February 5th 2024
How bad are UK unemployment rates really?
Employment rates in the UK are even worse than we thought. Kathleen Brooks, research director XTB, examines new figures from the Office of National Statistics (ONS) and analyses where it all went wrong.
The ONS released its updated Labour Force Data for the three months to November at the start of last week, which incorporates new estimates of the UK population increased response rates. The updated report now suggests that the unemployment rate fell to 3.9% from 4.2% in the three months to November, suggesting that the labour market was even tighter than expected at the end of 2023.
The UK’s creating jobs, but can’t get the workers
While the unemployment rate was revised down, the economic inactivity rate was higher than previous estimates and average hours worked were also revised down to 31.6 hours per week, from 31.7 hours. This highlights the dichotomy in the post pandemic labour market: there are less people working, those who are working are working fewer hours, and yet there is a huge demand for labour. The revised survey suggests that wage pressure could remain elevated for some time, which supports the Bank of England’s caution when it comes to cutting rates and instead focussing on inflation risks.
There were some other interesting details in the revised report. There was an increase in the relative number of women who were economically inactive and female employment levels dropped. There have been concerns about low response rates to labour force surveys, to combat this and in an effort to get higher levels of accuracy, the ONS will conduct face to face interviews from now on, which should improve the quality of UK labour market data.
Vodafone beats estimates, as UK stocks look to play catch up
There was good earnings news for the UK at the start of the week. Vodafone beat analyst estimates for organic revenue last quarter, rising by 4.7% vs. 4.27% expected. It also reiterated its full year 2024 guidance, and it sees adjusted earnings for this year at EUR 13.3bn, vs EUR 13.2bn expected. This is a solid set of earnings in an earnings season where share prices are rewarded if companies don’t post nasty surprises. The FTSE 100 is expected to open down a touch later this morning.
Powell reiterates 3 rate cuts for 2024
Fed chair, Jay Powell, was speaking to 60 minutes, a US TV news show, on Sunday night, which could set the tone for markets at the start of the week. He said that the Fed would move carefully on rate cuts. He also said that he does not think that FOMC members will have dramatically altered their forecast for interest rate cuts when they next update the ‘dot plot’ in March. The dot plot forecast three rate cuts for 2024. The market is currently expecting just under 5 rate cuts for 2024, according to the Fed Fund Futures market, and expectations are for US interest rates to end the year at 4.12%, whereas the Fed’s dot plot sees rates falling to 4.6% by year end.
There has been a rapid re-pricing in expectations for US interest rates in the past few days, after last week’s FOMC meeting essentially ruled out a March rate cut. After Powell’s comments on 60 minutes, there could be a further to go. There is now only a 17% chance of a March rate cut expected by the market, with the first cut expected in May. As usual, there are a large number of Fed speakers this week. If Powell has set the tone for Fed speak, then we could see more FOMC members converge around three rate cuts for this year.
Powell comments knocks sentiment to US stocks
Emini S&P 500 futures have turned lower, and Treasury yields have risen at the start of the week, although they have backed off their highs as we move towards the European session open. The S&P 500 reached another record high last week and has registered its 13th gain in 14 weeks. US stocks outperformed European indices after a strong rally at the end of the week, triggered by superb earnings from Meta and Amazon. This is the US blue chip index’s longest winning streak since 1986! However, February can be a choppy time for markets, and it is the third worst performing month for the S&P 500 going back to the 90s.
Meta’s 20th birthday present with stock at record high
Meta deserves a mention, after reaching a fresh record high last week, and rallying more than 20% on Friday. An interesting Meta fact, during its earnings call last week, the number of mentions of AI and machine learning was at its lowest level for a year. We cannot confirm if there is a link between the all-time high in the stock price, and the fact that AI was mentioned less frequently on this earnings call, or if investors are cooling to the AI theme. However, Meta is a keen reminder that the market likes good results across multiple business lines, and it seems to only love AI if it comes clothed in revenue growth.
Corporate earnings on both sides of the Atlantic to set the tone for markets
We are mid-point through earnings season for last quarter, and although there are more companies who have missed earnings estimates compared to the 5-year average, the level who have surpassed estimates is rising. The earnings growth rate of the 46% of companies who have reported results for the previous quarter currently stands at 1.6%, however, this level may be improved upon after the earnings reports coming up this week. On a sector basis, those reporting YoY earnings growth include tech, communication services, consumer discretionary and utilities. Those reporting earnings declines YoY include energy, healthcare and financials.
Caterpillar and McDonalds to test the appetite for stocks beyond tech
There are also some key earnings releases this week, including analytics AI retail favourite Palantir. There could also be a test of the market’s appetite for stocks beyond tech, with earnings releases for McDonalds, and Caterpillar on Monday. Although the US economy is growing strongly, growth has not been even, and there are signs of weakness, particularly in industrial sectors. Caterpillar is seen as an economic bell weather for demand for industrial equipment. The company announced in October that its order backlog had slumped, and analysts expect slowing sales and orders for Q4. In the past, Caterpillar earnings have tended to signal trends in US growth. The US economy is less tied to industrial trends than it once was, however, a second consecutive slowdown for Caterpillar’s results may not be a good omen for the US economy.
Can the GRANOLAS continue to drive European shares?
Eli Lily, the largest healthcare firm in the US by market cap, Walt Disney, PayPal and Pepsi also report later this week. They could tell us interesting information about the strength of the US consumer, and also how companies outside of tech are performing. In the UK, BP, the oil major, will report results on Tuesday, followed by Barratt Developments on Wednesday, Unilever and Astra Zeneca on Thursday and BATS on Friday. In Europe, we get Total on Tuesday, Siemens on Thursday along with another dose of earnings from the luxury sector, including Kerring on Thursday and Hermes on Friday. German and French shares reached record highs last week. All eyes will be on whether these earnings reports can help them to sustain further gains, and whether European indices, which have less tech exposure than their US counterparts, can also keep making record highs as we move into February.
Could volatility in Chinese shares lead to political unrest?
Chinese stocks have slumped at the start of the week, even though Chinese officials pledged more support to stabilise the market, without specifying details. This pledge of support has not soothed market fears. The larger index of Chinese shares, including the CSI 300 and the Hang Seng managed to eke out small gains on Monday, however, the index of small and medium sized shares, including the Shenzhen composite and the CSI 1000 are coming under intense selling pressure, the Shenzhen Composite is down some 5.5% and the CSI 1000 has slumped by 7.2%. Volatility in the shares of China’s small and medium sized companies has led to fears about margin calls, and derivates called snowballs that could hit their knock-in levels could exasperate the selling pressure.
The downturn in Chinese shares in recent weeks has been broad based as the economy fails to return to pre-pandemic highs. The Hang Seng is lower by nearly 8.5% YTD while the CSI 300 is down by 7.29%. The contrast with the US could not be starker. The S&P 500 reached a record high at the end of last week, and is up by nearly 4% YTD, while the Nasdaq is higher by 4.1%. The selling pressure is particularly noticeable in the small and medium-sized stock indices. This largely impacts domestic investors and could increase the risk of social unrest. There are reports of investors venting their frustrations with the Chinese market on social media, and so-far signs of official intervention in the market has not had lasting effects. If Chinese officials cannot find a way to stabilise financial markets soon, this could lead to political problems for Beijing, and this is why it is worth watching the Chinese stock markets at this delicate time.
Images: geralt and Aaron Burden
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