UK wage growth surges, as China’s growth targets leave the markets flat

UK Labour market data was a mixed bag, the unemployment rate remained steady at 2.4%, there was a sharp drop in payrolled employees in November, down 35k, the sharpest drop in 4 years. Added to this, the number of vacancies decreased in the three months to October, although they remain above pre-pandemic levels.  However, it was the wage data that has stolen the headlines. Average weekly earnings rose to 5.2% in October, up from 4.4%, which is extremely strong, however, this data needs to be viewed alongside other data points. There was weakness in the private sector employment data in the December PMIs, which suggests that the NI rise for employers has weighed on employment prospects.

Thus, the rise in wages could be a public sector story rather than a private sector story, and it may not be indicative that the UK labour market is resilient. Instead, it could be a result of rising government borrowing levels since the summer, to pay for public sector pay rises. Today’s data complicates the picture for the Bank of England. On the one hand, private sector employment is contracting and there are signs of distress in the economic data. On the other hand, wage data is higher, which could pose a threat to the disinflation trend that we have seen.

We do not think that today’s Labour Force survey data will move the dial for the Bank of England. Unlike the Federal Reserve, they do not target full employment, only price stability. Thus, Wednesday’s CPI data is critical for the size and pace of potential rate cuts from the BOE in 2025. The tone of the BOE’s rhetoric will be critical in the coming weeks to determine if they adopt a Catherine-Mann Style shock and awe super-sized rate cut.

Pound benefits from strong wage data

The pound has continued its move higher on Tuesday after rising on Monday. GBP/USD is back above $1.27, as the UK wage data boosts the pound’s relative yield differential with other G10 currencies. As we have moved through December, rate cut expectations for 2025 have been scaled back, even though the economic data have shown fault lines. There are now 2.5 rate cuts priced in until November 2025. This is likely to be justified by Wednesday’s November inflation reading, which is expected to see the rate of CPI increase last month.

However, in the longer term, although wage data was stronger than expected, we think that the economic backdrop is weakening, which will lead to a loosening of the UK labour market over the course of 2025. Thus, there is a risk that the market is currently underestimating the chance of rate cuts from the BOE next year.

European bond market in focus

Also, in focus this week is European politics, and the European bond market, after a rise in bond yields at the start of the week. The German government, unsurprisingly, lost the no confidence vote on Monday that will trigger an election in February, also as expected. The new French PM has not cooled concerns about France’s fiscal position. The spread between French and German 10-year bond yields has widened to 80bps, as the bond ,market punishes those with big budget deficits like France, and is boosting hopes for government spending splurges from countries like Germany. Fiscal concerns are a key theme for Europe and elsewhere in 2025.

China growth target

Elsewhere, China’s 5% growth target for 2025 has been announced and Beijing has said that it will increase the budget deficit to 4% next year. The Chinese government has said that it will spend more to try to boost growth, however, stock market futures are weaker, which is a sign that the market is under-whelmed by Chinese growth forecasts. Essentially the government has set the same target for growth, but they need to spend a lot more to reach it.

Disappointing China news coupled with rising European bond yields is not conducive for European stocks right now. Investors globally are favouring the US tech sector over pretty much everything else as we move into year end. There could be some December malaise creeping in and the path of least resistance is major tech stocks, so we may see the Nasdaq continue to make record highs during this holiday shortened month.