Monday, June 24, 2024

Pre-election UK interest rate cut unlikely despite cooling jobs market; Moody’s warns France over snap election – business live

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Introduction: Unemployment rate rises to 4.4%

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Back when the UK general election was called, today was identified as a key date to take the health of the economy.

That’s because the latest labour market data is being released, the first of five pieces of important economic news which will test Rishi Sunak’s claim that his economic plan was working.

The data will also be watched at the Bank of England, as well as across Westminster, as central bankers look for evidence that inflationary pressures are esing.

And the big news is that unemployment has risen, while wage growth remains stickily high – which may dampen hopes of an early interest rate cut.

The Office for National Statistics has reported that the number of people unemployed rose by 138,000 in the February-April quarter, taking the total to just over 1.5 million.

This lifts the UK unemployment rate to 4.4%, the highest since July-September 2021.

The number of people in work has fallen, by 139,000, to 32.97 million.

And 132,000 more people fell out of the labour market altogether, partly due to ill health, taking the total of economically inactive up to 9.434m. That left the economic inactivity rate at 22.3% for the three months to April, up from 22% in the previous quarter.

The data also shows that companies are cutting back on hiring, with the number of vacancies in March to May 2024 falling by 12,000 to 904,000.

The number of vacancies in March to May 2024 was 904,000, a decrease of 12,000 on the previous 3 months.

This is down by 156,000 from a year before, although they remained 108,000 above their pre #COVID19 levels.

Read Vacancies and jobs in the UK ➡️ https://t.co/OOuA5MDtdJ pic.twitter.com/RzohaWofTp

— Office for National Statistics (ONS) (@ONS) June 11, 2024

The ONS says:

This month’s figures continue to show signs that the labour market may be cooling, with the number of vacancies still falling and unemployment rising, though earnings growth remains relatively strong.

We’ve published the latest UK labour market figures.

Headline indicators for the UK labour market for February to April 2024 show:

• employment was 74.3%
• unemployment was 4.4%
• economic inactivity was 22.3%

Read Labour market overview ➡️ https://t.co/d5svuWoytL pic.twitter.com/hsLB0qWhCg

— Office for National Statistics (ONS) (@ONS) June 11, 2024

But wage growth did not slow, despite this cooling demand for workers.

The ONS reports that annual growth in regular earnings (excluding bonuses) was 6.0%, the same as for the previous three-month period; and annual growth in employees’ average total earnings (including bonuses) was 5.9%, the same as for the previous three-month period.

The agenda

  • 7am BST: UK labour market statistics

  • 11am BST: NFIB index of US small business optimism

  • Noon BST: Fireside chat with ECB chief economist Philip Lane at the Banking and Payments Federation Ireland National Conference in Dublin

  • 2pm BST: Russia trade balance for April

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Key events

European stock markets are in the red again.

The UK’s FTSE 100 has dropped to its lowest level since the end of last month, down 55 points or -0.7% at 8174 points.

Miners and banks are leading the fallers, with Antofagasta down 3%, Standard Chartered losing 2.9% and Glencore off 2.8%.

European markets are also weaker again, with France’s CAC40 dropping another 0.55% and Germany’s DAX losing 0.4%.

Traders are nursing fears that the US central bank may not cut interest rates as soon as hoped.

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, explains:

The Federal Reserve (Fed) starts its two-day meeting today and is widely expected to trim its rate cutting projections for this year due to sticky inflation and still-tight jobs market.

The US dollar index spiked past its 50-DMA following last Friday’s surprisingly strong jobs data, and is consolidating gains above this level ahead of tomorrow’s most important CPI data and the Fed announcement.

Provided the economic data and the inflation trends, there is a greater chance that we hear a hawkish Fed statement than the contrary.

The gap between Paris and Berlin’s borrowing costs are widening again….

⚠️ SPREAD BETWEEN FRANCE AND GERMANY’S 10-YEAR YIELDS WIDENS TO 64.8 BPS, WIDEST SINCE OCTOBER

— PiQ (@PiQSuite) June 11, 2024

That suggests bond investors are seeing French bonds as riskier, given the uncertainty created by the snap elections announced on Sunday.

