Sterling has pared some of its recent gains this morning after the latest wage data failed to show an increase despite consensus forecasts projecting one. The FTSE 100 is down by more than 30 points and set for a second successive daily drop for the first time in a month.
Absent wage growth leaves workers feeling the squeeze
The latest wage data has unexpectedly failed to show an increase in average earnings with the index coming in in-line with last month’s reading of 2.1%. Even if the reading had risen to the consensus forecast of 2.3% it would have done little to lift the mood of UK workers who are continuing to feel the squeeze of falling real wages. The fact that it comes in flat is a real disappointment and may increase the pressure on the BoE to take measures to curb inflation at their policy meeting tomorrow.
GBP pares gains ahead of BoE
Yesterday saw the latest CPI Y/Y data rise back to 2.9%, its joint-highest level since 2013, and with wage growth stalling there is now a pronounced cut occurring in real wages. Following today’s release sterling has pulled back against the US dollar after hitting its highest level in a year shortly after the European open this morning with the pair falling back below the 1.33 handle. Whilst the failure for wages to rise can be seen as an absence of growing inflationary pressures in the labour market, and therefore GBP negative, it could alternatively be seen to apply pressure on the BoE to reign in the above-target inflation. A gaping 0.8% gap between the current rise in prices and wage increases is substantial to say the least, and will no doubt leave many workers believing the onus is now on the Bank of England to at least attempt to reduce this significant fall in real pay that is leaving workers worse off - especially when you consider that wages are in fact rising faster than the 2% inflation threshold upon which the BoE is mandated.
Dissent to grow in the BoE?
The Bank of England is almost universally expected to hold rates at record lows of 0.25% following tomorrow’s meeting, but as the Bank of Canada showed just last week, treating central bank decisions with near-certainty with regards the outcome can cause large knee-jerk reactions should they throw up surprise. Having said that, the most likely market-moving component of the release is the minutes with traders set to scrutinise them for any further signs of an earlier interest rate hike than is currently expected, with the voting pattern in particular keenly viewed. Back in June, when the CPI Y/Y reading had also just come in at 2.9% - the now joint-highest level since 2013 - 3 members of the rate-setting committee dissented in calling for higher rates. Even though one of those dissenters, Kristin Forbes, has since left, there is a fair chance we see others joining Mccafferty and Saunders in opposing a decision to keep rates at historic lows. Chief economist Andy Haldane has been touted as a possible candidate for a hawkish shift and should that occur then the market may have to quickly reprice the probability of a rate hike, which at present is still given scant chance of occurring for the foreseeable future and if this occurs the recent appreciation seen in the pound could well turn into a larger rally.