British Pound: Rebound in Sterling after Retail Sales comes in Above-Forecast

Above-expectation Retail Sales figures in November, help sterling recover after recent lower-than-expected wage data had weighed, due to delaying BOE hike time-line.

November’s Retail Sales figures showed a rise of 1.7% mm, which easily beat the expected 0.6%.  

Year-on-year, they sported a massive 5.0% rise compared to the 3.0% forecast.

Previous data was revised down to -0.5% mom for Ocotber and 4.2% yoy for November '15.

Sterling strengthened on the data after it increased the possibility of an early rate hike, particularly after the

Recent data showing wage paralysis in the face of falling unemployment had puzzled economists and led to a delay in rate hike expectations.

As a consequence, the pound fell, however, today’s improved Retail data led to a small recovery in the currency as it, to some degree improved the economic outlook for inflation.

The Conundrum of low wages and high employment 

Recent data showed a surprise basis-point fall in the Unemployment Rate to 5.2% in the 3-months to October; but – in contrast to expectations - a lower-than-forecast 2.0% wage increase (ex bonus) in the same 3-month period compared to a year ago.

Analysts had expected a much higher 2.3% gain in earnings, as a result of the shrinking pool of available talent, having the effect of pushing up incomes.

Instead, wages appeared to remain mysteriously immune to the tightening labour market - a situation which runs contrary to expected correlations.

Older participants an explanation?

According to a research note put out by BofA, the October employment/wage data had once again presented economists with the ‘puzzle’ of how falling unemployment was failing to push up wages:

“But that puzzle has re-emerged. Pay growth slowed to 2.4% 3m yoy in October data, published this morning, while 207k jobs were added in the past three months, the strongest since March”

The note went on to highlight the strength of the U.K labour market:

“The unemployment rate suggests that there is little slack left in the UK economy. The rate fell by 0.1ppt, to 5.2%, in October: it has not been lower since January 2006. The BoE did not forecast the rate to reach 5.2% until the end of next year. The weak jobs data in the second quarter increasingly look like a blip or related to election uncertainty.”

The BofA analysts were also upbeat about the economy, arguing growth remained “above trend” contrary to what official indicators suggested:

“The economy continues to grow at above-trend rates. We are skeptical that momentum has slowed as much as the PMIs or recent GDP data suggest (see UK Watch: Who cares about PMIs anyway? ) - or at least slowed as much relative to trend as those data could suggest.”

Pay remained the missing 'happy ending' to the U.K economic growth story, however, with no rises in most service sectors, and the only strong recovery happening in Construction, where wages have increase by 6.1% in the 3-months to October yoy:

“Total pay is little changed since March. Finance explains some of that, but other sectors have seen pay growth slow too: wholesaling, retailing, hotels and restaurants, for example. There is one high-profile exception to that picture though: construction wages rose by 6.1% 3m yoy in October, similar to the 6.2% reading in September. Anecdotally, construction has been suffering from significant recruitment difficulties. That suggests that recruitment difficulties still matter for pay gains.”

The BofA report tentatively put forward an interesting solution to the paradox of low pay and high employment, arguing the puzzle could be explained by the higher-than-average rise in older workers joining the workforce, who are paid on average less:

“Older workers' participation in the labour force rose rapidly through 2012-2013. Those increasing numbers of people looking for jobs may help to explain the surprising weakness of wage growth at the time. That trend appears to be returning: 50-64-year- olds' participation rate has risen by 1ppt since April.”

As far as BofA’s outlook for BOE policy was concerned, the note finished explaining how the evidence of continued subdued pay had now skewed their call for a Q2 policy hike towards a longer delay.

UniCredit’s Venazza sees wage paralysis as temporary

In a note in a similar vein, UniCredit’s Daniel Venazza, the Lead U.K Economist for the group, argued the labour market was now so tight that sluggish wages are probably only a temporary factor:

“The unemployment rate is now just 0.1pp above the BoE’s estimate of the long-term equilibrium rate – on any measure, slack in the labour market and the wider economy is close to zero. We expect the weakness in wage growth to be temporary.”

Venazza said the fall in the October wage figure meant the BOE would be unlikely to “be in a hurry” to follow the Fed, who are expected to raise rates at their FOMC on Wednesday 16th (today).

He also alluded to a recent speech by the Deputy Governor of the BOE Minouche Shafik, which in retrospect appeared eerily prescient, in which she underlined the importance of sustained wage growth in to ensure a vote for a rate hike:

“.in a speech this past Monday, Deputy Governor Minouche Shafik said, “I will wait until I am convinced that wage growth will be sustained at a level consistent with inflation returning to target before voting for an increase in Bank Rate. In this sense, I will proceed with caution.” 

Like BofA who maintained their call for a BOE rate hike in Q2, but with risks now skewed in favour of a delay, the UniCredit Economist also left unchanged his call for a May ’16 hike, although he too saw risks now biased towards a delay:

“At this point in time, we keep our forecast for the first BoE rate hike to come in May 2016, with the risks now skewed towards a later hike.”