UK real wage squeeze continues; Yellen testimony boosts markets - as it happened

Rolling coverage of the latest UK unemployment report, which shows that pay is lagging inflation despite another rise in employment

• Latest: Yellen upbeat on economy, cautious about inflation
• Market rally; Dow hits record high
• BREAKING: UK jobless rate falls to 4.5%, a 42-year low
• But! Wages are lagging inflation again

Earlier:

• Deputy governor says raising rates is 'a bit tricky'
  
• Ben Broadbent isn't ready to vote for a hike

7.02pm BST

And finally.... Janet Yellen's testimony to lawmakers on Capitol Hill didn't yield many fireworks.

"I believe a key thing that Congress should be taking into account in designing fiscal policy is the need to achieve sustainability in the debt path over time".

4.35pm BST

Janet Yellen has lessened expectations of a steep ascent of US rates, sending the Dow Jones industrial average to new alltime highs.

Joshua Mahony of IG says the Fed chair has cheered investors:

Stocks are back in the swing of things, with the Dow hitting new record highs in the wake of a dovish testimony from Janet Yellen in Washington. To some extent Yellen provided a relatively hawkish statement given her declaration that rate hikes should continue despite falling inflation. However, in speculating that it would not take many more hikes for the Fed funds rate to be neutral, Yellen has essentially signalled that there will be a finite amount of rate rises around the corner. Markets are now looking for a December rate hike at the earliest, and crucially just one rate rise in 2018.

3.20pm BST

UK consumers are suffering a sustained fall in living standards as real pay fell again in the three months to May, piling more pressure on cash-strapped households.

Related: UK pay squeeze intensifies as real wages continue to fall

3.15pm BST

The Canadian dollar is rallying on the back of the rate hike.....

Canadian dollar pops to fresh 11-month high as Bank of Canada increases rates for the first time in 7-years #ChartAttack #CAD pic.twitter.com/T8KsgTiL8P

3.12pm BST

Here's some reaction to the Bank of Canada's rate hike

Bank of Canada suggests "inflation softness temporary" in hiking rates. Haven't heard those tunes in a while from any major central bank...

Bank of Canada removed mention of hot housing markets in today's rate release. Interesting. #cdnecon

Loonie spikes after @BankofCanada rate +0.25% to 0.75%, sees "significant" economic slack absorbed, 2% inflation by mid-'18 #wordcloud @BNN pic.twitter.com/PoJYKVC1Tl

3.10pm BST

Canada's interest rate hike was generally expected, and is another sign that central bankers are moving towards normalising monetary policy.

In a statement the Bank of Canada says growth is strengthening across the economy and becoming more sustainable.

Recent data have bolstered the bank's confidence in its outlook for above-potential growth and the absorption of excess capacity in the economy. The Bank acknowledges recent softness in inflation but judges this to be temporary."

3.02pm BST

NEWSFLASH: Canadian interest rates have been hiked for the first time in seven years.

The Bank of Canada has voted to raise borrowing costs by a quarter-point, from 0.5% to 0.75%.

Bank of Canada raises rates 25-bps as expected to 0.75%; says softer inflation appears mostly from temporary factors.

2.51pm BST

The markets often get excited when a central banker hits the headlines.

And on this occasion, Ian Shepherdson of Pantheon Economics reckons they've got over-excited by Yellen's comments about inflation 'uncertainty'.

1. Yellen said: Rates need to rise further. Decent growth likely, which will push unemployment down further and lift wages/inflation.

2. She also recent recent low core numbers are due to "unusual reductions" in a few components.

3. Then she said that the relationship between "tightening resource utilization" - aka falling unemployment" and inflation is "uncertain"...

4. ...To which you might respond "Well, duh." But markets see Yellen use the words "inflation" and "uncertainty" in the same sentence...

5 ...And duly go bananas. I very much doubt that was her intention. She's going to keep hiking.

2.49pm BST

Up she goes...

#Dow rises above previous #record close - up over 100 pts at the open pic.twitter.com/ye4hMFZRjP

2.43pm BST

Shares are rallying in New York at the start of trading, as Wall Street absorbs Janet Yellen's testimony to Congress.

The Dow gained almost 100 points at the start of trading, and is getting very close to its previous record closing high.

Fed Chair Janet Yellen's prepared remarks, released ahead of her semi-annual testimony today, offered no new insights on the timing of either the next hike in interest rates or when balance sheet normalisation would begin. This is not a complete surprise, however, since it is still too early for the Fed to tip its hand on what it will do at September's FOMC meeting.

It makes a lot more sense to wait and absorb another couple of months' worth of data, before providing a stronger steer to the markets around the time of the Jackson Hole conference.

