UK jobs data consistent with BoE easing as soon as March

GBP: More data endorsing BoE easing

Financial market conditions this morning are portraying signs of risk aversion with UST bond yields opening lower after yesterday’s US holiday and equity futures in Europe and the US down on the day. Many markets in Asia remain closed for Chinese New Year but Japan equity markets also closed lower. The yen is the top performing G10 currency and gold and silver prices are also lower. The yen may have benefitted by the very strong rally in JGBs that further points to easing investor concerns over PM Takaichi’s approach to fiscal policy going forward. There was also a successful 5-year JGB auction with the bid-to-cover coming in at 3.1, down from a 12mth average of 3.48. The Nikkei today reported details of a speech to be given by PM Takaichi that contains steps to ease investor concerns over fiscal management. Yen risks related to fiscal risks are receding notably.

Fiscal risks in the UK have also receded somewhat with the prospects of easing inflation and BoE rate cuts helping restore confidence to the Gilt market that has eased fiscal sustainability risks. Today, the UK jobs data was released and in our view reinforces the prospect of a rate cut at the next meeting on 19^th March. Given the 5-4 split vote at the February meeting what is key now into the March meeting is that there is no nasty inflation-related surprises that would see the momentum shift back toward renewed caution. The inflation forecasts revealed by the BoE at the February meeting were certainly consistent with further easing – at 1.8% in Q1 2028 and 2.0% in Q1 2029. One key argument is that lower inflation should push down wage settlements. The data today certainly confirmed a general further easing in wage growth with the headline weekly earnings 3mth YoY reading slowing from 4.6% (revised from 4.7%) to 4.2% in December. The ex-bonus measure slowed from 4.4% (revised from 4.5%) to 4.2%. The unemployment rate ticked higher by 0.1ppt to 5.2%. Notably, the single-month unemployment rate hit 5.37%, the same level at the peak of the post-covid fall-out in the labour market. The one element of strength relative to expectations was the upward revision to PAYE employment with the December reading revised from -43k to -6k. The January reading was -11k, a little better than expected. Still, the economy continues to shed jobs, just not at the pace previously reported.

The pound is the worst performing G10 currency so far today in response to this data and that underperformance could extend further if the CPI data tomorrow does not show any upside surprises. With Governor Bailey stating that he would approach each meeting asking “whether a cut is justified” it is clear where the bias lies with one key swing voter. Today’s data will make Bailey more confident on cutting rates. Catherine Mann is also close to a cut based on her comments and today’s data will make her more confident in cutting rates. CPI data as expected tomorrow will reinforce our view of a March rate cut and keep the pound under downward pressure.

UK UNEMPLOYMENT RATE (SINGLE MONTH) HITS COVID PEAK (5.37%)

Source: Bloomberg, Macrobond & MUFG GMR

AUD: Positioning starting to look excessive

The Australian dollar has declined modestly today (mainly on general increased risk aversion) and positioning data released last Friday certainly point to more limited scope for further gains at these more elevated AUD levels. The Australian dollar remains the top performing G10 currency in February and a on year-to-date basis helped by the RBA’s decision to hike its policy rate earlier this month.

The positioning data released on Friday, to Tuesday of last week, revealed a further increase in Leveraged Funds’ long AUD positions – to close to 65k, the largest total AUD long position since October 2017. Sept/Oct 2017 was when AUD/USD spot had advanced to over the 0.80-level but then abruptly turned lower as those long positions were nearly completely liquidated by the end of the year. Our own Z-Score indicator ( number of standard deviation moves based on an average of two years’ worth of data) measures the extent of over-stretched positioning and is now at a record in the data series going back to 2006. The risk-reward at these levels is certainly starting to look a little less attractive given the RBA stance now looks much better priced. Another rate hike is priced along with close to a 50% probability of another before the end of the year.

AUD/USD was helped last week by the pop higher in consumer inflation expectations, to 5.0% in February, from 4.6% in January. It was the highest level since July 2023 and up from a more recent low of 3.6% in March of last year. The jobs data on Thursday will be important in shaping expectations of further RBA action this year. The OIS market implies about an 80% probability of another 25bp hike in May.

The minutes from the meeting earlier this month were released today and the details were more balanced than perhaps some were expecting, given the RBA hiked for the first time since November 2023. On 3^rd February when the RBA hiked the message was cautious, avoiding any clear bias on future moves but also making clear it was “uncomfortable” with the level of inflation. The minutes today maintained that more balanced tone that has resulted in yields at the front end declining modestly. That may help reinforce the potential for a near-term correction lower, especially if the emerging signs of risk aversion were to intensify. Still, any correction lower in AUD would be a short-term dynamic and clear-out of positioning would be an ideal opportunity for re-entering for a medium-term move higher with the fundamental backdrop looking favourable beyond the short-term.

AUD LONGS Z-SCORE INDICATES MOST OVER-STRETCHED POSIONING ON RECORD IN DATA BACK TO 2006

Source: Bloomberg & MUFG Research

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com