Pound drops after UK labour data

OVERNIGHT

Asian equity markets are mostly higher despite Chinese data pointing to some waning of the post-Covid economic bounce. Both retail sales and industrial production in the year-on-year comparison were lower than forecast. Markets continued to watch developments in the US debt ceiling negotiations. Reports suggest that President Biden and House Speaker McCarthy will meet today, as Treasury Secretary Yellen warned that her department may run out of cash in June. 

THE DAY AHEAD

UK labour market data released earlier this morning were slightly softer than expected. The unemployment rate unexpectedly increased to 3.9% from 3.8% and regular pay growth (excluding bonuses) edged up less than expected to 6.7% from 6.6%. There is evidence that labour supply is improving but the BoE noted last week, following its twelfth interest rate increase, that survey evidence such as from our Business Barometer points to further employment growth. The labour market overall still remains tight.

The German ZEW survey will provide an early gauge of economic sentiment in May. It is a survey of institutional investors rather than businesses. We expect declines in the expectations component to -5.0 from 4.1, which would be the third successive fall to the lowest level since December. The recent trend reflects financial market volatility, partly related to stresses in US regional banks. The ZEW current situation index is also predicted to fall. 

Key US data will be watched to support Fed ‘pause’ expectations. They include April data for industrial production and retail sales today. We expect retail sales to increase by 0.6%m/m, the first rise in three months, although driven by auto sales rather than broader strength. Industrial activity was probably flat, broadly consistent with mostly softening manufacturing surveys. Meanwhile, Canadian CPI inflation is forecast to fall to 4.2% from 4.3%.

Overnight, the first reading of Japanese Q1 GDP is expected to show annualised quarter-on-quarter growth of 0.8%, up from 0.1% in Q4. A weaker outturn would increase expectations for the Bank of Japan to maintains its ultra-easy monetary policy settings for now.

MARKETS

The pound declined after this morning’s softer than expected UK labour data. GBP/USD fell below 1.25 and GBP/EUR below 1.15. The Australian dollar also fell after the Chinese data.