Basically everything in the world is green in the wake of that Yellen testimony. https://t.co/kAdWrVfZrK pic.twitter.com/WrQIOPcFVM

2.06pm BST

The US dollar has dropped after Janet Yellen's testimony hit the wires.

Traders seem to be focusing on the Fed Chair's cautious comments about inflation, and the fact she highlighted it is below the Fed's target of around 2%.

US dollar slips as investors parse testimony from Fed chief Janet Yellen. https://t.co/F0zid0FV5n pic.twitter.com/OMqqZ3Nm1e

Dollar pressured as market took initial headlines from Yellen speech as dovish despite tone largely unch. https://t.co/ecdi9C6vwP pic.twitter.com/1xlkvSkb58

1.48pm BST

Newsflash: The world's most powerful central banker, Janet Yellen of the Federal Reserve, has just released her testimony to the US Congress.

In it, Yellen says that the US labour market has continued to recover since her last testimony, in February. The economy appears to have grown at a moderate pace, on average, so far this year, she adds.

The Committee continues to expect that the evolution of the economy will warrant gradual increases in the federal funds rate over time to achieve and maintain maximum employment and stable prices.

Inflation continues to run below our 2 percent objective and has declined recently; the Committee will be monitoring inflation developments closely in the months ahead.

Key comments from Yellen on inflation... running below goal, has declined recently & key uncertainty... more dovish on that specific topic

Full text of Yellen speech. https://t.co/csVhjwF9rk

Yellen hitting a few marginally dovish-sounding notes, but this is all well priced in, so there's no new news here.

1.44pm BST

Breaking! Royal Bank of Scotland is paying over 4bn to America's Federal Housing Finance Agency to resolve long-running inquiry.

It relates to the misselling of mortgage-backed securities in the run-up to the financial crisis (before RBS almost collapsed, and was bailed out by the taxpayer).

RBS says to pay US regulator FHFA US$5.5 bn (4.2 bn) over toxic bond misselling

"Today's announcement is an important step forward in resolving one of the most significant legacy matters facing RBS and is further evidence of the determination of the bank's leadership to put our remaining issues behind us.

"This settlement is a stark reminder of what happened to this bank before the financial crisis, and the heavy price paid for its pursuit of global ambitions."

Settlement reached with the Federal Housing Finance Agency regarding US RMBS claims: https://t.co/DzciI4jl8A

1.27pm BST

Over in Greece, the prospect that the debt-stricken country could return to the financial markets soon has dominated the news.

Now, in exclusive comments to our correspondent, the Greek minister of state and government spokesman has confirmed that accessing markets remains a priority even if senior bank officials have described the move as premature.

"Given that, we are considering all possible scenarios regarding optimum timing for the first issuance."

1.21pm BST

We've also got fresh evidence that the European recovery is strengthening.

Eurozone industrial production rose by 4% year-on-year in May, new figures from Eurostat show.

More evidence of #eurozone recovery: industrial production puts on a sprint in May, up a perky 4% on year. pic.twitter.com/M0ZbkCwTHj

1.09pm BST

Kathleen Brooks of City Index sees signs of hope for workers in today's data.

She's encouraged by that weekly earnings, excluding bonuses, rose to 2% per year from 1.8%, and that the number of new jobs created also rose.

Even with the pick-up in wage growth in May, the consumer remains constrained, as CPI is running at 2.9%, however, things could start to get easier for UK households as we will explain. Chart 1 below shows UK 3-month jobs growth and UK ex. Bonus wage data over five years.

As you can see, there is no real link between UK job creation and wage data, with the two often moving in opposite directions. However, the recent uptick in wages has corresponded with an uptick in job creation, after the two moved in opposing directions, as you can see marked in the chart.

Wages tend to lag job growth, however, as job growth continues to pick up from the lows reached in Q3 last year, perhaps now is the time for wages to rise.....

12.19pm BST

The opposition Labour party says it would battle the wage freeze by raising the UK's minimum wage to 10 per hour, from 7.20 today.

Debbie Abrahams MP, Labour's Shadow Work and Pensions Secretary, says:

"We welcome the overall increase in employment, but are deeply concerned that millions have faced a real terms pay cut under this Government."

"The cost of basic essentials continues to rise as real wages decline under the Conservatives. Millions are struggling to get by while Theresa May hands 1 billion to the DUP to keep herself in a job."

12.12pm BST

Professor Costas Milas, of the Management School at Liverpool University, has interrogated the data, and reports:

The Bank of England historical database, which reports unemployment rate data since 1856 is telling us that the unemployment rate has been below 4.5% 43%(!!!) of the times.

