Stronger Employment Numbers Point To Rate Rise But Inflation Story Remains Unchanged:

Last week there wasn’t much for markets to get excited about. Headline inflation figures were up a bit. But, the underlying data still suggests pandemic disruption is the main culprit. Consumer confidence was also up a bit while business confidence was down. So not much change overall! The one interesting point last week was the employment numbers, and particularly the fall in unemployment, especially following the end of the furlough scheme. There is some evidence that a section of previously employed people have dropped out of the workforce altogether. But, the sudden cliff edge of people with no jobs to go back to looks to have been avoided.

Elsewhere, attention now shifts to how central banks may react to this news. Bank of England governor Andrew Bailey has been talking up the chances of a hike. He has emphasised that this time he really means it. The European Central Bank has made it clear they won’t be touching interest rates for a while. And this has been good for the pound as people move money from euros to take advantage of expected higher interest rates.

Labour Market Strengthens As Inflation Rises Again

As alluded earlier, the UK employment numbers were stronger than expected following the end of the government’s furlough scheme. The number of vacancies continued to rise to a new record of 1,172,000 while unemployment fell 0.5% to 4.3%. Earlier last week  Andrew Bailey said the decision to hold interest rates was a ‘close call.’ The October employment figures, he said, would be the most important factor in his decision at the next policy meeting. Meanwhile, UK inflation reached its highest level since 2011, rising to 4.2% in October from 3.1%.

The higher-than-expected inflation data, together with high employment figures, added pressure on the Bank of England. They may soon need to raise interest rates in order to control rising inflation. Bailey’s remarks increased speculations among investors about a December rate rise. It came as yields on short-dated bonds rose slightly early in the week, and sterling pushed to its highest level against the euro since February 2020.

Covid Effect Begins To Unwind For Some Stocks

Last week provided further signs that some of the pandemic effect on company share prices are unwinding. It comes as markets begin to see a further return to normal. Royal Mail has continued to benefit from the growth in online shopping. Subsequently, it is returning £400m to investors following a strong first half to the year. B&Q owner Kingfisher is another stock which benefitted as people turned to DIY during lockdown. Last week it said profits will be at the top end of estimates as sales remain above pre-pandemic levels. But, despite strong trading these beneficiaries of lockdown have given back a portion of their lockdown gains.

Meanwhile, British Land said property is recovering from the pandemic. It reported that the value of its portfolio of offices and shops is rising and demand for office space is returning. The company’s share price is almost back to its February 2020 level as it recovers from the 46% drop it experienced in the first weeks of the pandemic.

 

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