Good morning,

UK: Pay higher but will sales follow?

Sterling stabilised yesterday following a higher than expected wage release suggesting that the pain of real wage declines in the UK may be lessening. Despite pay rising by 2.1% on the quarter UK consumers grew poorer by 0.5% in the 2nd quarter of this year according to yesterday’s stats and this will continue to act as a short term depressant on UK economic growth.

While the Bank of England and markets may be confident that inflation may become more benign there is less commitment to a belief that pay will start to charge higher and therein lies the rub; real wage increases cannot be counted on to fuel a dependable backdrop for our post-Brexit economy. We have said many times that real wage increases are the silver bullet for the concerns that swamp the UK economy and while this figure is better than had been expected, at the end of the day people are still getting poorer.

The labour market is solid at the moment but it has been solid for a long time and has not been enough to generate reliable and meaningful wage growth. The translation into retail sales later will be interesting; how much has the average shopper tightened their belt against this backdrop? We will find out at 09.30 this morning.

There is no Brexit position paper to be analysed later today.

US: Fed minutes hint at rate underpricing

Dollar has not reacted much to the latest set of minutes from the Federal Reserve released overnight that confirmed that while there is by no means a single viewpoint on inflation within the central bank, you could throw a small blanket over them such is their lack of dispersion. The overarching theme is that the recent dip in inflation is transitory and therefore we believe that the risk of a December rate hike is a little under-priced by markets at the moment, giving USD room to rebound. Obviously this is contingent on inflation coming higher but Tuesday’s retail sales data will have been encouraging.

The news that Donald Trump had shut down two business advisory groups to his Presidency following a stream of resignations has not been a market mover.

Korea: Red lines drawn

South Korea issued a warning to its northern counterpart yesterday that should it see North Korea deploy an ICBM missile tipped with a nuclear warhead then that would be a ‘red line’ adding that the Hermit Kingdom was coming up on that line quickly. South Korean President Moon also stated that President Trump had agreed to seek approval from South Korea before taking action against the North.

The Day Ahead

Away from the UK retail sales announcement at 09.30 we also have the final reading of Eurozone inflation at 10.00 and US industrial production at 14.15. Euro weakened unexpectedly yesterday following a rumour that Mario Draghi will decline to reveal any new policy that would tighten monetary conditions at the Jackson Hole Economic Symposium next weekend. We would suspect that today’s inflation figure is unlikely to pressure him into anything either and the near term story for the single currency may be one of consolidation at current levels.

Have a great day

Jeremy Cook, Chief Economist