Since 1856, real average wage growth has been 1.54% and during this period, it has been negative only 22% of the times.

11.24am BST

As this graph shows, the number of people working in the UK has risen pretty steadily since the recession ended in 2009.

UK employment up, and at a record high, in today's ONS data. But pay growth remains historically weak and below inflation. pic.twitter.com/HYQhDSWSnp

11.14am BST

Helen Barnard, head of analysis at the Joseph Rowntree Foundation (JRF), is deeply concerned by the drop in real wages

"Britain's employment has climbed ever higher and it is encouraging to see more people in work. Yet the number of people struggling to make ends meet despite being in work has also increased.

"Real wages have seen an alarming slide. This is the third month in a row that real earnings have fallen. In real terms earnings are no better than they were 12 years ago: total pay in real terms is the same as it was in August 2005.

11.13am BST

The minister for Employment, Damian Hinds, has welcomed today's labour market report.

He point out that more people are in work than at any time since 1971, when records began.

"These latest statistics are another reminder that our strong economy is giving record numbers of people the chance to find and stay in work.

"Unemployment is low, employment is high and there are over three quarters of a million vacancies. This is great news for Britain and for millions of ordinary working families.

10.39am BST

The real wage squeeze makes it hard for the Bank of England to raise interest rates soon, argues Ian Kernohan, economist at Royal London Asset Management.

Policy makers at the Bank of England are faced with a puzzling shift in the relationship between unemployment and wages. Growth in core average earnings (excluding bonuses), did improve but only marginally, and was up just 2% compared with a year earlier.

Inflation is now above the Bank's target level and real earnings growth has slipped into negative territory. This is having a negative impact on household spending. With uncertainty gathering over the Brexit negotiations, the Bank of England's Monetary Policy Committee would need to see a distinct improvement in earnings growth towards 3% and above, to be in a position to raise interest rates."

10.30am BST

John Hawksworth, chief economist at PwC, is encouraged that UK employment has hit a fresh record high.

"The great UK jobs creating machine has kicked into gear again, with employment growth accelerating in recent months after slower growth in late 2016. The employment rate is now within touching distance of 75% for the first time ever, while the unemployment rate fell further to 4.5%.

"In the 1970s or 1980s such low unemployment, combined with inflation rising towards 3%, could have set off a wage-price spiral. But the Phillips curve now appears remarkably flat, with regular pay growth still subdued at 2% despite some pick-up from last month. Including bonuses, average earnings growth actually fell back to 1.8%.

"As a consequence, real earnings growth remains deep in negative territory and this seems unlikely to change anytime soon. This will dampen consumer spending power, though the continued strength of the jobs market should prevent the recent slowdown in the economy turning into a recession."

Phillips curve is broken globally & Australia is no different. A central bank conundrum? Growth in the absence of inflation #ausbiz #ausecon pic.twitter.com/bb1lbk3OV1

10.17am BST

Geraint Johnes, Professor of Economics at Lancaster University and Research Director at the Work Foundation, says the drop in total pay is "a source of concern."

Including bonuses, the preferred three month average figure for the growth in average weekly earnings slipped down to 1.8% in May, compared with 2.1% in April.

This figure is now 2% or lower in all sectors except for distribution and hospitality. The less reliable single month figure for the whole economy also now stands at 1.8%.

There has been a sharp decline in vacancies in the real estate sector over the most recent quarter, possibly reflecting the slowdown in the housing market.

10.10am BST

This latest fall in real wages is likely to drag on Britain's economic growth this year,

Ben Brettell, senior economist at Hargreaves Lansdown, explains:

Shrinking real pay doesn't bode well for economic growth - the UK economy is heavily reliant on the consumer and falling real incomes should eventually translate into lower retail sales. Respected think-tank NIESR said last week it expects relatively anaemic growth of 0.3% in the second quarter - barely higher than the disappointing 0.2% registered in Q1.

The UK labour market is becoming increasingly difficult to interpret. Conventional economic theory suggests that low unemployment should ultimately lead to upward pressure on wages - but there has been scant evidence of this during the latest squeeze on household finances. Perhaps workers simply don't have the bargaining power they once did.

10.05am BST

Britain's economy needs higher wages to keep consumer spending up, and protect the economy from Brexit uncertainty.

So argues Jeremy Cook, chief economist at the international payments company, World First.

Real wage gains are the silver bullet for the concerns that swamp the UK economy at the moment; they come from optimistic employers happy with business conditions (which we do not have), they allow consumers to re-balance spending figures from credit uptake (which we urgently need) and promote growth in generalised output with a central bank more comfortable to normalise monetary policy (which is an argument that desperately needs clarity but yet there is little to be found)."

