UK Private Regular Wages Fall

Summary

• It was another reduced labour market release (full labour force survey data will be corrected and updated in January hopefully). But what we did get was dovish.
• Total weekly wage growth dropped 0.8ppt (from an upwardly revised +8.0% YoY) to +7.2%. Meanwhile, regular pay dropped 0.5ppt from an upwardly revised +7.8% in September.
• Most importantly, private sector regular pay dropped to just +6.4% YoY – below where the BoE had forecast it would be by year-end at its last MPR, and almost as low as its YE forecast at the August MPR.
• The MoM decline in regular private pay suggests there is a risk of a near-term bounce. We do not like to read too much into single prints, but even if the recent trajectory is maintained, wages will undershoot MPR forecasts.
• Experimental unemployment rate readings were not very informative. It remains at 4.2%. The recent trajectory looks odd.
• The BoE will have more scope for optimism on services inflation at this week’s meeting, although until they get full labour market corrections in January they will remain cautious.

Market Implications

• We continue to like to receive May 2024-dated SONIA, with a growing possibility that the BoE is ready to cut by May 2024.
• We continue to like to fade pricing for Fed 2024 easing versus that of the BoE via a SONIA/SOFR Mar24/Mar25 calendar box.
• The outturn adds to our bullish gilt conviction. We will consider re-entering our long Gilt vs EGB view post-ECB.

Labour Market Data Remains Limited

The ONS released a restricted data set once again on the back of issues with the labour force survey (LFS) response rate. This has once again restricted the output. However, what we did get painted a more dovish picture for the sector.

For the BoE this provides scope for more optimism on wage growth (and services inflation) this Thursday. However, they will probably not want to take too much from it until we have the January corrections. February’s MPR is on track to see more dovish revisions to the outlook.

We continue to like to receive May 2024-dated SONIA, with a growing possibility that the BoE is ready to cut by May 2024. We also continue to see value fading pricing for Fed 2024 easing versus that of the BoE via a SONIA/SOFR Mar24/Mar25 calendar box. The outturn adds to our bullish gilt conviction. We will consider re-entering our long Gilt vs EGB view post-ECB.

Private Regular Wages Decline

After a long period of overshooting other surveys, the ONS’s AWE pay growth has dropped back sharply, particularly in regular private pay (what the BoE is most interested in). Regular private pay growth is now running at +6.4% YoY, a more than 1ppt drop on the month. This was largely driven by a surprise fall MoM in wages, which may yet reverse (Chart 1). Even so, the more timely (albeit also oft-revised) HMRC PAYE data continues to suggest that momentum is falling. It dropped to just +5.8% 3mma (Chart 2).

Importantly, despite the BoE having revised up their wage growth estimates at the November MPR, regular private AWE are now running close to their August prediction for the end of year (6.2%).

We noted back in September that the August MPR forecast of +6.2% YoY looked achievable on the basis that the necessary monthly changes in wage growth for this were not too onerous vs the recent trend. This remains the case: much of the pay growth this year was centred in May and June and the MoM momentum looks even weaker now. Even if the drop in October was a one-off and wages rise MoM ahead at the average rate of the three months before this release (c.4.6% annualised), YoY wage growth would undershoot the August MPR, and continue to fall thereafter (Chart 3).

Importantly, employment composition continues to support wage growth. We have for some time flagged the fact that this looks odd versus the shift towards part-time employment. But the above assumption is not even contingent on this wage-growth tail-wind slowing. Single month outturns can be volatile, and there is nothing to preclude a November wage spike, but as of now there are probably downside risks to the current average trajectory if the employment composition effects do fade.

Unemployment Data Uninformative

Employment and unemployment data remains experimental, and in that regard it is not very informative. Experimental unemployment rate remained at 4.2%, while claimant count is slowly rising, but still around 4% (Chart 4). Our view remains that when the labour force survey numbers are updated in January, the picture for loosening will be much stronger than what is currently being shown in the experimental data. The surveys suggest this is the case, as does the continued decline in vacancies. While the unemployment data is somewhat suspect (being experimental), the ratio of unemployment to vacancies continues to decline (Chart 5). Given that the corrected unemployment rate will attempt to reweight to areas of deprivation and 18-24 age bracket (both of which have higher than average unemployment), there is a possibility that total unemployment could also be revised higher there.

Henry Occleston is a Strategist, who focuses on European markets. Formerly, he worked in European credit and rates strategy at Mizuho Bank, and market strategy at Lloyds Bank.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)