Investment Management Blog - Montague Capital

This is the sort of number UK monetary policy doves need to have if they are to counter-attack resurgent hawks bent on hammering home the message that inflation will not be allowed to get a grip.  US non-farm payrolls for June posted the sixth consecutive decline, which, combined with downward revisions for April and May, brings total job losses year-to-date to 438,000.  Adjusting crudely for the difference in total population, an equivalent year-to-date increase in unemployment for the UK would be 85-90,000, but the latest six-month figure (to April) is just 6,000.  US equities had cause for a brief and minor rally on the hope that steadily increasing inflation (but a jobless rate of still just 5.5%) might persuade the Fed to hold off on increasing interest rates.  But the UK isn’t suffering equivalent pain yet, although 900 job losses at Taylor Wimpey, 1,000 at Barratt and several thousand in Canary Wharf later this year if markets don’t improve, will make a difference. 

For the time being then it is all going to be about perceived inflationary pressures.  The ECB predictably raised rates 0.25% yesterday.  Frankly, after all the speeches, it really didn’t have an alternative.  Anyway, a rise of this size is still just a gesture rather than an effective tightening of policy, since banks’ lending strike puts them well in front of the authorities’ policy changes when it comes to the cost and availability of money.  Next week’s Monetary Policy Committee rate-setting meeting is much less of a done deal.  MPs yesterday did their bit for controlling public sector wage expectations by rejecting the official pay award in favour of a smaller one (2.25%).  (Yes, really!  Skip the bit about keeping their second home allowances.)  Figures released by Incomes Data Services yesterday show that median annual pay increases for the three months to May fell from 3.8% to 3.5%.  That’s going in the right direction, but settlements lag changes in inflation, that is, before they become “embedded” and lead them.  And the snag is that this figure is biased by large public sector awards, which the unions involved are still not fully committed to and for which they are now demanding a relaxation of the legal restrictions on strike action, and pre-dates the nasty precedent set by the Shell tanker drivers.  On top of which, many settlements in recent years have been “RPI-plus”, which will now involve larger awards than had been originally anticipated.  This will be going in to the “mix” at the MPC next week, as will an oil price that just won’t get the message.  Wednesday’s two big equity stories show that things are at last starting to bite in the real economy.  But we should all know by now that the MPC has a clear idea, in private, as to how fast the jaws should shut and of what it will do if that doesn’t happen fast enough.  The MPC would probably prefer not to have to raise rates, for fear of sowing the thought that inflation is getting out of hand much faster than had been hoped.  But then that didn’t bother the ECB.