Market report: UK’s tight labour market eases, US earnings forecasts boost sentiment despite Middle East tensions
- UK registers a drop in vacancies and wage growth indicating more economic fragility but an easing of inflationary pressures.
- Institute of Fiscal studies warns against tax cuts before next election.
- Oil prices stay at elevated levels amid Middle East tensions.
- US bank stocks in focus amid highly sensitive expectations regarding interest rates
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
‘’The FTSE 100 has opened on the front foot as investors assess progress in the easing of inflationary pay demands in the UK, amid some hopes that a US diplomatic dash could stop conflict escalating in the Middle East.
Wages are retreating from giddy heights, but it’s a slow march down and the Bank of England will continue to keep a wary eye on progress. Total average earnings fell by 0.5% month on month in August, after dropping by 0.9% in July. The numbers indicate that the fragile economy is making workers more cautious about asking for a raise while employers are increasingly reticent about conceding to high pay demands. On a three-month basis pay is still racing ahead of inflation, coming in at 8.1%, showing how tight the labour market still is. However, the vast lake of vacancies is gradually shrinking as demand for workers continues to evaporate slowly. They dropped from 998,000 in the three months to August to 988,000 in the three months to September. There will be more small sighs of relief that labour market pressures are easing, and the numbers will add to expectations that the Bank of England will continue to press pause on interest rate hikes. But with the bank’s chief economist Huw Pill warning that it’s far too early to declare victory in the fight against inflation, interest rates are expected to stay at these elevated levels until at least the second half of next year.
Any hopes for an immediate easing of the unpleasant squeeze on household budgets are still far off in the distance. The Institute for Fiscal Studies has warned that there is no room for tax cuts before an election. It’s stressed that the country is in a bind, which is little wonder given its sluggish growth while being forced to pay eye-watering levels of debt interest over the next few years. Tax cuts might set off a mini-spending spree but that could see high prices being charged staying more stubborn and even going higher which could trigger further rate hikes.
The prospect of higher energy prices lingering for longer is increasing given the tensions in the Middle East. Crude remains elevated, with a barrel of Brent, still trading around $90 a barrel. Nerves are on edge after Iran threatened pre-emptive action in the coming hours. An escalation risks drawing the US into the conflict, with the Biden administration warning of a devastating response if Tehran backed Hezbollah becomes involved. This has the potential to disrupt supplies in the region, and why crude prices are sensitive to the risks of a fresh geo-political twist. For now, attempts by the US to ease tensions, with a trip by Joe Biden to Israel to ascertain Israel’s goals. is helping dissipate fears that violence will spill over to other countries.
Investor sentiment is being driven by hopes of a largely positive US earnings season, so far, continuing. Bank of America and Goldman Sachs will report later, but they are likely to present more of a mixed bag of results compared to JP Morgan, Citi and Wells Fargo which beat third quarter profit expectations. Although net interest income may still be benefiting from the higher interest rate environment, a dip in deal-making has been a drag, so investors will be keen to assess what’s in the pipeline going forward. Expectations are settling in for an extended pause in the hiking cycle with rates kept at an elevated level way into next year, which has the potential to keep buoying up earnings, but slowing growth in lending risks keeping a lid on profits especially given the uncertainty hanging around about the health of the global economy which could weigh down on consumer and company sentiment.”
