Gilts rise and sterling falls after mixed UK labour market data

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UK government bond yields and the pound dropped on Tuesday, as investors took a mixed set of jobs data as a sign that the labour market may be cooling.

The pound declined 0.3 per cent to trade at $1.265 against the dollar after figures showing record wage growth despite signs the jobs market is weakening. The yield on the interest rate-sensitive two-year gilt fell 0.04 percentage points to 5.04 per cent and the 10-year yield dropped by a similar amount to 4.43 per cent. Bond yields move inversely to prices.

UK unemployment rose to 4.3 per cent in the three months to July, above the Bank of England’s forecast for the third quarter. However, annual pay growth was 7.8 per cent in the three months to July, the highest rate in records going back to 2001.

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“With unemployment on the rise and vacancies continuing to fall, the UK jobs market is likely to loosen further as businesses rethink expansion and hiring plans,” said Alice Haine, personal finance analyst at investment platform Bestinvest. 

Yet the pace of wage growth has helped convince the majority of market participants that the BoE will increase interest rates, which are already at a 15-year high, by another quarter-point to 5.5 per cent next week. 

“Signals coming from the labour market have simply been too strong to justify a pause in rate rises”, said Hugh Gimber, global market strategist at JPMorgan Asset Management. “This morning’s data makes another increase in UK interest rates highly likely next week, even despite some of the weaker growth numbers recently.” 

The jobs data comes a day after Catherine Mann, one of the central bank’s more hawkish policymakers, said she would “rather err on the side of over-tightening”, as price pressures remained well above the BoE target.

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European stocks, meanwhile, were mixed on Tuesday. The region-wide Stoxx Europe 600 rose 0.1 per cent and London’s FTSE 100 advanced 0.6 per cent but Germany’s Dax lost 0.4 per cent and France’s Cac 40 slipped 0.1 per cent. 

Contracts tracking Wall Street’s benchmark S&P and those tracking the tech-focused Nasdaq Composite declined 0.2 per cent ahead of the New York opening bell. 

Investors’ attention is turning to the US inflation report due on Wednesday, which will feed into the US Federal Reserve’s own decision on interest rates next week. 

The rate of annual price growth in the world’s largest economy is expected to have increased to 3.6 per cent in August, up from 3.2 per cent in the previous month, bolstered by firmer oil prices. 

“While that won’t move the needle for next week’s Fed decision, where a pause is widely anticipated, it would indicate hawkish risks to the broader Fed outlook,” said Benjamin Schroeder, senior rates strategist at ING.

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Brent crude, the international benchmark, rose 0.6 per cent to $91.19 per barrel on Tuesday, near its highest level this year, while US marker West Texas Intermediate added 0.7 per cent to $87.91.

Asian equities were mixed, with Hong Kong’s Hang Seng index down 0.4 per cent and China’s CSI 300 losing 0.2 per cent, while Japan’s Topix rose 0.8 per cent.