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UK mortgages in arrears rise as households come under pressure

Worryingly, the number of UK mortgages in arrears has risen to a seven-year high.

New Bank of England data shows that 1.28% of loans were in arrears in the first quarter of 2024, up from 1.23% in the previous three months.

That’s the highest reading since the fourth quarter of 2016, and suggests more households are strugging to meet their mortgage payments due to high interest rates.

The value of outstanding mortgage balances with arrears increased by 4.2% from the previous quarter to £21.3bn – a 44.5% increase compared with a year earlier. This is the highest reading in almost a decade, since the third quarter of 2024.

Photograph: Bank of England

Simon Gammon, managing partner at Knight Frank Finance, said:

“The value of mortgage balances in arrears has surged as household finances have come under pressure from both higher mortgage rates and the rising cost of various goods and services.

This is serious for people struggling to pay their mortgage, but it doesn’t yet present a systemic risk to the housing market. The proportion of the total loan balances in arrears is still relatively low at 1.28%, though Bank of England policymakers will be watching this data closely. New arrears cases actually dipped a little during the quarter, which suggests the situation may be stabilising.

“Mortgage rates are currently trading sideways and barring any nasty surprises, should continue easing once the timing of the Bank of England’s first cut to the base rate becomes clearer.

“Anybody concerned about falling behind on their mortgage payments should contact their lender as early as possible. The lenders have received strict instructions from regulators to offer forbearance, whether via extending mortgage terms or temporarily switching to interest only payments.”

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ING developed markets economist, James Smith, suspects the financial markets are underpricing the chances of a UK interest rate cut this summer:

Smith explains:

“The UK jobs market is cooling quite noticeably now, and that makes it all the more surprising that financial markets are pricing just a 7% probability of a rate cut next week and only 46% for August’s meeting.

We think a summer rate cut is much more likely.

Today’s hiring figures back this up, Smith argues, although he points out there are still “major question marks” surrounding the quality of the data.

Taken at face value, the rise in the unemployment rate from 3.8% at the end of last year to 4.4% now is pretty eye-catching. But the very pronounced fall in the response rate to the Labour Force Survey and potential bias in the achieved sample means it is still hard to know how seriously to take these latest numbers.

But the data on unemployment corresponds with the ongoing fall in job openings, and the vacancy-to-unemployment rate is now back down to pre-Covid levels. An alternative measure of employment using firms’ payroll data shows it flat to slightly negative so far this year.

Although real wages are growing a faster rate this year (as inflation falls), they’re still below their levels before the cost of living crisis, points out Hannah Slaughter, senior economist at the Resolution Foundation:

Turning to pay – real wages are growing at a healthy 2.3%, stronger than any point since 2015 (bar the pandemic). But the Bank of England will likely be worried about strong nominal pay growth (6.0%) – without productivity gains, this is unsustainable w/o pushing inflation up. pic.twitter.com/jOFGKszu03

— Hannah Slaughter (@hcslaughter_) June 11, 2024

For workers, a return to real pay growth will be a relief – but it’s worth bearing in mind that average earnings are still 1.6% lower in real terms than before the cost of living crisis, and 4.8% lower in the public sector. pic.twitter.com/jefQRVeiiZ

— Hannah Slaughter (@hcslaughter_) June 11, 2024

And the long-term picture remains one of stagnation, with the average worker more than £14,000 worse off than they would have been if pre-financial crisis wage growth had continued. pic.twitter.com/T0jqFlTIdz

— Hannah Slaughter (@hcslaughter_) June 11, 2024

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French bonds weaken after ‘crazy’ dissolution

French government bonds are weakening again this morning, adding to losses yesterday.

With prices falling, the yield (or interest rate) on 10-year French government bonds has risen to 3.28%, up four basis points (or 0.04 percentage points) from last night.

That’s the highest levels since last November.

