European markets got off to a mixed start yesterday, while US markets, after initially looking in good shape, rolled over into the close to finish on the lows of the day.
While investors want to believe the narrative that stock markets can continue to move higher, this belief is bumping up against the reality of how the continued rise in energy prices, as well as supply chain pressures are likely to impact company profit margins, at a time when consumer incomes are likely to face increasing pressure as we head into the winter months.
“The reality is that over the last few months stock markets haven’t gone anywhere, chopping in a broad range since early July,” commented Michael Hewson, Chief Market Analyst at CMC Markets UK, this morning.
“As we look ahead to today’s European open, we can expect to see more of the same, with markets expected to open lower after last night’s late US sell-off, and this morning’s weakness in Asia markets, as once again concerns over rising energy prices outweigh optimism over the recovery in demand,” he said.
“It seems rather counterintuitive to be speculating that we may well see a rate hike from the Bank of England by the end of this year, at a time when the bank is still implementing an asset purchase program, but that’s where we are right now, with some warning of the risk of a policy mistake from the central bank,” Hewson continued.
They do appear to be painting themselves into a corner, when it comes to a rate rise, which is always a dangerous place to be.
All eyes on UK unemployment
Today’s latest UK unemployment data may well reinforce the rate rise narrative, and while a hike of 0.15 per cent, back to 0.25 per cent, may well be warranted in the months ahead, gilt markets are pricing in much more than that, although its notable the pound hasn’t risen in line with yields. This would suggest that the move in bond markets may well be overdone.
The unemployment picture for the UK economy has improved considerably over the last few months, a trend that has been no better illustrated than with the decline seen in the claimant count rate since March, when it was at 7.2 per cent.
Since then, we’ve seen steady declines, falling to 5.4 per cent in August, as businesses continued to reopen, even with the delay to July 19th, Hewson pointed out.
“The ILO rate has also fallen steadily falling to 4.6 per cent in July, and looks set to fall again for the three months to August to 4.5 per cent, even as furlough continues to roll-off, with the Bank of England seemingly of the mind that we may not see a post furlough move higher,” he said.
“With the various supply chain disruptions being seen across sectors it is becoming increasingly apparent that furlough has outlived its usefulness. Job vacancies in July rose to over 1m, with 182k new roles added as the UK economy reopened and the rest of the remaining restrictions were removed,” Hewson pointed out.
Wages are also on the up, and while some of the gains can be put down to base effects caused by the pandemic, they still rose from 6.6 per cent to 7.4 per cent, excluding bonuses in June, although we did slip back to 6.8 per cent in July, and could slip even further today to 6 per cent, for the three months to August.
“Nonetheless, wages are still rising much faster than headline CPI, and this trend could well continue in the coming months as we head into year-end if the howls of anguish from businesses about labour shortages are in any way accurate,” Hewson said.
“This might still see the ILO measure edge higher, if struggling businesses decide to let any remaining employees go. If that happens the next few months could be difficult ones for the labour market, especially where there are skills mismatches which result in delays in returning to the labour force,” he concluded.