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In our Market Insights, Prosperity Investment Management examines the latest developments across the globe's biggest financial markets - providing you with all the latest information you need to know.
UK unemployment levels falls as pay growth slows
The UK's unemployment rate has seen a slight decrease, according to official data.
In the three months leading up to the end of June, unemployment dropped to 4.2%, down from 4.4% in the previous quarter. Wage growth, however, has slowed significantly, increasing at an annual rate of 5.4%—the slowest pace in nearly two years.
The Office for National Statistics (ONS) noted that while some aspects of the report are encouraging, there are indications that the labour market is "cooling."
This is reflected in the rise in job vacancies, increasing redundancies, and a persistently high number of people not actively seeking work. The ONS also highlighted that businesses, facing higher operating costs, might be reducing their hiring efforts.
However, the ONS cautioned against over-interpreting these job figures, as its Labour Force Survey has had fewer respondents than usual over the past year.
These figures might influence further interest rate cuts by the Bank of England this year. In a recent, closely contested decision, the Bank reduced the rate to 5% from 5.25%—its first cut in over four years. While the Bank has kept rates high to combat inflation, this strategy has also increased borrowing costs for consumers and contributed to higher wages.
While beneficial for workers, this could be prompting businesses to scale back on hiring. The ONS reported that estimated job vacancies in the UK fell by 26,000, bringing the total to 884,000 in the three months to July.
European stocks close higher as steady bounce back from volatility continues
European stocks edged higher on Tuesday, maintaining a cautious upward trend following last week’s market volatility.
The Stoxx 600 index, the region’s benchmark, rose by 0.08% as of 9:49 a.m. London time. Gains were led by utilities, which climbed 0.57%, while travel stocks fell by 1.26%.
On Monday, European markets had a mixed close, with investors focused on upcoming inflation data from the U.S. and the U.K.
On Tuesday, the U.K.'s Office for National Statistics reported wage growth, excluding bonuses, at 5.4% year-on-year between April and June—the slowest rate in two years. The unemployment rate also fell to 4.2% from 4.4%, defying economists’ expectations of a rise to 4.5%.
The U.K.'s inflation data, set to be released on Wednesday, will be closely watched as it will be the first report since the Bank of England's recent interest rate cut of 25 basis points.
After two months of holding steady at 2%, economists surveyed by Reuters anticipate the headline inflation rate to increase slightly to 2.3%.
Money markets are currently anticipating further rate cuts by the Bank of England, potentially totalling 50 basis points this year, with the Bank’s key rate currently at 5%. Following the labour market data, the British pound strengthened, rising 0.28% against the U.S. dollar to $1.280 and 0.3% against the euro to 1.1722.
Globally, investors are also focused on the latest U.S. inflation data this week to gauge the economic outlook of the world’s largest economy.
The U.S. producer price index, a key measure of wholesale prices, will be released on Tuesday, followed by the consumer price index for July on Wednesday. Investors will assess whether these figures could prompt the U.S. Federal Reserve to consider rate cuts as early as September.
In the Asia-Pacific region, markets were mixed overnight following a volatile session in the U.S. on Monday. Meanwhile, U.S. stock futures showed little movement Monday night as investors awaited this week’s crucial inflation data.
Latest Bank of Japan action leads to a sharp rise in the value of the yen
Over the past year, many have speculated about when the Bank of Japan (BOJ) would begin significantly tightening its monetary policy, particularly with Japanese inflation reaching or nearing a 40-year high.
That moment has now arrived. The BOJ raised the benchmark interest rate from 0.10% to 0.25%, following a previous increase in March from -0.1% to 0.1%. Additionally, the BOJ announced plans to reduce the pace of asset purchases by half.
While a shift in asset purchases was anticipated by investors, the unexpected increase in the benchmark interest rate caught them off guard, according to a survey.
This led to a sharp rise in the value of the yen, which recently approached 148 yen per US dollar, a significant recovery from its low of 161 yen per dollar just weeks earlier.
BOJ Governor Kazuo Ueda, in his comments after the announcement, emphasised that even with the increase to 0.25%, the policy rate remains very low, particularly when adjusted for inflation.
Currently, there is a broad expectation that the BOJ will continue to raise rates, while the U.S. Federal Reserve is widely expected to begin gradually cutting rates in September. If both central banks' actions align with these expectations, further sharp appreciation of the yen is unlikely—barring unexpected developments that could disrupt currency values.
As for the impact of a stronger yen, there are several potential consequences. Economists are currently viewing a rising yen as disinflationary, which aligns with the BOJ’s objectives.
BOJ Governor Ueda even mentioned that the exchange rate was a factor in the BOJ’s decision. Secondly, a stronger yen will lower the prices of imported commodities, potentially increasing the purchasing power of Japanese households.
Lastly, it could reduce the competitiveness of Japanese exports. If investors anticipate further interest rate hikes or continued yen appreciation, this could suppress the carry trade. Reports indicate that some investors have already begun unwinding their carry trade positions in response.
