3 Numbers: BoE to hold rates — US labour market report, jobs trends
- The Bank of England is likely keep its policy rate unchanged at 0.50%
- US Labour Market data will give a fresh perspective on Friday’s upbeat jobs report
- The Employment Trends Index will show how well the US is creating new jobs
By James Picerno
In the wake of last week’s election in the UK, the Bank of England’s policy announcement is sure to receive close attention as the focus returns to economics. Meanwhile, two US indicators – the Fed’s Labor Market Conditions Index and the Conference Board’s Employment Trends Index – will provide a deeper context for interpreting Friday’s encouraging update on last month’s payrolls data.
UK: Bank of England Policy Announcement (11:00 GMT) Last week’s victory by Prime Minister David Cameron and the Tories means that the crowd can again focus on the hard data rather than the warm and fuzzy numbers of politics when it comes to analyzing Britain’s economy. But while the election is over, the after-effects have only just begun.
“If the Conservatives are as tight on fiscal policy as they promise, it will be incumbent on the [Bank of England] to do what they can to offset that by relatively lax monetary standards,” an economist at Commerzbank in London advised. “The bank will do what it promised, which is to tighten only gradually.”
The gradual rise, however, isn’t expected to start with today’s announcement. Instead, analysts think that the policy rate will remain unchanged at 0.50%. A key reason the bank is willing to keep rates low while the economy continues to grow at solid pace (GDP increased 2.8% last year): the soft trend in inflation lately.
Headline consumer inflation was flat in February and March on a year-over-year basis while core inflation, although higher at 1.0% at the end of the first quarter, is low and ticking even lower. Meanwhile, the acceleration in wages in late-2014 appears to have peaked. Although wage growth (regular pay) advanced 1.8% through February, that’s in line with the pace since last November. Wage growth that’s above inflation is a boon for workers, but it’s not yet obvious that it presents an imminent challenge for pricing stability from a monetary perspective.
Indeed, some forecasters warn that headline inflation may dip mildly into the red in the months ahead in annual terms. Some of this is due to sharply lower energy prices. As oil stabilises, the disinflationary winds may start to fade, which could boost inflation later this year. That may force the bank’s hand, assuming that economic growth continues to plug along as it has. For now, however, the BoE is under no pressure to start hiking rates.
Deciding if the economy is genuinely on firmer footing in the second quarter will remain a work in progress, even after factoring in the April employment report. Another clue comes in today’s release from the Federal Reserve, which will update its multi-factor review of the labour market. The last three reports through March look troubling, with the Labor Market Conditions Index (LMCI) slumping to its weakest reading in nearly three years.
It’s old news, of course, that the economic conditions took a hit in Q1. The case for anticipating a Q2 revival is stronger after Friday’s payrolls figures, which implies that LMCI will post a decent rebound in today’s report for April. If not, the data du jour will dim the glow emanating from last month’s jobs data.
Economists, however, are upbeat. Econoday.com's consensus forecast calls for a strong rebound to 3.1 for LMCI in April from the previous month's slightly negative reading. If so, we'll have another data point for maintaining a brighter outlook for Q2.
The first quarter revealed some weakness relative to persistent gains in 2014, based on ETI. The year-over-year change is still firmly positive through March, although the pace of increase dipped to 5.6% — the slowest rise since last September.
Based on what we know from the encouraging April figures on payrolls and recent updates on jobless claims, which remain near a 15-year low, today’s ETI report will probably reflect the improvement at the start of Q2. Indeed, the sight of growth in nonfarm payrolls bouncing back in April is a reassuring sign for the economy. It would be surprising if today’s ETI numbers tell us otherwise.
– Edited by Robert Ryan
James Picerno is a macro analyst/editor at CapitalSpectator.com. Follow James or post your comment below to engage with Saxo Bank's social trading platform.