Starting to hurt

If anyone has been bemoaning the lack of volatility in GBP or USD pairs, then yesterday will have shut them up. Sterling and the US dollar were boosted and laid low respectively as markets responded to some very revealing data.

In the UK, the news was good and seemed to show that any fears over the state of the labour market in the UK can be put to bed. Employment was boosted to 73.6% – the highest on record – and well above similar measures for the US and Europe. The unemployment rate also fell to 5.4% with gains made in both employee and self-employed measures and also full and part-time areas.

The release was not all sweetness and light, however, as wage growth once again disappointed. Increases in pay are still well above where inflation is currently sitting but if you agree with us and expect inflation to start rising as we move through 2016, then wages are going to have to keep up. Vacancies are falling and we expect further signs of labour market tightness to emphasise this.

Retail shying away as lower prices impact

But the main economics story yesterday was the falls in retail sales through the US economy which has further damaged thoughts of a 2015 rate hike. While retail sales grew by 0.1% on the month, once you discount away car sales, that figure slumps to a 0.3% decline. Falling petrol prices seem to be being blamed for the miss, and with lower US producer prices – inflation or raw materials and finished articles at the factory gate – the trend could play out for longer.

Whither 2015?

As retail sales fall, so do estimates of personal consumption, and before you know it everyone is starting to cut back GDP estimates. Fed funds predictions – probabilities of when and by how much the Federal Reserve will alter interest rates – now show a 4% chance of a hike at the meeting on October 28th and less than a 50% chance that anything happens before the end of March.

Disinflation from the Chinese yuan devaluation and shifts in other emerging markets is starting to be felt already in developed markets. I’m surprised that we’ve seen it hit too quickly if I’m honest but pressures in prices are being felt throughout the West.

All eyes will be on US inflation today at 13.30 BST with overall deflation expected but a strong core to temper fears.

GBPUSD had one of its strongest days in a while as these data points combined to drive the pair to 1.5497, the highest level in three weeks. Sterling also moved higher against most of its crosses although the euro remained stubborn with traders still happy to bid up the single currency as a test to the European Central Bank ahead of its policy meeting a week today.

The Day Ahead

Overnight news from the Australian labour market has been poor as employment fell and works switched from full-time to part-time which is a trend that we have seen globally. AUD has managed to remain strong despite the figure, especially against the beleaguered USD.