These 10-year bond yields, a measure of French government borrowing costs, ended last week at 3.12%, but jumped on Monday, before rising again today.

Rising bond yields reflect investor nervousness about the political uncertainty in France created by Emmanual Macron’s decision to dissolve the French parliament and hold snap elections.

Christophe Jakubyszyn of French financial newspaper Les Echos has argued that Macron acted too quickly, with a “crazy” dissolution which risks leaving the door wide open to the far right.

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Moody’s issues France with credit rating warning over snap elections

Across the Channel, ratings agency Moody’s has warned the French government that its snap parliamentary elections are negative for the country’s credit score.

In a statement, Moody’s warns:

“This snap election increases risks to fiscal consolidation.”

President Emmanual Macron shocked Europe by announcing the parliamentary election, just a few hours after learning that his centrist allies had been pummelled in European elections, while the far right Rally National had secured twice as many votes, around 32%.

Moody’s suggests that its current “stable” outlook on France’s rating could be cut to “negative” if its debt metrics worsened further, saying:

“Potential political instability is a credit risk given the challenging fiscal picture the next government will inherit.

A weakening commitment to fiscal consolidation would also increase downward credit pressures”.

An opinion poll last night suggested that National Rally was on track to win the snap election in France but fall short of an absolute majority.

If RN were to win a majority, Macron will be forced to name a RN deputy as prime minister — leading to a period of so-called “cohabitation” between the parliament and the Élysée Palace.

Modupe Adegbembo and Mohit Kumar of Jefferies say:

Such an outcome would leave Macron in an even weaker position to push through much need economic reforms including changes to unemployment benefits and fiscal consolidation. Even in a situation in which Macron is able to still command a majority, it hard to think he will not end up in an even weaker position after this.

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Bank of England unlikely to cut interest rates in short term despite cooling jobs market

The Bank of England is unlikely to cut interest rates before next month’s general election, the money markets indicate today.

There’s just a 10% chance that the BoE lowers base rate to 5%, from 5.25%, at its meeting a week on Thursday. (20 June), according to the latest City pricing.

That’s little changed from last night, before this morning’s data showed the labour market is cooling, with unemployment rising again to 4.4%.

The Bank is then due to set rates in August, September, November and December.

And this morning, the markets now expect the first rate cut to come by November. Before 7am today, the first cut was only fully priced in for December.

The complication for the Bank is that it wants to see more evidence that inflationary pressures are cooling. A weaker jobs market will help with that, but wage stickiness – earnings are rising at around 6% per year – will not.

So, the fact that wage growth slowed in April alone – despite being unchanged over the February-April quarter – could nudge some policymakers towards considering easing policy this year, if the trend continues.

Yael Selfin, KPMG’s chief economist, says today’s “mixed labour market data” is unlikely to shift the dial for the BoE this month:

The unemployment rate ticked up to 4.4%. The recent weakening in demand for staff has been attributed to a lack of roles and firms delaying hiring decisions. This is consistent with a broader trend of retaining existing labour, and could signal that firms expect a pickup in activity so that they could utilise their existing staff more.

“Overall, today’s data are unlikely to warrant an immediate shift in policy from the Bank of England. We expect the MPC to stay put at its June meeting and reassess the incoming data flow over the summer before it embarks on cutting interest rates.”

Matthew Ryan, head of market strategy at global financial services firm Ebury, agrees that hopes of a pre-election interest rate cut have faded:

“Sterling largely held its own off the back of the data, as while rapidly rising wages could delay the start to Bank of England interest rate cuts, the increase in joblessness bodes ill for the UK’s growth outlook.

“This will not be particularly welcome news for Rishi Sunak’s Tory Party, who appear to have based their call for early elections on the strength of Britain’s recent economic data.”

RSM UK economist Thomas Pugh argues that the Bank’s monetary policy committee (MPC) should cut rates in August:

“Today’s data will make pretty uncomfortable reading for the MPC.

