Market report: Sluggish UK jobs picture as Middle East fracture sends crude and borrowing costs higher
Susannah Streeter, chief investment strategist, Wealth Club: “With economic uncertainty so high, and payroll taxes increasingly onerous, it’s not surprising many UK employers are staying cautious, and unwilling to take the risk of hiring new staff. The trend is showing up once again in the latest labour market snapshot from the ONS.
Payrolled employees fell by 78,000 over the year to June, while the early estimate for July shows a further annual decline of 94,000. The number of vacancies has also slipped to 707,000, the lowest level outside the pandemic period since late 2014, with the ONS reporting feedback that some smaller firms are holding back on recruitment because of higher labour costs and other operating expenses.
Regular pay growth edged up to 3.5% in the year to June, from 3.4% previously, which may spark fresh niggles of concern among Bank of England policymakers. However this is being largely driven by higher pay deals in the public sector. Even so private sector companies may come under pressure to keep up with demands for better deals from their staff. Policymakers will watch closely for signs that this could lead to higher payroll costs being passed on as higher prices for goods and services. Right now markets are currently pricing in two interest rate hikes over the next year, given the potential rise in inflationary pressures.
This snapshot shows that businesses are hunkering down and trying to deal with a storm of higher costs, rather than taking a punt on expansion, which doesn’t bode well for UK growth prospects. It’s not just taxes and payroll costs which are weighing heavily, higher energy bills are also causing havoc with budgets, with fears of secondary price increases rising amid fresh fractures in geopolitics.
Brent crude has climbed above $91 a barrel as tensions have frayed again in the Middle East, raising fears of yet more supply disruption. Trump’s inflammatory language towards Oman, threatening to bomb the US ally, has sparked this latest rally. There’s disappointment that the temporary ceasefire with Iran has expired without a deal, and the US president for now claims he’s not interested in reaching one. He’s clearly irked that Oman and Iran are in negotiations without the US to reopen the crucial Strait of Hormuz, and unable to control the situation, is reverting to threats of fresh military action instead.
Higher energy prices risk feeding through into transport, manufacturing and household bills, making the battle to bring down inflation harder to win. That is forcing markets to reassess how long interest rates will stay elevated.
Bond markets are flashing amber across the globe, with investors demanding ever-higher returns to lend to governments as fears grow that inflation may prove much harder to shift. The yield on the US 30-year Treasury has pushed above 5.32%, its highest level in almost two decades, while UK gilt yields have also surged back towards levels not seen since the aftermath of the financial crisis. France is also feeling the heat, with 30-year borrowing costs having climbed to their highest level since 2008. Investors are increasingly demanding a bigger premium to hold long-dated government debt as higher oil prices threaten to keep inflation elevated and concerns mount about the sheer scale of government borrowing.
The yen is caught in the crossfire of these concerns. Japan has also seen its own bond yields leap to multi-decade highs as investors anticipate further rate rises from the Bank of Japan. Normally that would be enough to give the yen a lift. Instead, the currency remains stubbornly weak because Japanese interest rates are still well below those available in the US and other countries, so the risk is that the yen stays caught in this doom loop, with investors chasing higher returns elsewhere. We may have seen a remarkable bout of currency intervention, with Japan selling dollars and buying the yen, and the US Treasury also stepping in to support the currency. But the effect has proved short-lived, with powerful currents in global bond markets continuing to overwhelm those efforts.”