Economic Highlights

The UK’s labour market remains remarkably strong. Employment growth, as measured by the ILO labour market survey, showed a rise of 250k in the three months to April, the third month in a row where the three-month moving average of employment growth has strengthened. Although the participation rate increased measurably, and is now at 79.0% (for those aged 16-64), up by 0.3%pts from a quarter previously, the unemployment rate nudged up by just 0.1%pt, to 3.8%. The small loosening in labour market conditions is not yet having much of an impact on wage-setting. Total wage growth strengthened to 6.5% in the three months to April, and regular (ex-bonus) pay to 7.2%. Whereas stronger wage growth is positive at the level of the individuals receiving pay rises, it is simply not helpful from the point of view of reducing aggregate cost pressures on inflation.

Headline CPI fell from 4.9% in April to 4% in May, which was slightly lower than expected. Core CPI also fell, from 5.5% to 5.2%. That was good news, but there’s still a way to go to get back to the 2% target. The Federal Reserve decided to keep interest rates unchanged for the first time in the cycle, leaving the Fed Funds target at 5.25%. However, the Fed’s members remain committed to further rate increases to keep inflation expectations low. The “dot plot” of members’ expectations now sees the median rate at 5.625% at the end of 2023. The University of Michigan Consumer Sentiment Survey showed consumer confidence is increasing above expectations and to levels last seen before the banking stress in March. Easing inflation and successful debt ceiling negotiations were cited as reasons. One-year ahead inflation expectations fell by a whopping 0.9% to 3.3%, the lowest level since March 2021. The five to ten-year expectations remain reasonably well anchored at 3%.

The European Central Bank (ECB) increased its policy rates by 25 basis points, as was well trailed by Governing Council (GC) members. In particular the Deposit rate now stands at 3.50%. The Main ‘refi’ rate increases to 4.00% and the Marginal Lending rate to 4.25%. In its press release, the GC made it clear that rates would rise as far and for as long as necessary to meet its 2% inflation target. It also confirmed that it would cease the reinvestment of maturities from the Asset Purchase Programme, starting in July. The ECB staff forecast for ‘core’ inflation was raised for each of the next three years compared with the central bank’s previous projections in March. The GC did concede however that underlying price pressures show some ‘tentative signs of softening’.

The People's Bank of China (PBoC) initially eased economic policy by cutting the seven-day reverse repo rate and the rate on the Standing Lending Facility (SLF) by 10 basis points. Those rate cuts were followed today by a cut in the Medium-term Lending Facility rate; the one-year rate was cut by 10bps to 2.65%. The easing was driven by signs of a stuttering recovery, and growth in a number of key monthly indicators slowed and missed expectations. In May, industrial production slowed to 3.5% (year-on-year) from the 5.6% seen in April and missed expectations of 3.6%. Retail sales also slowed more than expected to 12.7% (consensus 13.6%) from 18.4%. Meanwhile investment growth moderated to 4.0% from 4.7% (consensus 4.4%). Reports suggest that the government is also considering fiscal policy announcements with a broad package of support, targeting everything from supporting domestic demand to the troubled real estate sector.