UK jobs and pay raise expectations of rate hike

(Alliance News) - Stock prices in London opened higher on Tuesday morning after a surprise dip in the UK unemployment rate and pick-up in pay growth helped cement expectations of another interest rate hike by the Bank of England next week.

The FTSE 100 index opened up 7.50 points, or 0.1%, at 7,578.19. The FTSE 250 was up 22.36 points, or 0.1%, at 19,213.17, and the AIM All-Share was up 1.27 points, or 0.2%, at 793.75.

The Cboe UK 100 was up 0.1% at 755.62, the Cboe UK 250 was flat at 16,725.42, and the Cboe Small Companies was up 0.1% at 13,248.78.

The UK unemployment rate ticked downward in the three months to April, while pay growth accelerated, figures from the Office for National Statistics showed.

Unemployment edged down to 3.8% in the three months to April from 3.9% in the three months to March. Market consensus, as cited by FXStreet, had expected unemployment to rise to 4.0%.

James Smith, developed markets economist at ING, said the unexpected fall in the unemployment rate "underscores the overall resilience of the labour market right now".

"Crucially for the Bank of England, we also saw another marked acceleration in wage growth," he added.

In the three months to April, annual growth in average total pay, including bonuses, picked up to 6.5% from 6.1% in the three months to March. This came above market consensus, which expected pay growth to hold steady.

Excluding bonuses, annual average earnings growth was 7.2% in the three months to April, compared to 6.8% in the previous three months. This was above expectations of 6.9% growth.

"For the Bank of England, all of this cements a June rate hike and if the inflation numbers continue to come in hot, it's quite plausible that we end up with an August move as well," Smith concluded.

The pound was quoted at USD1.2566 at early on Tuesday in London, up from USD1.2511 at the stock-market close on Monday.

The Bank of England will announce its interest rate decision on Thursday next week. Before then, there will be rate decisions this week from the Federal Reserve, the European Central Bank and the Bank of Japan.

With the Fed first to take centre stage on Wednesday, all eyes are on a US inflation print, due out at 1330 BST on Tuesday.

According to FXStreet-cited consensus, markets are expecting May's consumer price index to show a continued slowdown in inflation. Headline consumer price inflation is expected to cool to 4.1% from 4.9% on an annual basis, with core prices expected to slow their annual rise to 5.3% from 5.5%.

"If we don't see a slowdown in core prices, then that might introduce some nervousness that might prompt the Fed to hike again tomorrow instead of the pause that is currently being priced," said Michael Hewson, chief market analyst at CMC Markets.

Markets currently see a 76% chance that the US central bank will hold rates steady on Wednesday, with the balance anticipating another 25 basis point hike, according to the CME FedWatch Tool.

Market predictions have fluctuated over the past week. The 76% expectation of a hold by the Fed is up from 70% on Monday, but down from 78% a week ago.

Ahead of the inflation data, the dollar was softer.

The euro stood at USD1.0799 early on Monday, higher against USD1.0754 late Friday. Against the yen, the dollar was trading at JPY139.49, lower compared to JPY139.54.

In London, Admiral was the worst blue-chip performer in early morning trade, down 4.9%, after Citigroup cut the insurer to 'sell' from 'neutral'.

Ashtead was down 0.2% despite posting a "record" performance in the financial year that ended April 30, with double-digit growth in revenue and profit.

The equipment rental firm reported its pretax profit rose 30% to USD2.16 billion from USD1.67 billion the year prior, and its revenue climbed 24% to USD9.67 billion from USD7.96 billion.

Centrica shares were trading flat.

The British Gas-owner said its performance over the first five months of the year has been "strong" and that it now expects its performance in the year as a whole to be around the top end of recent analyst expectations.

In the FTSE 250, CMC Markets dropped 6.4%, making it the index's worst-performing stock in early morning trade.

The financial services firm reported a sharp drop in profit in the year ended March 31. Pretax profit fall 40% year-on-year to GBP52.2 million from GBP91.5 million the year prior.

The fall came as CMC Markets' operating expenses increased by GBP45.6 million as a result of "significant" investment in technology, people, and product throughout the year along with the impact of the elevated inflationary environment seen across all regions, the company said.

Elsewhere in London, William Hill-owner 888 climbed 4.5% after it announced it had completed the sale of its Latvian business to Paf Consulting.

Chair Jonathan Mendelsohn commented: "The sale of the Latvian business marks another positive step in the execution of our integration programme. This sale generates cash proceeds from a non-core market to support our deleveraging plans, as well as enabling reinvestment into our core and growth markets."

In European equities on Tuesday, the CAC 40 in Paris and the DAX 40 in Frankfurt were both 0.6% higher.

In China on Tuesday, the Shanghai Composite closed up 0.2%, while the Hang Seng index in Hong Kong was up 0.7%.

China's central bank cut a key policy interest rate on Tuesday, in a surprise move to boost the country's flagging economy. The People's Bank of China said it was lowering the seven-day reverse repo rate to 1.9% from 2.0%, the first such move since August last year.

The seven-day reverse repo is the short-term interest paid by the central bank on loans from commercial lenders, and a decrease in the rate is expected to increase domestic money supply and stimulate spending.

Beijing has kept interest rates low compared with other major economies, but the country's near-zero price inflation highlights challenges faced by policymakers as they try to stimulate growth.

In Tokyo, the Nikkei 225 index closed up 1.8%. The S&P/ASX 200 closed up 0.2% after the stock market in Sydney returned from holiday.

In the US on Monday, Wall Street ended higher on hopes that the Federal Reserve to leave interest rates unchanged on Wednesday.

The Dow Jones Industrial Average closed up 0.6%, the S&P 500 up 0.9% and the Nasdaq Composite up 1.5%.

Brent oil was quoted at USD72.39 a barrel at early in London on Tuesday, down from USD72.71 late Monday. Gold was quoted at USD1,964.91 an ounce, higher against USD1,957.18.

By Heather Rydings, Alliance News senior economics reporter

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