Market update: Stagflation worries rise as job data shows economy cooling
Susannah Streeter, chief investment strategist, Wealth Club: “Stagflation worries are stalking the UK as the latest data shows the labour market continuing to lose momentum, while conflict in the Middle East has fanned the flames of inflation. The jobs numbers show employers are becoming increasingly cautious about hiring amid a backdrop of sluggish growth, geopolitical uncertainty and increasing cost pressures.
The rise in unemployment from 4.9% to 5% adds to mounting evidence that cracks are beginning to widen in the labour market. Vacancies are also continuing their steady descent, falling again to 705,000, the lowest level since early 2021.
There’s another warning sign coming from the employment data, with the early estimate for April showing the number of payrolled employees falling by 210,000 compared with a year earlier, alongside a monthly decline of 100,000. It appears businesses are becoming markedly more defensive as economic uncertainty intensifies.
Wage pressures have eased further, with regular pay growth slowing to 3.4%, down from 3.6% and well below the elevated post-pandemic highs. Ordinarily, private sector wage growth cooling towards 3% would be the kind of mood music likely to prompt expectations of interest rate cuts. But given the discordant notes on inflation right now, pressure is building for rates to stay higher for longer instead. Financial markets are still pricing in three rate hikes by the end of the year, with the possibility of another increase next year.
Wage growth is still only just inching ahead of inflation, and by a meagre amount. This is likely to keep spending subdued, particularly as households brace for more bill increases ahead. This is likely to keep a lid on discretionary purchases, with retailers and hospitality firms particularly vulnerable if consumers continue cutting back on bigger-ticket purchases and prioritising essentials.
The FTSE 100 is poised to open on the front foot in early trade, as hopes remain alive for further talks aimed at resolving the Middle East conflict. President Trump has dialled down the rhetoric, reportedly calling off further strikes on Iran, following pressure from allies in the Gulf and this is leading to hopes that negotiations could resume again. The weaker labour market snapshot had largely been anticipated and is unlikely to prove a significant market mover. Investor sentiment is still likely to be driven by twists and turns in diplomatic efforts to calm tensions and secure a longer-term resolution. Until the Strait of Hormuz is fully reopened, inflation concerns are unlikely to meaningfully subside and are set to keep markets on edge.”