But it is clear the labour market is loosening and forward-looking indicators suggest pay growth will slow, combined with a further fall in inflation in May, that should be enough to justify the Bank of England following the ECB with a rate cut in August.

Richard Carter, head of fixed interest research at Quilter Cheviot, says the Bank will be nervous about sparking another bout of inflation, by cutting rates too early:

“The BoE will be incredibly cautious to cut rates at a period when spending power is high for consumers and potentially triggering a fresh inflationary bout.

As such, today’s data will continue to put a dampener on a rate cut in June or August, with November remaining the likeliest date to see that first fall.

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Full story: UK unemployment rises by 138,000 as labour market weakens

Larry Elliott

There are signs in today’s UK labour market report that wage growth has slowed, despite looking sticky.

Our economics editor Larry Elliott explains:

Annual growth in average earnings in the three months to April was 5.9% for all workers – unchanged on the three months to March – while for the private sector the growth rate eased from 6.1% to 5.8%.

In April alone, earnings overall were 5.5% up on the same month in 2023 compared with 6.4% in the year to March. For the private sector, the annual increase was 5% in April, down from 6.8% in the year to March.

Pay in real terms is rising because wages are rising faster than the annual inflation rate, which stood at 2.3% in April.

Here’s the full story:

Resolution: Cooling labour market means next government must tackle falling employment

The next government will have to tackle the problem of falling employment, rather than falling inflation, says the Resolution Foundation thinktank.

Resolution point out that the UK unemployment rate has increased for four months in a row – from 3.8% in the last quarter of 2023, to 4.4% in the three months to April 2024 – an increase of 190,000 people out of work.

Vacancies have fallen for 23 out of the past 24 months, they add, while the number of employees in the PAYE data has fallen for three out of the past four months, after rising for 35 months in a row.

And average earnings remain more than £14,000 a year off their pre-financial crisis path after 16 years of wage stagnation.

Cooling labour market means next government will have to tackle the problem of falling employment, not falling inflation – @nyecominetti responds to the latest @ONS labour market statistics. Full thread with all the key takeaways coming shortly…. https://t.co/HuWSijbPeR

— Resolution Foundation (@resfoundation) June 11, 2024

Nye Cominetti, principal economist at the Resolution Foundation, explains:

“The labour market has continued to cool in early 2024, with both unemployment and inactivity up. Worryingly, the UK employment is closer to its mid-pandemic lows, than its pre-pandemic highs.

“Turning around this poor performance, and kickstarting the kind of jobs growth Britain experienced in the 2010s will be a key task for the next government.

“But while the jobs market weakens, pay packets remain resilient. This recent spurt of real wage growth, the strongest in an almost a decade, will be a relief to workers and a worry for the Bank of England. But it can’t be sustained unless productivity picks up.”

Next government must ‘widen employment support to all’

The fall in UK employment in the last quarter, and the rise in inactivity, shows that the labour market isn’t working for millions of people, explains Stephen Evans, chief executive of the Learning and Work Institute.

Evans explains:

“The last labour market stats before the election show a further drop in employment and rise in economic inactivity. 3.2 million people are out of work but want a job: the next government needs to widen employment support to all who want to work, given today only 1 in 10 out-of-work disabled people get help to find work each year.

Average earnings are rising in real terms as inflation falls, but are a staggering £12,000 per year below what they’d be on pre-financial crisis trends. This shows the scale of catch-up needed in the years ahead.”

Last pre-election labour market stats. Employment falling & economic inactivity rising. Product of weak economy & policy that doesn’t reach enough of the 3.2m people out of work who want a job. Only 1 in 10 out of work disabled people get help to find work each year. pic.twitter.com/SM4WTZ2wMI

— Stephen Evans (@Stephen_EvansUK) June 11, 2024

Worth saying the only real way to reduce the benefits bill without further increasing hardship is to invest in a long-term plan to help people back to work & improve wages & good work.

