Global Daily – Stronger UK wage growth unlikely to rattle BoE

by: Bill Diviney , Aline Schuiling

UK Macro: Wage growth picking up – Data this morning continued to point to a tight labour market in the UK, and – more importantly for monetary policy – wage growth gaining momentum. Nominal average weekly earnings growth picked up to 3.1% yoy in July from 2.8% in June – unrounded, this was the fastest pace since November 2008. While 3m/3m jobs growth slowed to just +3k from +42k in June, the unemployment rate held at a four-decade low of 4.0%. Although jobs growth has started to slow, we think the risks are skewed to the unemployment rate falling further still in the coming months, with the recent drop in net migration having a dampening effect on labour force growth. This is likely to put further upward pressure on wage growth. This is of course predicated on our base case of the UK leaving the EU with a deal next March, with recent newsflow pointing to that being the increasingly likely outcome. Consistent with the balance of risks facing the UK, and BoE Governor Carney’s signalling, we expect one further rate hike from the MPC in 2019, which is currently one hike less than the Bloomberg consensus. Today’s data are broadly consistent with the BoE’s outlook for wages, and as such are unlikely to lead to a renewed hawkish shift on the MPC. (Bill Diviney)

Euro Macro: German sentiment improves, but remains subdued – Germany’s ZEW economic sentiment (gauging the expectations of economists and analysts about the state of the German economy over the next six months) increased to -10.6 in August, from -13.7 in July. This was the second consecutive monthly rise, which followed six monthly drops in a row and has left sentiment still well below its long-term average of almost +23. The details of the report show that expectations about the eurozone economy as a whole improved somewhat, whereas the outlook for Italy became gloomier. Obviously, worries about the possible consequences of the expansionary budgetary policy plans of Italy’s new government have played a role here. These plans had already reduced investor sentiment towards Italy in the past few months, pushing Italy’s government bond yields higher and equity prices lower. Besides Italy, expectations for the US economy dropped as well, which probably reflects worries about the intensifying trade conflict between the US and China. All in all, the rise in ZEW sentiment towards Germany and the eurozone in August and September is consistent with our base scenario for the economy of Germany and that of the eurozone as a whole – which is of a slight pick-up in growth in the second half of the year, following the slowdown in the first half. (Aline Schuiling)