seen since August 2008 with the average rate on a two-year fixed deal reaching 6.66% this week. As higher interest rates start to hit homeowners, policymakers do need to tread carefully and consider the lags involved in monetary policy.

Looking to China, as the country continues to release policies to bolster the economy, this week the government announced an extension of two financial policies until the end of 2024. The policies aim to sustain and promote the stable and healthy growth of the real estate market. The extension provided markets with a more optimistic outlook this week after inflation data came in below expectations.

Markets eagerly await US CPI data due out later today with investors anxious to see if prices are continuing to ease. The annual rate of inflation decelerated to 4% year on year in May 2023 and is expected to continue slowing down to 3.1% on year in June. The Federal Reserve made the decision to pause interest rate hikes last month to allow for the lags associated with monetary policy. The Fed is largely expected to raise interest rates by 25 basis points at the end of this month and as the Fed has always maintained its data dependant stance, today’s inflation figures will help determine whether the Federal Reserve is nearing the end of its rate rise cycle and could boost bond and equity markets.

Still to come this week we have China’s balance of trade, UK GDP, US PPI and University of Michigan consumer sentiment for the US.

Kate Mimnagh, Portfolio Economist