FTSE Continues Lower on Higher-than-Expected Pay Rises

Stocks retreat as bets on lower BoE rates decline after today’s surprise wage increases.

• Wages rises 5.2% compared to forecasts of 5%
• Markets reduce bets on BoE rate cuts
• Budget concerns limit BoE action

The FTSE declined 0.40% this morning on continued negative sentiment for a lower interest rate environment. Pressure has been building as the markets consider recent price data and an inflationary budget.

Wage Increase Surprise Dents Rate Cut Hopes

Today’s data showed wage increase rose by 5.2% 3mth/yr compared to 4.9% for the previous period. The surprise is 0.2 higher than forecasts, which predicted a slower increase of 5%.

The markets see this data as a possible factor that may cause the BoE to hold rates steady at the MPC meeting on Thursday.

The 2-year gilt yield increased sharply today; this sector of the bond curve is particularly sensitive to interest rate variations. 2-year gilt yields opened at 4.451% up from yesterday’s close of 4.396%.

The bond market is clearly backing away from the likelihood of a rate cut at this week’s MPC meeting. The bond market is now pricing 2 rate cuts from now to the end of 2025.

FTSE Live Chart

FTSE

Budget Concerns Holding Back BoE

The market widely expects the central bank to keep rates on hold this Thursday. The market expects the BoE to wait and see the effects of the recent budget.

The budget will raise employee costs and impact on the jobs market. The conundrum facing the BoE is whether the effect of the budget may shrink economic activity, but also the raising fear of higher inflation.

The central bank may consider cutting rates in an attempt to boost the economy. At the same time, it could aggravate inflation and find itself in a stick situation.

Inflation Data Tomorrow

The board members will see inflation data the day before their meeting. Analysts expect an increase of YoY inflation from 2.3% last month to 2.6%. With Core inflation YoY to rise to 3.6% from 3.3%.

The numbers clearly would not leave any room for maneuver, since they are well above the 2% target.

While lower numbers might cause a boost in bullishness, the pace of action for the BoE is still defined by their wait and see approach due to the budget. On the other hand, a sharper than expected rise could cause more volatility due to the pushback on cutting rates anytime soon.

Gino D’Alessio is a professional Forex trader with 20+ years of experience in the financial markets as a broker-dealer. Having worked in New York and London, Gino is regularly featured on Seeking Alpha. He completed the CAIA program in 2015, which also gave great insight into global macro factors. His main focus is FX majors, indices and commodities.