Market Update – 12th October 2022.

ONS data released yesterday (Tuesday), showed that the UK Labour market remained “tight” in August.

Headline unemployment fell to 3.5%, which was below expectations and the lowest reading since 1974.

A large contributing factor was the number of people able or willing to work, which has fallen dramatically since the pandemic, mainly due to early retirement, long-term sickness and a record number of young people in education.

With fewer people economically active, the number of job vacancies in the UK has been elevated and whilst this has been showing signs of improvement recently, employers are having to pay more in order to secure workers.

Wages including bonuses grew 6% over the past 12 months and whilst this lags headline inflation (and is therefore a cut in real terms), should elevated wage growth persist, it will fuel inflation for longer, which increases pressure on the Bank of England (BoE) to raise interest rates.

Earlier this week it was announced that publication of the Chancellor’s “medium-term fiscal plan” would be in advance of the next monetary policy meeting and include an independent analysis by the Office for Budget Responsibility (OBR).

The government has been vocal about its intentions to boost UK economic growth via looser fiscal policy and following Kwasi Kwarteng’s “mini-budget”, interest rate expectations have jumped dramatically.

Data released this morning showed the UK economy unexpectedly shrank by 0.3% in August, and given the unexpected bank holiday for the Queen’s funeral in September, it is highly likely the economy contracted over the quarter.

And so, whilst this week’s data cements the likelihood that the BoE’s Monetary Policy Committee will raise rates at their next meeting, the scale will be largely dependent on the details of the government’s “medium-term fiscal plan” to boost economic growth.

Later today we have the release of the minutes from the last Fed monetary meeting (held on 21 September 2022).

Investment Management Team

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