UK unemployment data adds pressure to Reeves
Millennium Wheel and Landscape at Sunset. London, England.
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UK assets were volatile in morning trade on Tuesday as investors weighed the economic impact of a weakening labor market ahead of the crucial budget and final interest rate decision of the year.
Data published by Britain’s Office for National Statistics (ONS) on Tuesday showed that the country’s unemployment rate rose to a higher-than-expected 5% in the three months to September. Meanwhile, the estimated number of employees on payroll in the UK fell by 32,000 between August and September.
By 11:20 a.m. (6:20 a.m. ET) in London, yields on U.K. government bonds, known as gilts, had fallen significantly across the curve. Benchmark return 10 years gilded It fell more than 5 basis points to 4.405% as bets on the Bank of England’s year-end rate cut increased.
UK 10 year government bond
Bond yields and prices move in opposite directions. The UK has the highest long-term government borrowing cost among the G-7 countries; The 30-year gold trade is well above the critical 5% threshold.
pound sterlingMeanwhile, it was 0.4% lower against the US dollar, trading around $1.313, down 0.3%. against the euro.
British pound and US dollar
Christmas interest rate cut
Tuesday’s data release should give the Bank of England’s Monetary Policy Committee confidence to cut its key interest rate before the end of the year, Sanjay Raja, Deutsche Bank’s chief UK economist, said in a note following the announcement.
“Labor market slack continued to widen – even surprising market expectations,” he said. “While budget uncertainty is hampering hiring plans heading into 4-25, one thing is clear: today’s data should continue to strengthen the case for a Christmas rate cut.”
According to LSEG data, financial markets are currently pricing the likelihood of a rate cut at the Bank of England’s December meeting at 75%.
Raja stated that, like the Bank of England, Deutsche Bank expects the unemployment rate to rise to 4.9%.
“The big picture, barring any revisions, today’s data points to two things: first, there is more stagnation in the labor market – and perhaps more than assumed in the MPC’s November forecasts; and second, wage momentum continues to slow,” he said.
“Today’s data should give the majority of the MPC additional confidence that labor market weakness is translating into weaker wage momentum, which will be reflected in inflation in the coming months and quarters.”
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Grant Slade, Morningstar’s UK Economist, agreed that the figures published on Tuesday raised the prospect of interest rates falling as they provided further evidence that the economy continued to slump.
“With the UK disinflation process still alive and well, we expect interest rates to normalize further in 2026,” he said in an email to CNBC.
Inflation in the UK reached 3.8% in October; this was cooler than expected but still well above the Bank of England’s 2% target. The Central Bank kept interest rates constant at its November meeting.
Autumn Budget
The shape of the UK labor market is putting further pressure on Chancellor of the Exchequer Rachel Reeves as the crucial Autumn Budget approaches, Julian Howard, multi-asset investment strategist at GAM Investments, told CNBC.
“Today’s unemployment figures increase pressure on both the government and the Bank of England to change course and go easy on tax increases and interest rate cuts respectively,” he said. “But neither is simple. The government needs to somehow fix the difficult financial situation the country is in, without demoralizing the animals.”
It has been under constant pressure since last year’s budget, when the government announced strict rules limiting spending and borrowing room for manoeuvre. Under his fiscal rules, day-to-day government spending must be financed by tax revenues, not borrowing, and he has also promised to ensure that the share of public debt in economic output falls by 2029-30.
The finance minister is considering several ways to support public finances: taxation of dividends with Higher taxes on some professionsAccording to reports from local media outlets.
“Income tax, pensions, ISAs, housing are all covered, but the challenge is that clamping down on these will have a dampening effect on consumption and enterprise to varying degrees,” Howard warned.
“With unemployment steadily rising, the fragility of the economy is becoming more apparent, and as a result the government will be forced to impose tax increases on a weakening economy, contrary to widely accepted economic doctrine. But given the improbability of welfare reform, there is no obvious political alternative.”
The ruling Labor Party’s attempts to slash Britain’s welfare bill earlier this year were met with rebellion from its own MPs, forcing the government to water down planned cuts to cover a multibillion-pound deficit in the budget.
“Markets logically appear to be pricing in a story of lower growth and possibly lower rates over time as cables weaken and the 10-year gold yield [falling]GAM’s Howard said of the reaction in financial markets on Tuesday:
“The assumption, of course, is that the Budget will go ahead regardless and growth will have to be adjusted downward accordingly.”
