UK Wage Surge Fuels Hawkish BoE Outlook Amid Rising Unemployment

Highlights

• Average earnings, including bonuses, up 8.2% YoY, beating forecasts.
• UK unemployment rate at 4.2% in June.
• Wage growth and the unemployment rate to test BoE monetary policy goals.

It is a busy Tuesday on the UK economic calendar. This morning, the UK Labour Market Overview drew interest. Wage growth remained the focal point. A pickup in wage growth would support a more hawkish BoE policy outlook.

The UK unemployment rate unexpectedly rose from 4.0% to 4.2% in June. However, UK average earnings, including bonuses, increased by 8.2% year-over-year versus 7.2% in May. Economists forecast average earnings, including bonuses, to rise by 7.3% in June and for the unemployment rate to hold steady at 4.0%.

According to the Office for National Statistics,

• The one-off NHS bonus payments drove annual growth in regular pay, including bonuses, higher.
• From April to June, the unemployment rate increased by 0.3 percentage points to 4.2%, driven by the unemployed for up to six months.
• The UK employment rate was 75.7% (estimate) from April to June 2023, down 0.1 percentage points compared to January to March 2023.
• According to the ONS, there was a large net movement from economic activity into unemployment.
• From May to July 2023, estimated vacancies declined by 66,000, registering a thirteenth consecutive period decline.
• Claimant counts increased by 29,000 in July versus a 16,200 rise in June. (Forecast: -7,300).

The jump in average earnings plus bonuses will fuel bets on a more hawkish BoE monetary policy outlook. However, the increase in the unemployment rate and the reasons behind the surge in average earnings plus bonuses could give the BoE reason to hold out for the July report.

GBP to USD Reaction to UK Wage Growth

Ahead of the UK Labour Market Overview Report, the GBP to USD rose to a pre-stat high of $1.26943 before falling to a low of $1.26753.

However, in response to the Labour Market Report, the GBP to USD fell to a low of $1.26798 before rising to a post-stat high of $1.27209.

At the time of writing, the GBP to USD was up 0.18% to $1.27090.

Next Up

US retail sales and the NY Empire State Manufacturing Index will move the dial. We expect the retail sales figures to have more impact.

Economists forecast retail sales to increase by 0.4% in July versus +0.2% in June.

A jump in retail sales could force the Fed to hike rates to curb spending and eliminate the demand effect on consumer price inflation. However, with the manufacturing sector accounting for less than 30% of the US economy, the NY State numbers are unlikely to influence the Fed.