— Stephen Evans (@Stephen_EvansUK) June 11, 2024

Employment rate recovery has not just stalled, it’s going backwards. Look at the red line. Another few months & recovery could be weaker than the 90s recession, even though the initial employment dip in the pandemic was smaller. Caveat about LFS data challenges of course. pic.twitter.com/UsGjPyrXz8

— Stephen Evans (@Stephen_EvansUK) June 11, 2024

We’re going backwards compared to other countries too: from 2nd in the G7 pre-pandemic to 4th now. Over 3m people are out of work but want a job, but too few get help to find work each year. That must change as part of a plan for inclusive growth. pic.twitter.com/DrI7eKiT59

— Stephen Evans (@Stephen_EvansUK) June 11, 2024

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TUC: The Conservatives have failed working people

TUC General Secretary Paul Nowak says:

“These damning figures show the Conservatives have taken the jobs market from bad to worse.

“Unemployment is rising. Vacancies are falling. Insecure work is at epidemic levels. Record numbers are long-term sick. And wages are still worth less than in 2008.

“The Tories have failed working people. We need a government that will rebuild industry, create wage growth, and deliver a better living for working families.”

UK workforce is ‘poorer and sicker’ than in 2019

Today’s labour market data shows there will be no time for complacency for the next Government as the UK has a smaller workforce that is poorer and sicker than in 2019.

That’s the verdict of Rebecca Florisson, principal analyst at the Work Foundation at Lancaster University.

Florisson explains that living standards have not recovered despite strong wage growth:

“Annual nominal wage growth was 6%, with the record National Living Wage increase of 9.8% improving the pay of 3.3 million low paid workers. There are signs that the wage growth recovery has peaked.

“Despite real wages rising by 2.3% on the year, the economic impact of the Covid-19 pandemic and the war in the Ukraine has made this the first Parliament since 1955 where living standards have declined. The reality is that most people are feeling poorer than when they last voted in the last General Election nearly five years ago.

The UK also has a smaller workforce than at the start of the Parliament, Florisson adds:

“There are now a record 2.83 million people who are economically inactive due to long-term sickness – 702,000 higher than in January-March 2020. The UK continues to be an international outlier with participation rates well below pre-Covid levels and this trend shows no sign of abating.

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Pay is rising fastest in the City, and slowest on UK building sites.

The ONS explains:

In February to April 2024, the finance and business services sector saw the largest annual total pay growth at 6.9%. The construction sector saw the smallest annual total pay growth across sectors, at 2.1%.

Liz Kendall: Rising unemployment due to Tory ‘abject failure’

The rise in unemployment, and in people neither working nor looking for work (economically inactive) is a sign of 14 years of “abject failure” by the government, says Liz Kendall, Labour’s shadow work and pensions secretary:

“Today’s figures confirm that the Tories have no hiding place after 14 years of abject failure.

On Rishi Sunak’s watch, a record number of people are out of work due to long-term sickness at terrible cost to them, to business and the taxpayer, and we remain the only G7 country whose employment rate still isn’t back to pre-pandemic levels.

Labour’s plan will get Britain working by cutting NHS waiting lists, introducing a new national jobs and careers service, making work pay and supporting people into good jobs across every part of the country.

It’s time to stop the chaos, turn the page and start rebuilding Britain.”

Minimum wage increases pushed up warnings.

The increase in the UK minimum wage helped to keep wage growth strong in the last quarter.

The national living wage rose by almost 10% at the start of April, to £11.44 an hour, lifting take-home pay for around three million workers.

Yael Selfin, chief economist at KPMG UK, says:

“Wage growth remained elevated in April as the 10% hike in the National Living Wage was enough to temporarily arrest the downward momentum in pay.

Based on today’s release, we estimate that the rise in the National Living Wage boosted the overall level of pay by around 0.1%, although the current headline rate somewhat underestimates the impact because it is reported as a three-month average.

“The unemployment rate ticked up to 4.4%. The recent weakening in demand for staff has been attributed to a lack of roles and firms delaying hiring decisions. This is consistent with a broader trend of retaining existing labour, and could signal that firms expect a pickup in activity so that they could utilise their existing staff more.

