Trump Trade Trends Trump Value
Headline UK activity releases have disappointed over the past week, with the unemployment rate rising and GDP falling in September. Weaker activity data didn’t stop rates from rising, although this was driven by the US, where rate expectations moved much further as Trump trades extended. This contrast contributed to Sterling’s ongoing underperformance, although the Euro has also suffered severely. The vigorous technical rejection of 1.05 EURUSD amid a heavy weight of options makes us think the bullish-USD consensus trade has run out of road.
Most interesting of the UK data was unemployment’s 0.3pp jump to 4.3% in September as young people struggled to find work when school returned, extending a trend since the election was called. Evidence for this move hits a statistical sore spot with few respondents. Underlying changes only softened slightly to signal small trend increases. Levels remain healthy. Pay growth rebounded surprisingly far and will increase further when bumper public sector deals take effect. Students won’t slow this as their pay is broadly set by policy (see UK Teaches Youth Unemployment).
The slowdown in UK GDP growth should also be read relative to the labour market when gauging the inflationary pressures. Employment growth was brisk despite the unemployment rate rising, so Q3’s flash productivity estimate showed a 0.5% q-o-q decline in output per worker (+0.3% y-o-y). Output per hour was even worse, falling 0.8% q-o-q and 1.8% y-o-y. Poor productivity stokes unit labour costs, pressuring firms to raise consumer prices. An output fall can thus be hawkish when not matched by employment, making it more likely a supply rather than demand shock.
There wasn’t much direct inflation news this week, even with the US CPI release, owing to its unsurprising October print. Although the seasonally adjusted rates annualised above the target again, unadjusted rates are trending at dovishly subdued levels, with no headline exceptions since April. These numbers might be old news but need not discourage a December cut. The recent case against December is anticipating Trump policies that won’t hit until after he becomes president again in 2025. Pre-emptive policy seems too presumptive (see US CPI Keeps December Cut Alive).
Nonetheless, Chairman Powell subsequently created more space to skip December, as he warned there is no rush to cut. If that pause happens, it will be a significantly different reaction function to the ECB, which sought to frontload easing ahead of scope to slow if necessary. We doubt the Fed will be immune to this risk management argument, not least because the tariffs Trump threatens don’t have a simple impact. Indeed, Alastair Newton notes how, bargaining chip or not, Trump’s Hobbesian view poses a massive threat to the global economy (see US Politics: Promises, Promises). Knowing what changes are implemented and how the impact balances will take time. Decisions in the interim should consider that and remain dependent on coincident data.
Inflation Forecasts
UK inflation is the most important UK data release next week, although the outcome seems uncontentious relative to the sizable (0.5pp) expected jump in the CPI rate to 2.2% y-o-y. That is not only our view but the consensus and the BoE’s forecast from its November Monetary Policy Report. The jump is primarily driven by household energy utility bills, which dropped with the Ofgem price cap last October but rose with it this year. Meanwhile, annual core and services price inflation rates will likely be within 0.1pp of the previous release without energy’s contribution.
Assistant Vice President, Wealth Management Associate
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