Unemployment hits 42yr low but inflation squeezes real wage growth

May 22, 2017

The FTSE 100 reached a new record last week, closing at 7522 on Tuesday. This in combination with the recent strength of the pound has meant that the UK market has become one of the best performing for global equity investors, over the last few weeks. The bounce back in the oil price, a more supportive European economy and a worsening of sentiment in the US has boosted the relative performance. Valuations of UK equities do not look as stretched as equivalents in the US; however, the upcoming Brexit negotiations will continue to put downward pressure on the market for the foreseeable future. Currency movements and political developments continue to drive short term market movements, yet there is a greater divergence on a sector and company level.


The UK jobs figures for April released last week showed a further reduction in unemployment. The jobless rate fell to 4.6%, and the number of unemployed fell by 53,000 to 1.54 million in the three months to March. The unemployment rate is now at its lowest level in 42 years, raising concerns that there is little slack in the labour market. While earnings growth continues to accelerate slowly, it has now been overtaken by inflation, which was recorded at 2.7% over the year to April, a four-year high. This has meant that workers have received a real wage reduction over the last 12 months. Forecasters are predicting that given the uncertainty of Brexit negotiations, the unemployment rate may begin to rise again as companies hold back on projects and employment decisions.


Concerns over the US political situation spooked markets last week. The possibility that Donald Trump might be impeached removed some of the positive sentiment around his potential stimulus plans. While it looks like an impeachment will not happen this time, there remains the potential for political events to shake markets, at least over a short time period. The price investors were willing to pay for protection on their portfolios spiked sharply last week, after nearing historical lows. Market participants have been reminded that there should be things that concern them, even if price volatility appears to be low.


Index Open Close Change % Change
FTSE 100 7435 7470 35 0.47%
S&P 500 2390 2381 -9 -0.38%
Dax 12770 12638 -132 -1.03%
Cac 40 5405 5324 -81 -1.50%
Nikkei 225 19883 19590 -293 -1.47%
UK 10 Year Gilt Yield 1.11 1.09 -0.02 -1.80%


German GDP for the first quarter will be released on Tuesday followed by Japanese inflation figures on Friday.