Proactive Investors -
- FTSE 100 slips, down 27 points at 7,246
- Further rate rises expected after strong wages data
- Centrica (LON:CNA) signs US$8bn LNG supply deal
UK jobs market weakening
While the wages data is grabbing most of the attention the other key story is that the labour market is showing signs of easing.
Samuel Tombs at Pantheon Macroeconomics pointed out the single-month unemployment rate jumped to 4.3% in May and now is in line with the MPC's estimate of its equilibrium rate:
In addition, job vacancies fell by 85,000 in the three months to June, compared to the previous three months, the largest drop since January 2009, excluding pandemic-distorted months.
As a result, the vacancies-to-unemployment ratio - the MPC’s go-to measure of labour market tightness - fell to 0.77 in May, from 0.83 in April.
Tombs estimates It will reach 2019’s average level by November, if the rate of decline since last year’s peak is maintained.
He also pointed out the payroll measure of employee numbers fell marginally (-8K m/m) in June.
“For now, wage growth still has far too much momentum, but we know it lags trends in labour market slack,” he said.
“The clear message from the slack indicators is that the MPC needn’t hike Bank Rate as aggressively as markets now are pricing in.”
Dowlais tumbles as Citi highlights downside risks
Dowlais Group PLC (LON:DWL) fell 6.8% to 117.24p after analysts at Citi started coverage of the company with a sell rating and 97p price target.
The broker notes consensus expects electrification to be neutral/positive for Dowlais, but its analysis suggests battery electric vehicles could be a risk in the mid-term, with around 45-50% of sales seeing margin pressure.
The bank said this was a “technical and underresearched space,” but its due-diligence includes in-depth proprietary work on the EV powertrain sub-sector and feedback from those involved in EV design and/or purchasing at car-makers.
“In a nutshell, many of the components Dowlais competes in are at risk of commoditization and/or content-loss and/or over-capacity in the BEV world amid current or upcoming tech-disruptions,” in Citi’s opinion.
Relatively high net debt and near zero financial year 2023 free cash flow also add to concerns, should the cycle turn, the broker added.
Citi also explained the stock is trading at a 20% premium versus peers.
UK mortgage rates at 15 year highs
Expectations of higher interest rates have driven another rise in UK short-term fixed mortgage rates which have risen above the levels seen last autumn after the infamous mini-budget.
The average 2-year fixed residential mortgage rate has risen to 6.66%, Moneyfacts reports, up from 6.63% on Monday.
Confirmation from Moneyfacts this morning that we are passed the post-Truss mini-Budget peak of mortgage rates, which are now at their highest since August 2008. Full @thetimes story from yesterday/today ⬇️ pic.twitter.com/rzocyZ6JVB— George Nixon (@George_Nixon97) July 11, 2023
That takes the cost of two-year mortgages slightly above the peak of 6.65% set last autumn, when the borrowing market was rattled by Kwasi Kwarteng’s package of unfunded tax cuts.
It’s the highest rate for two-year fixed-rate mortgages since 2008.
Pound rises as wages data fuels talk of further rate hike
Sterling has risen following today's average earnings figures and comments from the Bank of England governor Andrew Bailey in his Mansion House speech on Monday.
The pound is trading just below US$1.2875, after earlier hitting a 15-month high, above US$1.29.
Bailey vowed that the central bank must "see the job through" to quickly bring inflation back down.
He stressed that "unacceptably high" inflation is currently his "pre-occupation"
Back to the average earnings figures, Danni Hewson at AJ Bell thinks "both the chancellor and the governor of the Bank of England will be chilled by today’s numbers which have been released just hours after both spoke of the need for pay restraint if inflation’s sticky fingers are to be prized from the UK economy."
“But as calls for wage restraint ring in our ears there are signs that the labour market is changing. Vacancy numbers have continued their steady decline and more people are looking for work."
“The UK economy has been resilient and high employment has played a huge part in fostering that resilience. But if recession is really necessary to stamp out inflation’s smouldering embers, there are signs that it is creeping closer."
“The mood music is changing and pretty soon bad news won’t be in the lining of good news, it will just be bad news," she reckons