Employment Data, Interest Rates and Growth
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Employment Data, Interest Rates and Growth

Employment Data, Interest Rates and Growth


Trading Features / Strategies from Simon Denham of Capital Spreads.

Employment prospects are finally moving in the direction that the events of the last six to nine months would have led us to expect. Hiring in May was the lowest for five years as companies start to draw in their horns and batten down the hatches for a possible sharp slump on the high street.

For the first time in a great many years it appears that employers are gaining the upper hand as more and more people join the labour pool. In the Bank of England’s fight against inflation this would appear to be the best news they have had for a while. The one thing that wipes out any attempt by a central bank to rein in inflationary trends is if employers are being forced to pay ever-higher wages to attract staff. Whilst the one off impact of currency and commodity price hikes will work their evil way into the numbers the MPC can at least sit back in the knowledge that that an inflation/wage spiral is becoming less probable. Of course, nowadays, the difficulty and expense in laying off even the most incompetent worker will mean that the jobs data may continue to flatter to deceive and small to medium sized companies will probably suffer profit squeezes rather than risk the tribulations of any redundancies.

In line with the weakening of the jobs market, Nationwide has brought out its latest consumer confidence numbers this morning showing that this has fallen to the lowest level in four years, a piece of data which will not exactly have surprised the average reader of this column. Spending power of virtually everyone apart from the super rich will have suffered in the Bunsen burner heat of petrol, food, tax etc’s above average price action. Purchasing intentions over ‘big ticket’ (cars, pc’s white goods, houses) items are at their lowest since 2003. These are the one part of the inflation matrix that is well under control.


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The BOE is struggling to balance the fight against inflation with the need for at least some growth. There is not much point in announcing you have defeated the price inflation demon if at the same time you no longer have an economy capable of taking advantage of it. The sentiment is for no interest rate cut tomorrow which will leave UK base rates at 5% still well below the ‘real’ market rates as experienced by everyone from Building Societies to Mortgage holders. It is this that I fear is not being taken into account by the MPC. The fact is that for all the cuts from 5.75% to the current level the actual three month Libor lending rate is higher than it was at the beginning (yesterdays fixing was 5.86%). The market has, in effect, been doing the MPC’s inflation busting job for them. For anyone to claim that the central bank has eased lending over the past year would be making the statement in the face of the actual facts on the ground.

With Bradford and Bingley and the other high street banks’ share prices drifting lower and lower by the day the appetite for lending risk is shrinking by the minute. The fact is that, notwithstanding whatever the BOE does, market forces will do far more to reign in economic growth (and thus inflation) in the medium to long term.



The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.


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Article provided / approved by Capital Spreads which is a trading name of London Capital Group Ltd which is authorised and regulated by the Financial Services Authority (FSA), FSA Register number 182110.

'Employment Data, Interest Rates and Growth' edited by SD, updated 04-Jun-08




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