Morning Brief – Labour

Charles Porter
Thu 12 Jan 2023

Labour

Before you panic, this briefing is about the economic aggregate of labour, not the UK political party. Whilst that may mean this briefing is a little less controversial than it otherwise may be, it will be more far reaching. Labour factors and the labour market in general have served a supporting role to monetary authorities’ ambitions to curb inflation. Citations of a strong labour market have often come thick and fast as a justification of why inflation will not be transitory and must be taken seriously. The labour market in many economies has also been positioned as the reason why the economy can accommodate and weather such astronomic rises in the cost of borrowing. Aside from inflation, the labour market has become one of the key economic focal points for policy and market pricing alike due to its recent glorification by policy makers. 

So long as the music keeps playing, i.e. people stay in jobs and the labour market remains healthy, there isn’t too much of a problem in the conceptual labour market remaining on the proverbial pedestal. However, elevating its position becomes dangerous once the labour market begins to falter and wobble from its perch. The bigger it is made out to be, the harder it will fall. That is likely beginning to happen in several economies. Undoubtedly, this could derail current monetary direction and therefore market flows. But there is an alternative, the faltering of the labour market could just create headaches for policy makers as rhetoric is adjusted and the artificial pedestal is removed from beneath the labour market. 

In the US, it has been data that has evidenced a softening labour market and this in turn has been undermining the US Dollar. It was the Federal Reserve using the strong labour market as a tool to help the market and public alike digest its aggressive rate hiking path that allowed the market to draw the conclusion that a softer labour market must necessarily constrain the central bank’s ability to raise rates. The Dollar had fallen alongside implied yields on US denominated debt on the back of such labour market data. Attempts have been made by officials to correct the rhetoric and to sideline their previously championed labour market as no longer a necessary or sufficient condition for monetary tightening. 

Similar signs are afoot in the UK. Despite labour market headlines remaining relatively sanguine, it is the Bank of England who is starting to show unease surrounding the labour market. Huw Pill, Chief Economist at the Bank of England, has been suggesting recently that labour market softness may be around the corner, looking through the peripheral soft data. Given the BoE has also leveraged employment figures in recent months to justify its monetary policy, higher levels of unemployment could also disturb UK rate expectations and therefore Sterling if Pill’s forecasts are to materialise. 

Discussion and Analysis by Charles Porter

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