Labour Market Remains the UK Economy's Bright Spot

Data shows the UK labour market remaining tight, but sterling declines as the Brexit deadlock continues to exert pressure.

Previous Day's Market Highlights

Sterling declined on Tuesday despite a relatively resilient labour market report, as a lack of progress in bipartisan Brexit talks exerted further downward pressure on the pound. Data showed the labour market remaining tight, with the unemployment rate falling to a near 45-year low of 3.8% and employment reaching the joint-highest level on record. Wages also increased at a healthy rate, 3.2% including bonuses, albeit slightly softer than expected and the slowest pace of wage growth since September 2018. However, the softer wage data can be largely ignored, with wages expected to pick up throughout the year due to the market being close to or at full employment. The report however does little to alter the Bank of England’s monetary policy outlook, with the BoE remaining handcuffed by Brexit-linked uncertainties despite likely inflationary pressures stemming from the tight labour market. On the subject of Brexit, cross-party talks once again made little progress on Tuesday, with reports persisting that the talks are close to collapse. It now appears to be a question of ‘when’ rather than ‘if’ the talks fail, with a 4th vote on the Withdrawal Agreement likely to be held in early-June should a bipartisan deal not be reached. Over the course of the day, the uncertainties weighed on the pound, which fell by around 0.3% against the dollar and the euro, chalking up a 7th straight daily decline against the latter to extend the pairing’s worst run since late-September 2017. 
 
Elsewhere, the single currency lost ground after an unexpected fall in economic sentiment and weak industrial production figures. Sentiment figures for the eurozone fell to -1.6, from a previous level of 4.5, with the decline into pessimistic territory casting further doubt on the extent of the bloc’s economic soft patch. The dollar meanwhile benefitted from a weaker euro and pound, chalking up a gain of 0.25% against a basket of peers despite softer than expected import and export price indices, though US-China trade relations remain the main focus. Little in the way of trade headlines were to be found on Tuesday, with talks remaining stalled, though safe-haven demand did decline as risk appetite improved, with both the yen and franc losing 0.3%. Overnight, softer than expected economic data from Australia and China has weighed on the Aussie dollar, with the currency falling around 0.2%. Wages increased at just 0.5% on a quarterly basis, showing the slack in the labour market and increasing chances of an RBA rate cut in the coming months. Weaker industrial production and retail sales figures from China also weighed, with lower Chinese demand likely to hurt the Australian economy due to the two nations’ close trading relationship. 
 
Away from FX, equity markets gained, reversing around half the losses recorded in Monday’s sell-off. The pan-European Stoxx 600 added 0.9%, while the US benchmark S&P 500 gained 0.8%. Finally, oil prices firmed after pipeline disruptions in Saudi Arabia, with both Brent and WTI adding more than 1% over the course of the day.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1515 1.1776 1.1505 2.30%
GBP/USD 1.2910 1.3176 1.2866 2.35%
EUR/USD 1.1205 1.1265 1.1110 1.38%
GBP/AUD 1.8625 1.8882 1.8093 4.18%
GBP/NZD 1.9660 2.0021 1.9242 3.89%
GBP/CAD 1.7385 1.7728 1.7300 2.41%

Today's Market Highlights

Today sees a busy economic calendar, though no major releases are due from the UK, where focus will remain on the progress of cross-party Brexit talks. 
 
From the eurozone, markets will look to this morning’s 2nd revisions of 1st quarter GDP, with expectations for growth to remain unchanged from the previous estimate. Markets expect figures to affirm the eurozone economy expanded at 1.2% on a year-on-year basis in the first quarter, along with quarter-on-quarter growth of 0.4%. Such data, while showing more resilient economic performance than expected by some, is unlikely to impact markets barring a downside surprise - with more attention usually paid to the 1st estimate than subsequent revisions. Markets will also look to this afternoon’s speeches by ECB members Coeure and Praet for any comments on the policy outlook. 
 
Across the pond, US retail sales are likely to be the main focus, with markets expecting the typically volatile release to pullback sharply after the fastest increase since September 2017 last month. Expectations are for sales to have increased at 0.2% on a month-on-month basis in April, with the less-volatile core measure, which excludes automobile sales, expected to increase at 0.7%. Markets will be using the release as an indicator of future US economic performance, with the US’s consumer driven economy likely to expand at a solid pace should retail sales increase solidly - an outcome that would support the dollar. Other focuses for the dollar include several lower-tier releases, including industrial production and capacity utilisation figures, though this afternoon’s speech by Fed Governor Quarles is likely to be ignored, with the subject matter being financial stability. 
 
Finally, from Canada, inflation figures for April will be eyed, with the data taking on greater significance after the BoC shed their tightening bias last month. Expectations are for CPI to drift further away from the BoC’s 2% target, with prices set to have increased at 1.7% on a year-on-year basis last month. The core figure, which strips out food and energy prices, is however set to paint a more upbeat picture, with an expected increase of 1.8% being the fastest pace of core inflation since September 2016. The expected uptick in core inflation, along with a relatively tight labour market, make an imminent BoC rate cut unlikely, an outcome which is likely to support the loonie.

Today's Economic Calendar

Time Currency Release Consensus Previous
10:00am EUR GDP (Prelim. Flash Q1 - q/q) 0.4% 0.4%
10:00am EUR GDP (Prelim. Flash Q1 - y/y) 1.2% 1.2%
1:30pm USD Retail Sales (Apr - m/m) 0.2% 1.6%
1:30pm USD Retail Sales ex. Autos (Apr - m/m) 0.7% 1.2%
1:30pm CAD CPI (Apr - y/y) 1.7% 1.9%
1:30pm CAD Core CPI (Apr - y/y) 1.8% 1.6%