Thomas Pugh, economist at audit, tax and consulting firm RSM UK, agrees that the minimum wage increase kept regular pay high:

“The punchy 0.6% m/m increase in private sector regular pay in April was enough to keep headline total pay growth at 5.9%. However, we estimate at least half of this monthly increase was due to the one-off 9.7% increase in the national minimum wage.

Indeed, the labour market continues to loosen with employment dropping by another 139,000 in the three months to April and the unemployment rate rising to 4.4%

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Wages are rising slightly faster in the UK public sector than in the private sector, today’s labour market report shows.

The Office for National Statistics reports that annual average regular earnings growth for the public sector “remains strong”, at 6.4% in February to April 2024.

For the private sector, total regular (ex-bonuses) pay rose by 5.8%, the slowest rate since April to June 2022 (when it was 5.4%).

Annual average total earnings growth for the public sector was 6.3% and was 5.8% for the private sector, the ONS adds.

UK real wages rising at fastest since 2021

The good news for workers is that real wages (ie, after inflation) rose at their fastest rate in almost three years.

Adjusted for CPI inflation, total pay (including bonuses) grew by 2.7% per year in February to April 2024, which is the fastest rate since July to September 2021 (when it was 3.0%).

Regular pay (which excludes bonuses) rose by 2.9%, the fastest growth since June to August 2021 (when it was 3.4%).

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Introduction: Unemployment rate rises to 4.4%

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Back when the UK general election was called, today was identified as a key date to take the health of the economy.

That’s because the latest labour market data is being released, the first of five pieces of important economic news which will test Rishi Sunak’s claim that his economic plan was working.

The data will also be watched at the Bank of England, as well as across Westminster, as central bankers look for evidence that inflationary pressures are esing.

And the big news is that unemployment has risen, while wage growth remains stickily high – which may dampen hopes of an early interest rate cut.

The Office for National Statistics has reported that the number of people unemployed rose by 138,000 in the February-April quarter, taking the total to just over 1.5 million.

This lifts the UK unemployment rate to 4.4%, the highest since July-September 2021.

The number of people in work has fallen, by 139,000, to 32.97 million.

And 132,000 more people fell out of the labour market altogether, partly due to ill health, taking the total of economically inactive up to 9.434m. That left the economic inactivity rate at 22.3% for the three months to April, up from 22% in the previous quarter.

The data also shows that companies are cutting back on hiring, with the number of vacancies in March to May 2024 falling by 12,000 to 904,000.

The number of vacancies in March to May 2024 was 904,000, a decrease of 12,000 on the previous 3 months.

This is down by 156,000 from a year before, although they remained 108,000 above their pre #COVID19 levels.

Read Vacancies and jobs in the UK ➡️ https://t.co/OOuA5MDtdJ pic.twitter.com/RzohaWofTp

— Office for National Statistics (ONS) (@ONS) June 11, 2024

The ONS says:

This month’s figures continue to show signs that the labour market may be cooling, with the number of vacancies still falling and unemployment rising, though earnings growth remains relatively strong.

We’ve published the latest UK labour market figures.

Headline indicators for the UK labour market for February to April 2024 show:

• employment was 74.3%
• unemployment was 4.4%
• economic inactivity was 22.3%

Read Labour market overview ➡️ https://t.co/d5svuWoytL pic.twitter.com/hsLB0qWhCg

— Office for National Statistics (ONS) (@ONS) June 11, 2024

But wage growth did not slow, despite this cooling demand for workers.

The ONS reports that annual growth in regular earnings (excluding bonuses) was 6.0%, the same as for the previous three-month period; and annual growth in employees’ average total earnings (including bonuses) was 5.9%, the same as for the previous three-month period.

The agenda

  • 7am BST: UK labour market statistics

  • 11am BST: NFIB index of US small business optimism

  • Noon BST: Fireside chat with ECB chief economist Philip Lane at the Banking and Payments Federation Ireland National Conference in Dublin

  • 2pm BST: Russia trade balance for April

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