How Did the Markets React?
The UK labor market tightened in November, as the number of claimants for jobless benefits unexpectedly dropped 5,700 – the biggest decline since January 2005. Additionally, the figure for October was revised to -3,600 from +1,200, boding even better for the employment picture. Meanwhile, the ILO unemployment rate surprisingly dipped as well, hitting 5.5%. The resilience of the labor market has led to greater wage pressures, as average earnings (including bonuses) jumped to 4.1% from 3.9%. This will be of great concern to the Bank of England, who recently cited payroll growth as a major upside risk for inflation. Combined with yesterday’s RPI release, BOE hawks may talk up the need for further policy tightening in 2007. While the data caused quite a stir in the FX markets, UK bond and equity markets blatantly ignored it as price continued its trajectory from their respective market openings.
Bonds – UK 10-Year Gilts
Prices on 10-year gilts ran completely counter to the typical direction seen on a day of impressive economic data, which increased the chances for policy tightening by the Bank of England in 2007. Gilts hit a high of 95.460 after the market opening found price bouncing from a low of 95.180 on rising volume and dip buying. Consequently, yields edged down two basis points to a rate of 4.583% by the London afternoon.
FX – GBP/USD, EUR/GBP
The British pound jumped on the release of better than expected unemployment data, as the labor market continues to tighten. Cable held onto its 40 points of gains, but price traded just above yesterday’s New York close at 1.9724 as GBP/USD spent much of the Asian session meandering lower. Meanwhile, EUR/GBP dropped from .6732 to a low of .6724 on the data, but subsequently edged back up to trade at .6724 within an hour. While all of the components of the labor market report were stronger than estimated, the posting of average earnings made the greatest impact, as the Bank of England recently cited wage growth as a major upside risk for inflation. As a result, markets started to price in the potential for a more hawkish BOE in 2007.
Equities – FTSE 100 Index
UK equities ignored today’s release of better-than-expected employment data, with price action in the FTSE 100 indistinguishable from any other point in the session. By mid-London afternoon, the UK benchmark index was up 0.1% to 6,160.70 on run up in retail stocks ahead of the holidays along with a strong performance in the banking sector. Fashion retailer Next added 1.9% to hit £17.98 while HBOS, Britain's biggest mortgage lender, gained 0.9% to £10.86. Meanwhile, declining oil prices led oil refiner BP to fall 0.4% to 578p as Royal Dutch Shell B shares slipped 0.17% to £18.00.