Pound Sterling Supported on Signs "the Jobs Market is Booming"

• GBP rallies on jobs report
• Adding to gains following Bank of England comments
• Oct. saw strong jobs growth says ONS
• "Jobs market is booming" - Berenberg.
• Surge in post-furlough unemployment hasn't happened
• Bank of England to hike rates in Dec/Feb. 2022

Image © Adobe Stock

The British Pound rallied in the wake of a strong labour market reading that increased the prospects of a Bank of England interest rate rise in December.

Labour market statistics for the September period came in well ahead of expectation, while statistics covering the crucial post-furlough month of October also revealed a surge in unemployment has not occured.

In October the number of people seeking out of work benefits fell by 14.9K said the ONS, whereas a surge would have been expected in the event that the ending of the government's job support scheme (furlough) would lead to a jump in unemployment.

Furthermore, the October estimate for payrolled employees rose sharply.

"October's early estimate shows the number of people on the payroll rose strongly on the month and stands well above its pre-pandemic level," says ONS head of economic statistics, Sam Beckett.

Early estimates for October 2021 indicate that the number of payrolled employees rose by 4.0% compared with October 2020, a rise of 1,139,000 employees; there were 160K more people were in payrolled employment in October 2021 when compared with September 2021.

"That October saw paid employment rise further above pre-Covid levels gave an early sign that the furlough scheme closed without causing much damage," says Andrew Goodwin, Chief UK Economist at Oxford Economics.

"There is also no sign of an upturn in redundancies, and businesses tell us that only a very small proportion of their previously furloughed staff have been laid off. In addition, vacancies again reached a new record high," said Beckett.

The Pound had been rising ahead of the jobs report thanks to an appearance of members of the Bank of England in parliament, where they said an interest rate rise could occur at any of the upcoming Monetary Policy Committee meetings.

The jobs report accelerated the currency's gains as it gives encouragement to the view that the Bank will feel confident enough to lift rates from emergency settings, in either December or February.

The Pound to Euro exchange rate has risen back to 1.1847 on building rate hike expectations, the Pound to Dollar exchange rate is up at 1.3466.

The ONS reported employment grew 247K in the three months to September, surpassing the previous month's reading of 235K and analyst expectations for a reading of 185K to be delivered.

"The jobs market is booming," says Kallum Pickering, Senior Economist at Berenberg Bank. "The rapid recovery from the pandemic shock plus the huge policy tailwind continued to underpin the UK labour market recovery in September."

The unemployment rate fell to 4.3% in September, below the 4.4% expected by the market and August's 4.5%.

The average earnings index with bonuses included rose 5.8% in September, surpassing consensus estimates for 5.6%, although this was down on the surge of 7.2% recorded in August.

Above: Four-hour chart for GBP/USD (top) and GBP/EUR (bottom) showing price action this November, including in the wake of the September-October jobs data release on Nov. 16.

• Reference rates at publication:
  GBP to EUR: 1.1847 \ GBP to USD: 1.3463
• High street bank rates (indicative): 1.1615 \ 1.3186
• Payment specialist rates (indicative: 1.1788 \ 1.3396
• Find out about specialist rates, here
• Or, set up an exchange rate alert, here

Data from the ONS also revealed the total actual weekly hours worked increased on the quarter to September, reflecting the decreased coronavirus restrictions, but they are still below pre-pandemic levels.

This hints that some previously furloughed employees are being offered fewer hours by their employers.

Redundancies meanwhile increased on the quarter, but the ONS says they are still at pre-pandemic levels.

Looking ahead, all signs point to further resilience in the jobs market: the number of job vacancies in August to October 2021 continued to rise to a new record of 1,172,000.

This is an increase of 388K from the pre-coronavirus pandemic January to March 2020 level, with 15 of the 18 industry sectors showing record highs.

The rate of growth in vacancies has however continued to slow down in tandem with the maturing rebound in activity; in August to October 2021 vacancies rose 222K (23.4%), down from 288K(43.4%) in the last quarter.

According to the ONS the largest quarterly increase in vacancies was seen in "wholesale and retail trade; repair of motor vehicles and motorcycles", up 29,600 (24.8%).

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The Pound fell sharply on November 04 after the Bank of England said it would keep interest rates unchanged, a move that surprised a market that was expecting a hike of at least 15 basis points.

Justifying the decision, the Bank said it needed time to see how the labour market had responded to the ending furlough in September.

The Bank judges that a robust labour market would mean spare capacity in the economy is likely to shrink sharply over coming months posing upside risks to inflation, which can in turn be remedied by higher interest rates.

Appearing before UK lawmakers on Monday Bank of England governor Andrew Bailey did however say the labour market appears to be heading in a direction consistent with higher interest rates.

Bailey said the labour market looks "tight" i.e. there are less employees chasing more jobs, as confirmed by today's vacancies numbers.

Bailey told Parliament's Treasury Select Committee that anecdotes suggest that the transition out of the furlough scheme has not increased unemployment.

As such, Bailey believes the MPC will begin to see "the picture" at the next policy meeting.

"The big question for me is that I believe the labour market is becoming significantly tighter," said Bailey.

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Looking forward, Andrew Goodwin, Chief UK Economist at Oxford Economics says he still wants to see more evidence that there has not been a disruption to the labour market following the furlough scheme before calling a December rate hike.

"December’s MPC decision will be finely balanced. But we narrowly favour February given the balance of risks, and the data needed for a full assessment of furlough’s end," says Goodwin.

Berenberg's Pickering says next month’s labour market report "is the one to watch".

He looks for a 15bps hike in December, with risks skewed to policymakers waiting until February to lift the bank rate from its historic low of 0.1%.

Money market pricing shows a 56% chance of a hike in December, while the odds of a February hike are above 100%.

The November jobs report could yet sway the Bank of England as it will give a complete picture of the post-furlough jobs market and comes out just two days before the December 16 MPC meeting.

"While some small uptick in unemployment is possible as a consequence of furlough payments ending for untenable jobs, strong employment gains, persistent wage pressure and a further rise in vacancies will likely support the case for an immediate 15bps hike in the bank rate," says Pickering.