UK unemployment falls but fuelled by increase in economic inactivity

December 20, 2016

Last week investors focused on the US Federal Reserve interest rate announcement on Wednesday. The decision was in line with expectations, with an increase of 0.25% in the headline interest rate to a 0.5%-0.75% range. However, this did not stop a market reaction to the announcement, with global bonds selling off and the US 10 year yield rising to 2.6%. The Federal Reserve have been comforted by the continuing resilience of the US economy, with unemployment low and job growth strong. Notably, wage growth has been accelerating, which is seen as the long-term driver of inflation. The Federal Reserve Chair, Jannet Yellen, guided markets that she anticipates another three 0.25% rises in the coming 12 months, slightly below expectations. However, as has been shown over the last year, much can change over this length of time.


UK unemployment figures for the three months to October were also released last week, showing that the number of people out of work fell slightly to 1.62m. This has meant that the unemployment rate has held steady at an 11-year low of 4.8%. However, the driver of these figures has been a drop in the number of people economically active rather than an increase in employment. While this data may be the first sign of slowing job creation, given the erratic nature of employment figures it is too early to say with any certainty. Furthermore, other metrics are suggesting that the labour market is continuing to tighten, contrasting the view of a weakening economy.


The Bank of England (BOE) met last week, choosing to maintain interest rates at the historically low level of 0.25%. The mixed data emerging since the referendum vote has led the committee to remain cautious, ensuring that monetary policy will not provide a headwind in the short term. Low interest rates are in growing contrast to an accelerating rate of inflation, which increased to 1.2% in November from 0.9% the month before, ahead of economists’ expectations. However, it is likely that the BOE will continue to look through short-term inflation data, particularly when it is driven by global factors such as rising commodity prices and currency fluctuations. There was a similar occurrence in 2011 when inflation reached 5% due to food and fuel price pressures.


Index Open Close Change % Change
FTSE 100 6954 7011 57 0.82%
S&P 500 2259 2258 -1 -0.04%
Dax 11203 11404 201 1.79%
Cac 40 4764 4833 69 1.45%
Nikkei 225 19155 19401 246 1.28%
UK 10 Year Gilt Yield 1.494 1.451 -0.043 -2.88%


Final quarter GDP and current account data for the UK will come out this week, along with US new home sales on Friday.