10.01am BST

Today's report also shows the regional differences in Britain's labour market.

Employment levels are highest in the South West of England, and the lowest in Northern Ireland.

Come to the South West of England, where it seems that virtually everyone is employed! UK employment rate record high 74.9%. S. West - 79.2% pic.twitter.com/zol3IvZRrn

9.53am BST

ONS senior statistician Matt Hughes says the UK employment market looks "strong", apart from the drop in real wages.

"The general picture is little changed on last month, with the overall employment rate and that for women both at record highs, the inactivity rate at a joint record low and the unemployment rate falling to its lowest since early summer 1975.

Despite the strong jobs picture, however, there has been another real-terms fall in total earnings, with the growth in weekly wages low and inflation still rising."

9.51am BST

Duncan Weldon of Resolution Group has some interesting thoughts on today's unemployment report:

Labour market stats in one word: "solid".

Unemployment at a 42 year low, pace of employment growth up, nominal wages a touch stronger than expected, total hours worked down -

- implying some (still weak) productivity growth. BUT - higher inflation means real earnings still falling.

Surprised that employment growth accelerated. Useful prop to household consumption despite falling real wages.

9.47am BST

This chart, from Jamie McGeever at Reuters, shows how rising inflation has driven real wages down:

Real earnings in Britain falling at their fastest pace in 3 years. pic.twitter.com/9XW1IQW9Zb

9.43am BST

Bad news for workers; wages are still not keeping up with inflation.

Today's report shows that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 1.8% including bonuses in the March-May quarter.

9.39am BST

The number of people in work rose by 175,000 during the last quarter, taking the employment total above 32 million.

The ONS says:

There were 32.01 million people in work, 175,000 more than for December 2016 to February 2017 and 324,000 more than for a year earlier.

9.38am BST

The chart shows how Britain's jobless rate has now dropped to the lowest level since Harold Wilson's final term in Downing Street:

9.34am BST

Breaking: Britain's unemployment rate has fallen to 4.5% in the three months to May, a new 42-year low.

That's down from 4.6% a month ago, and is the lowest rate since 1975.

9.25am BST

The drop in the pound is pushing shares in exporters higher in London.

The company say they are seeing "top customers returning". to their stores. In other words, the Chinese are spending again.

8.34am BST

We have bad news for any Brits heading over the channel this summer holidays.

The pound has hit its lowest level against the euro since November 2016, following Ben Broadbent's dovish comments.

8.22am BST

Lee Hardman, an analyst with MUFG in London, agrees that an August rate rise now looks less likely, which is why sterling has fallen.

He says (via Reuters)

"[The pound] is definitely trading on a softer footing after this news.

"For anyone who had any expectation of an August hike - that is clearly looking very unrealistic now, although he does reinforce that they are moving towards a hike. That will help keep alive expectations for a move later this year."

8.09am BST

The pound has fallen to a two-week low after Ben Broadbent revealed he isn't ready to vote for a rate hike.

Sterling shed 0.2% to hit $1.2821, its lowest level since late June, as the prospects of a rate rise in August receded.

Early pound weakness on latest Broadbent comments #BoE https://t.co/DBROrZvMFi pic.twitter.com/SW4TbWBUXQ

Deputy BoE Gov Ben Broadbent tells Aberdeen press he is not ready to raise rates yet. That should seal a 'no change' decision on 3 Aug. #BoE

BoE's Broadbent: Too Many Imponderables To Back Interest Rate Hike: UK regional press.

7.59am BST

There's early drama in the markets today, as Bank of England deputy governor Ben Broadbent declares that he is not ready to vote to raise interest rates.

Highlighting the "mood of business" as the key factor in his thinking, he said: "If you look at the past six to 12 months, economic growth has been okay and the employment rate good. Unemployment has drifted down a little " and inflation is higher.

"There is reason to see the committee moving in that direction (higher interest rates) - but there are still a lot of imponderables."

"In my opinion, it is a bit tricky at the moment to make a decision (to raise rates). I am not ready to do it yet."

Bank of England Broadbent sending #GBPUSD lower. #dove pic.twitter.com/gxwqh2vMZZ

7.37am BST

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Britain's cost of living squeeze could worsen today when the latest unemployment statistics are released.

The real inflation story in the UK is not the recent pickup in headline CPI inflation, but the failure of earnings growth to follow.

Today's labour market data will likely see headline earnings growth fall well below 2% y/y, leaving wage growth more than 1% point below CPI inflation.

Related: Political upheaval will lead to UK economy slowing down, says Moody's

Quick glance at #UK labour data, #Yellen testimony, #BoC pic.twitter.com/SuJZxY1SbJ