UK Wage Growth and US CPI: Insights for Central Banks' Rate Policies

UK wage growth and US CPI set to slow

By Michael Hewson (Chief Market Analyst at CMC Markets UK)

European equity markets got off to a slow start to the week yesterday, closing modestly higher with the FTSE100 underperforming due to concerns over weak demand out of China.

US markets were also resilient with the S&P500 and Dow both eking out new highs for 2023, as investors looked cautiously towards this week's central bank meetings of the Federal Reserve, European Central Bank, and the Bank of England, and their respective outlooks for rate policy heading into 2024.

Asia markets have continued in the positive vein of yesterday with that momentum set to continue into today's European open.

With the Federal Reserve due to start its 2-day meeting later today, and the Bank of England set to decide on rates on Thursday, today's UK wages data and US CPI numbers could go some way to shaping how policymakers react when they deliver their guidance on monetary policy later this week.

We start with the latest UK wages numbers for the 3-months to October and where wages have been trending higher by more than 8% for the last 3-months if bonuses are included.

Some at the Bank of England have been fretting about this high level of wages growth but they really shouldn't be given how badly inflation has impacted the pay packets of consumers these past 2 hours.

All that is happening now is that some of the purchasing power that has been lost over the last few months is slowly being clawed back and for the most part will take years to recover back to pre-pandemic levels. The central bank needs to be careful about overreacting to a phenomenon that they were too slow in reacting to on the way in.

With food prices only just recently dropping below 10% for the first time in over a year it can hardly be a wage price spiral if consumers are finally seeing the price/wage ratio finally starting to turn positive in their favour. Expectations are for wages ex-bonuses to slow from 7.7% to 7.4%, which might not be enough to reverse the calls for further rate hikes from the 3 hawks on the MPC, of Mann, Haskel and Greene.

Later this afternoon we'll get to see whether the slowdown we saw in US CPI during October has continued into November.

US inflation fell to 3.2% in October, down from 3.7% reversing a trend that had seen inflation fall to 3% in June, before gaining ground in subsequent months.

Core CPI on the other hand has been steadier, slowing at a more modest pace and coming in at 4%. More importantly, super core inflation which the Fed monitors closely also slowed, and with the risk of a US government shutdown postponed until January next year, the economic risks to the US economy appear to have diminished further.

There has been some concern that the resilience of the US economy may delay the return to the 2% target, however judging by the latest PPI data there is little sign of inflationary pressure in respect of company's costs.

These also slowed sharply in October declining -0.5%, dragging final demand down from 2.2% to 1.3%, in a sign that we could see further downside in US CPI, with the potential to slip below 3% before the end of the year.

Headline CPI for November is forecast to slow to 3.1%, with core prices remaining steady at 4%.

EUR/USD – holding above the 200-day SMA for now, stopping short last week at 1.0724, with a break below 1.0700 targeting the prospect of further losses toward the November lows at 1.0520. We need to see a move back through 1.0830 to stabilise.

GBP/USD – tight range but holding above the 200-day SMA for now, with only a break below 1.2460 signalling a broader test of the 1.2350 area. Resistance currently at 1.2620 area.

EUR/GBP – still range trading between the 0.8590 area and the lows at 0.8545/50. While below the 0.8615/20 area the risk remains for a move towards the September lows at 0.8520, and potentially further towards the August lows at 0.8490.

USD/JPY – after last week's test of the 200-day SMA at 142.50 we've seen a solid rebound with the move above 146.20 arguing for a move back towards 148.20.

FTSE100 is expected to open 13 points higher at 7,558

DAX is expected to open 51 points higher at 16,845

CAC40 is expected to open 18 points higher at 7,569