The UK is continuing to make progress toward being able to cut interest rates but as has been the case throughout the last couple of years, the process is far from straightforward.
The good news is that wage growth is slowing at a good pace after peaking last summer and near-term trends are very promising. The bad news is that the labor market remains very tight and it’s still highly uncertain whether wage growth will fall to a level consistent with 2% inflation soon.
Then there’s the unemployment rate which fell to 3.8% but is no longer reliable as a sole indicator. At a time when the BoE would like absolute clarity on the labor market, it’s left to piece together a variety of data and surveys to form a judgment. Not ideal when central banks everywhere are petrified to move too early and risk stoking inflationary pressures again.
This is the first major economic release for the UK this week with inflation to come tomorrow, GDP on Thursday, and retail sales on Friday. Ultimately the CPI data is what matters most but it would be handy if wage growth continues to slide between now and the May meeting if that is to be the live decision many expect it will.
The pound is trading higher on the back of the release on the belief that today’s data is a small setback – wage growth not falling as much as expected and unemployment falling further. I don’t think today changes a great deal, wage growth is still cooling at a decent rate and the data over the next couple of months is arguably more important.
The MPC will only have data up to March in time for the May meeting which is perhaps why markets are currently favoring a summer start for rate cuts.
Oil continues to drift higher
Oil prices are up almost 8% from last week’s lows but remain a little shy of the peak hit in late January. The market remains very volatile, with events in the Middle East creating upside risks. Then there’s the global economy and interest rates, the expectations of which are forever changing. Interest rate expectations have been pared back more recently but traders remain upbeat on the economic outlook. Of course, the further back the first rate cuts are pushed, the less confident people will be which could weigh on oil prices.
Gold choppy ahead of US CPI
Gold remains rangebound following quite a choppy start to the year. The yellow metal has remained above $2,000 during this time which suggests traders are committed to the prospect of many rate cuts this year. But in the absence of that first move or even a hint toward it, we haven’t seen a breakout in either direction. Perhaps the US CPI data later could tip the balance.
A psychologically important milestone
The post-ETF sell-off in bitcoin didn’t last very long and a break above $50,000 will be widely viewed as a significant milestone in its comeback. It’s been a rough couple of years but the ETF approvals were an important achievement that’s helped propel the price higher. Many will now be hoping it goes from strength to strength, perhaps buoyed by the halving event in April.
