MARKET UPDATE: UNEMPLOYMENT AND WAGE DATA TO SHED LIGHT ON UK ECONOMIC HEALTH

MARKET UPDATE: UNEMPLOYMENT AND WAGE DATA TO SHED LIGHT ON UK ECONOMIC HEALTH

14th May 2018

LAST WEEK – KEY TAkeAWAYs

Bank of England holds interest rates and cuts growth forecasts

  • The Monetary Policy Committee (MPC) voted 7 to 2 to hold interest rates at 0.5%, following softer UK growth at the beginning of the year.
  • The Bank of England now expects the UK economy to grow by 1.4% this year, down from 1.8% three months ago.
  • Bank has been dubbed the ‘unreliable boyfriend’ in its guidance having previously indicated a rate rise was on the cards.
  • The Omnis view: the MPC made the sensible move in holding off to see if the 0.1% first quarter economic growth was a temporary blip, impacted by adverse weather conditions, or something more concerning.

US pulls out of Iran nuclear deal; threatens European companies that trade in the country

  • President Trump’s decision to scrap deal with Iran, which limits its nuclear programme, was criticised by European leaders who have pledged to uphold their side of the agreement.
  • US is prepared to impose sanctions on European companies that do business in Iran, rather than continue with the 2015 deal under which corporations have contracts in the country.
  • French energy giant Total and plane manufacturer Airbus among those with sizeable business interests in Iran.
  • The Omnis view: the most meaningful impact from a markets perspective has been on oil prices, which have risen to their highest level since 2014 with a sizable chunk of Iranian supply now at risk.

China’s trade surplus narrows ahead of further talks with the US

  • Surplus comes in at $28.78bn in April, from $37.45bn a year earlier. Exports increased by 12.9% year-on-year to $200bn, while imports surged 21.5% to $172bn.
  • China’s top economic official, Liu He, will be in Washington this week to continue trade talks, after discussions in Beijing last week yielded no agreement on US trade demands.
  • President Trump’s administration has threatened to impose tariffs on up to $150bn of Chinese import goods.
  • The Omnis view: as we have highlighted in recent weeks, a ‘trade war’ is not in the interests of either nation, hence these talks. 

Populist parties agree on coalition programme as new Italian government imminent

  • Five Star Movement and anti-immigration League in negotiations on who would lead the prospective coalition, following March’s indecisive election result.
  • Italian president Sergio Mattarella meeting with both parties to judge whether a stable government can be formed, or if new elections will be needed.
  • Any new government will have to address Italy’s precarious financial position, with a debt-to-GDP ratio of 132%.
  • The Omnis view: the market reaction to the news, which broke late last week, has been muted. Omnis funds have a relatively small allocation to Italian equities and bonds. 

Norway open to UK joining EEA after Brexit

  • Norwegian prime minister, Erna Solberg, reportedly open to UK following its lead in operating outside of the EU but inside the single market. 
  • So-called Norwegian model a key option in Brexit debate with House of Lords voting in favour of membership to European Economic Area (EEA), which provides for the free movement of persons, goods, services and capital.
  • Theresa May’s government opposed to such an outcome, and the House of Commons is likely to overturn the vote.
  • The Omnis view: the main Brexit-related topic of debate for this week will centre on the prime minister’s decision to leave the EU customs union, which has stalled negotiations in Brussels and divided her cabinet.

Looking ahead - TALKING POINTS

Unemployment and wage growth data to shed more light on health of UK economy

  • The unemployment rate is expected to hold steady at the multi-decade low of 4.2% registered in the three months to February 2018.
  • Analysts predict that data will show wages rising at around 2.9%, the fastest rate in three years, as strong jobs market and skills shortages force employers to improve pay. 
  • Bank of England economists expect pay growth to remain at around 2.75% for the rest of this year, rising to 3.25% in 2019 and 3.5% in 2020.
  • The Omnis view: UK consumer price inflation fell in March to 2.5%, one of the contributing factors for the MPC to vote against an interest rate rise last week. However, last month’s figures showed signs of improvement in wage growth and the Bank of England will be keen for this trend to continue before it raises rates again.

UK unemployment rate (%) – March 2017 to February 2018

 Rsz _may _united -kingdom -unemployment -rate

Source: Office for National Statistics, tradingeconomics.com

Japan to unveil growth and inflation data

  • Gross domestic product (GDP) growth is forecast to have slowed, due to weaker private consumption and softer export demand.
  • A negative GDP print would mark the first contraction in the world’s third-largest economy since late 2015.
  • Inflation data is also due, having come in at a three-month low of 1.1% in March.
  • The Omnis view: despite relatively strong labour market conditions and industrial activity, inflationary pressures remain subdued in Japan. If the GDP figure does come out negative, this may well be just a temporary soft patch, impacted in part by bad winter weather.

Japan GDP growth rate (%) – January 2015 to January 2018

 Rsz _may _japan -gdp -growth

Source: Cabinet Office, tradingeconomics.com

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