The Bank of England did as the market expected them to do by hiking its bank rate by 75 bps to 3.00% and said rates will continue to rise but talked down the end game rate that the market was pricing in at around 5.25%. The MPC statement said “The majority of the Committee judges that, should the economy evolve broadly in line with the latest Monetary Policy Report projections, further increases in Bank Rate may be required for a sustainable return of inflation to target, albeit to a peak lower than priced into financial markets.” So the BoE is talking down market rate expectations while Jay Powell is intent on continuing to shock it.
The BoE is also doing something that the Fed has NEVER done, and that is forecasting a recession. They expect GDP to decline by ¾ of a % in the 2nd half of 2022 and “GDP is projected to continue to fall throughout 2023 and 2024 H1, as high energy prices and materially tighter financial conditions weigh on spending.”
On the terminal rate talk down, the pound is down sharply and the 10 yr gilt yield is higher by 15 bps while the 2 yr yield is little changed.
Initial jobless claims were 217k, 3k below the forecast and vs 218k last week. The 4 week average was little changed at 219k. Of note was the 47k person rise in continuing claims to 1.485mm and that is the most since the end of March.
Bottom line, the pace of firing’s is definitely still modest but the uptick in continuing claims possibly reflects more difficulty now in finding a new job.
4 Week Avg in Initial Claims
Productivity in Q3 was modest, rising .3% q/o/q annualized but follows a 4.1% drop in Q2. Unit labor costs slowed to 3.5% but after two robust quarters in the first half of 2022. On a y/o/y basis, productivity was negative for a 3rd straight quarter, down by 1.4%. Unit labor costs rose by 6.1% y/o/y. For perspective, in the 20 yrs leading into covid, unit labor costs averaged 1.3% per annum. Either cost cuts, productivity gains or price hikes offset this or profit margins will continue to slip. And as seen, productivity is outright declining.
Unit Labor Costs y/o/y