Sterling edged lower on Tuesday after a mixed bag of data that cast doubts on whether the UK economy is robust enough to cope with higher interest rates.
The pound was fractionally weaker against the dollar at $1.3592 and edged 0.1% lower to £0.8502 versus the euro. Sterling fell 0.2% to JPY153.79 against Japan’s yen.
Labour market tightens
The Office for National Statistics data, released on Tuesday, showed that the UK labour market looked strong, with a further drop in the unemployment rate in the three months to August to 4.5% from 4.6% in the three months to July. There was also a robust 235,000 rise in employment and further growth in wages.
However, labour shortages appeared to be persisting as the number of job vacancies rose to a fresh record high of 1.102 million.
Although the labour market looked tight, there was growing evidence that the foundation stone of the UK economy – consumer activity – was fading.
Retail sales weaken
The British Retail Consortium’s (BRC) monthly sales monitor showed that year-on-year growth in total sales in September eased to 0.6% from 3.1% a month earlier – its worst performance since January, when the UK was in the depths of the winter lockdown.
Like-for-like sales – a measure of comparable revenues from the same stores: ie not counting new openings or closures – were down 0.6% compared with the same month a year ago.
The BRC’s chief executive, Helen Dickinson, said: “An uncertain backdrop and slower growth means the fourth quarter looks challenging as the economic recovery is dependent on strong retail sales during the festive season.”
Market responses to the data appeared to cast doubt on whether the Bank of England will have the stomach to risk lifting interest rates, despite its growing concerns about above-target inflation.
The government bond market rallied – forcing yields higher – as UK equities fell: indeed, the equity market has the most to fear about rising interest rates, with many companies finding support during the pandemic from loans and debt issuance.
While the FTSE 100 shed 0.7% in early trade, the yield on the benchmark 10-Year Gilt fell to 1.19% after hitting a two-and-a-half-year high of 1.22% in the previous session.
The central bank targets an annual inflation rate of 2% and the headline Consumer Price Index for September indicated a rate of 3%, with most forecasts – even the BoE’s own – pointing to further gains. While the rate-setting Monetary Policy Committee acknowledges the danger of inflation expectations becoming embedded, the retail sales data indicated consumers are resisting buying now to mitigate against higher price tags in the future.