Key takeaways
- UK labour market figures remain inconclusive, while public sector employment trends raise fiscal concerns
- French authorities move to contain unrest, but EUR underperformance persists
- Ongoing questions around AI investment returns continue to weigh on the US dollar
- Middle East tensions continue to unsettle energy markets as Brent crude tests $110 per barrel
- Albertans reject calls for a referendum on separation from Canada
UK labour market figures remain inconclusive, while public sector employment trends raise fiscal concerns
The UK labour market figures for August and September provided little clarity on the underlying state of the labour market. There was some positive news, with the unemployment rate falling from 4.9% to 4.7%, the employment rate rising from 75.1% to 75.3%, and the economic inactivity rate declining by 0.1 percentage points to 20.9%.
However, the picture becomes less encouraging beneath the headline figures. Vacancies fell by 21,000, HMRC payroll data showed payrolled employment declining by around 110,000, private sector earnings remained well below public sector earnings, and public sector employment continued to expand.
This final point is likely to concern those looking for public sector spending restraint, as current trends suggest the government continues to rely on public spending to support activity. Public sector pay growth of 6.1% is almost 2.2 times faster than private sector pay growth of 2.8% year-on-year and, when combined with increased hiring, places additional strain on already stretched public finances. Moreover, despite headline employment indicators appearing relatively resilient, HMRC payroll data suggests private sector businesses remain cautious about taking on new staff.
Markets may find these figures difficult to interpret. The larger challenge, however, may be a public sector spending bill that the private sector is finding increasingly difficult to finance. For UK yields, risks remain skewed to the upside, while for sterling, the risks remain tilted towards renewed weakness, in my view.
French authorities move to contain unrest, but EUR underperformance persists
French districts have introduced curfews, restricted gatherings and, in some cases, directly targeted youth activity in an effort to regain control of riots and looting across much of the country. Similar unrest has spread to Italy, with reports of rioting and looting in Milan, Turin, Bergamo, Bologna and Brescia.
The unrest in France initially centred on student concerns regarding the state of schools before broadening to include opposition to possible budget cuts. In Italy, reports indicate concerns around living costs, wages, housing affordability and public service provision have been among the key drivers.
Should protests and violence spread further, downside risks to the Euro Area economy may intensify. The region has already been weakened by summer drought conditions and wildfires and remains under pressure from elevated energy prices.
If authorities successfully bring the situation under control, the euro’s current underperformance may begin to ease. For now, however, that underperformance persists, in my view.
Ongoing questions around AI investment returns continue to weigh on the US dollar
With a limited economic data calendar this week, markets may be looking elsewhere for direction. One area attracting particular attention remains the performance of US equity markets, especially AI-related stocks.
Despite continued gains in companies such as NVIDIA, Micron and Broadcom, concerns regarding the financing of AI investment programmes remain present. The key question is whether businesses that have already committed substantial resources to AI will ultimately generate returns commensurate with those investments, particularly as expenditure in this area continues to outpace investment elsewhere, including climate-related initiatives.
The US dollar remains under pressure as these questions continue to be raised. Additional concerns have also emerged, including the difficulty AI developers face in preventing hacks and data breaches, which continue to generate headlines.
The frequently cited benefits for productivity, GDP growth and AI monetisation are yet to materialise clearly. By contrast, the costs associated with data centres, energy consumption and water usage are already well documented.
Middle East tensions continue to unsettle energy markets as Brent crude tests $110 per barrel
Brent crude oil tested $110 per barrel today as concerns surrounding energy supplies and instability in the Middle East intensified. Saudi Arabia postponed the summit often referred to as “Davos in the Desert” due to security concerns, a Saudi military helicopter crashed near Yemen, and commercial flights within Saudi Arabia experienced significant disruption.
The conflict involving the Houthis appears set to intensify and could draw in other regional states that view the Houthis and Iran as a threat. This may keep oil prices elevated in the days and weeks ahead, while the probability of either a ceasefire or renewed talks between the United States and Iran appears to be diminishing.
For markets, this could renew upward pressure on bond yields, even as energy supplies from the Middle East to Europe increase in an effort to prevent a further rise in diesel prices.
Albertans reject calls for a referendum on separation from Canada
As widely expected, Albertans rejected calls for a referendum on separation from Canada in a vote held yesterday. In my view, the result is unlikely to have a significant impact on markets or on the USDCAD exchange rate.
The September CPI figures were also unlikely to have supported further CAD strength. Both headline and core inflation came in below expectations, pointing to a slower pace of price growth than anticipated.
That outcome should reduce the likelihood of additional interest rate increases in Canada before year-end.
In [Moneycorp’s] view, recent moves in USDCAD remain primarily a function of US dollar dynamics rather than developments specific to the Canadian economy.