Article / 11 November 2015 at 5:02 GMT

3 Numbers: UK job data won't spoil the macro party

editor/analyst /
United States
  • UK macro trend outlook encouraging, but watch today's claimant count 
  • How will US demand for mortgage applications fare if rates are heading higher?
  • The 2-year Treasury yield is signalling a rate hike at next month’s Fed meeting

By James Picerno

Wednesday’s a light day for economic releases, which will provide a bigger-than-usual spotlight on today’s monthly update of the UK labour market. Later, the first weekly report on US demand for mortgage applications arrives since last week’s surprisingly strong jobs report. Meanwhile, keep an eye on the 2-year Treasury yield as the crowd comes to terms with rising confidence that the Federal Reserve will start raising interest rates in December.

Job well done? A flat to slight decline in the claimant total is expected
in today’s UK labour market report. Photo: iStock

UK: Labour Market Report (0930 GMT) This week’s economic update from the Organisation for Economic Co-operation and Development advised that the UK is on track to grow at a “robust pace” through 2017. Real GDP is projected to rise 2.4% this year and next, ticking lower to a 2.3% pace in 2017.

The outlook for a moderately steady expansion aligns with the October GDP estimate from the National Institute of Economic and Social Research. The group advised last week that UK output inched up to a 0.6% increase for the three months through October – slightly above the 0.5% rise in the September report.

Today’s labour market release from the government isn’t expected to conflict with the generally upbeat outlook for Britain’s macro trend. But keep an eye on the claimant count, which has been creeping higher lately, albeit on the margins. In September the number of unemployed workers increased by 4,600 (seasonally adjusted), above the near-1,200 rise in August.

Those are small advances, although the slight gains stand out as a break from the downward trend over the last several years. Is the rise in the claimant count an early sign of trouble? For the moment, no, assuming that we don’t see higher increases. A number of economists are looking for a flat to slight decline for the claimant total in today’s release. 

But if the data surprises on the upside – particularly if the gain is well above September’s 4,600 advance – the news may spark new questions about Britain’s economy.

US: Weekly Mortgage Applications (1200 GMT) The revival in the growth rate for the US labour market in October put an interest rate hike back on the table for next month’s Federal Reserve policy meeting. That’s good news in the sense that higher rates reflect confidence that economic growth will continue and perhaps even accelerate. But for industries that rely on borrowing, a dearer price for credit may bring a turbulent transition period.

Or so one might assume when it comes to the housing market, which is highly dependent on loans for fuelling economic activity. As such, analysts are again focusing on how a period of rising rates will play out in a sector of the economy that has only witnessed flat to declining rates over the past eight years.

To be fair, even a modest rise in rates would still leave mortgage rates close to historic lows. Nonetheless, the perception that rates are finally headed higher may weigh on the housing market, if only temporarily.

It doesn’t help the near-term view of housing that the perspective of consumers has weakened lately. Fannie Mae’s Home Purchase Sentiment Index ticked lower in October “as consumers’ volatile outlook on both household income improvement and mortgage interest rates kept housing sentiment relatively flat”, the mortgage-finance provider said on Monday.

Meanwhile, mortgage rates are ticking higher. The national average for the 30-year rate increased to 3.87% last week – a seven-week high, according to Federal Reserve data.

The question is how all of this impacts demand for mortgages, which is the foundation for housing activity. Recent updates suggest that the appetite for credit has slowed to a crawl after several weeks of wild swings due to a recent change in lending regulations. It’ll be interesting to see how today’s weekly update compares – the first since last Friday’s bullish data on employment, which boosted the odds for a rate hike next month.

US: 2-Year Treasury Yield Speaking of rate-hike expectations, the 2-year yield has increased to a five-year high in recent days. The jump reflects growing confidence in the bond market that the Federal Reserve will squeeze monetary policy next month for the first time in nine years.

"If we see continued gradual improvement in the US economy, it will be appropriate to gradually increase short-term rates," Eric Rosengren, president of the Boston Fed, said on Monday. "I would highlight that the data received recently have been positive, reflecting real improvement for the economy."

The bond market is taking the hint. Indeed, the benchmark 10-year yield has also made a sharp turn higher in recent days, trading above the 2.3% mark in mid-day trading yesterday. That’s the highest since the summer and another indication that the crowd’s preparing for a rate hike next month.

Fed fund futures tell a similar story. The probability of a rate hike at the December 16 Federal Open Market Committee meeting jumped to nearly 70%, based on data published yesterday by the CME Group.  

The future suddenly looks relatively clear in terms of monetary policy, but there’s still a long way to go in terms of incoming economic data. As Rosengren suggests, much will depend on how the next round of numbers stacks up, including this Friday’s monthly update on retail sales for October. For now, the crowd’s looking for a modest improvement vs. September.

In the meantime, keep your eye on the 2-year yield for a real-time approximation of expectations for monetary policy. The stars appear to be lining up in favour of higher rates. But if the hawkish outlook turns out to be another head fake, an early clue that expectations have run too far too fast will show up in 2-year yield, which is widely considered the most sensitive spot on the yield curve for forward estimates of monetary policy changes.

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– Edited by Gayle Bryant

James Picerno is a macro analyst/editor at Follow James or post your comment below to engage with Saxo Bank's social trading platform.


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