The labour market data, released earlier today, was notable not because the economy created 254k jobs, causing the number of unemployed to fall by 121k in the three months to March, but because wage growth was so low.
It appears that bonuses were pretty much non-existent as average weekly earnings including bonuses increased by 0.3%, growth excluding bonuses was a little better at 0.7%. Both are meagre, and real earnings, when adjusted for inflation, remain mired in negative territory after CPI surged to 1.9% last month.
Weak wage growth is problematic on many levels – how can consumption grow if wages remain stagnant, will people be able to afford mortgages if interest rates rise and wages go nowhere? That is a problem for the Bank of England to deal with, for market observers there could be a silver lining to meagre pay packets.
As you can see in figure 1, the FTSE 100 and wages tend to move in opposite directions. This is not a big surprise, since low wages should mean that corporate expenses are kept under control, leaving more profits for shareholders. So while low wage growth is not great for your fellow man, it could be good news for your stock fund.
As a caveat to this, the correlation between wages and the FTSE 100 is not perfect, many companies on the FTSE 100 have international operations and don’t pay that many workers in the UK, however, we believe that this relationship is still worth noting. If the UK is considered a cheap place to do business, then we could see the UK index play catch up with some of its rivals. As you can see in figure 2 below, the FTSE 100 has lagged the S&P 500, DAX and the CAC 40 for the last year.
FTSE 250 and wages:
While the FTSE 100 tends to rally alongside weak wage growth, the same is not true for the broader FTSE 250 index. This index has a statistically significant positive correlation of 0.6 with UK wage growth. This may suggest that the FTSE 250 is more sensitive to the economic damage done to the consumer by subdued wage packets, which could be one factor weighing on the larger index.
Technical outlook:
In the short-term, the FTSE 100 has extended its advance today, it is currently above its 100-day sma, and the next key resistance level is the 50-day sma at 6,807. Above here opens the way to the 4th July high at 6,875. Key support lies at 6,740 – the 100-day sma – and then 6,689 – the 200-day sma.
Conclusion:
- • Both the technical and fundamental pictures are positive for the FTSE 100 right now.
- • Weak wage growth in the UK may boost the FTSE 100 as corporate expenditure is kept low, boosting profits.
- • The FTSE 100 has underperformed other major global indices so far this year, if the fundamental and technical pictures can stay aligned then it could play catch up over the summer months.
- • Interestingly, the broader FTSE 250 index has a 0.6 positive correlation with wage growth and as wages have remained subdued it has struggled, suggesting that this index could be more sensitive to the consequences of low wage growth, nominally patchy consumption.
Figure 1:
Source: PLEASE NOTE THAT THIS IS A BLOOMBERG CHART AND DOES NOT REPRESENT THE PRICES OFFERED BY FOREX.COM
Figure 2:
Source: PLEASE NOTE THAT THIS IS A BLOOMBERG CHART AND DOES NOT REPRESENT THE PRICES OFFERED BY FOREX.COM
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