FTSE 100 faces long-term resistance as wage growth cooling sparks optimism
Wage growth slowed in the UK in January for the sixth month in a row. The Office for National Statistics (ONS) said that average earnings grew 6.1% in the three months to January, a slower pace than the previous month, and lower than analysts were estimating. If bonuses are included, earnings grew at a slower pace in the same period at 5.6% versus 5.8% in December. The unemployment rate rose to 3.9% slightly higher than the 3.8% in December. The report also showed that the number of people claiming unemployment benefits rose by almost 17 thousand in February, higher than the 3 thousand in January, but lower than markets were anticipating.
The data evidenced a cooling in the UK labour market. Wage inflation has been a key area of concern for the Bank of England in recent months as the latest data confirmed the economy had entered a technical recession in the second half of 2023. This put further pressure on the central bank to control inflation before growth was damaged further. The easing in wage growth will likely be received with relief, but there is still more work to be done, as the data remains well above the long-term average.
Markets have received the data with optimism, with the FTSE 100 outshining its European and American peers after the data release. The index climbed to a three-week high but seems to have found resistance around 7,740. This area has been a long-term hurdle for buyers as momentum has failed to consolidate above it since early last year. The last daily close above 7.740 was May 22, 2023. Since then, there have been several attempts to breach the resistance, with the highest peak at 7,768 on December 20, but there has always been a pullback below 7.740 before the close. Whether buyers can garner enough momentum to consolidate above this level will be a good test of appetite in UK stocks.
FTSE 100 daily chart
Past performance is not a reliable indicator of future results.
The next hurdle for stock traders will be the monthly growth and manufacturing data released on Wednesday morning. GDP is anticipated to have grown 0.2% in January. As mentioned above, the UK economy entered a technical recession in Q2 and Q3 of 2023. Whilst a cooling in the economy was expected - and needed - to help bring down inflationary pressures, the combination of persistent price growth and economic contraction creates a tough environment to navigate when attempting to normalise monetary policy. The situation is also made worse on a comparative basis with the US, as it becomes evident that a soft landing has been achieved on the other side of the Atlantic, with two consecutive quarters of growth above 3% in the second half of 2023.
Markets are currently pricing in a 44% chance that the Bank of England will cut rates in June by 25bps. The odds have increased since the softer jobs data, but the BoE continues to be seen as the most hawkish out of the majors. A greater probability is still assigned to August, but expectations could continue to shift over the coming months as further data comes in. For next week’s meeting, markets are convinced there is no chance of a rate cut from the BoE and there is little expectation that the central bank will give further insight on the timing of upcoming policy adjustments. The “wait-and-see” stance will likely continue in the foreseeable future.