22nd Jan 2014 17:30
LONDON (Alliance News) - UK stocks closed close to flat Wednesday as fears grow that the Bank of England may increase its base rate sooner-than-expected after the latest reading of UK unemployment came in ahead of expectations.
Meanwhile, the pound continues to show its strength after shooting higher in the aftermath of the data.
The latest unemployment figures released by the Office for National Statistics Wednesday showed that the UK jobless rate for the three months to November fell to 7.1%, from 7.4%, coming in significantly lower than the more modest 0.1% decline to 7.3% that had been forecast by economists.
Indeed, a Bank of America Merrill Lynch Global Research report noted that, "around 50% of economists were forecasting a decline to 7.3%, and around 35% were anticipating a fall to 7.2%."
"The decline was once again driven by very strong employment growth - indeed the strongest in 40 years, and equivalent to a US non-farms payrolls number of around 450,000 - of which 80% were full time jobs," the report added. The ONS revealed that the number of people out of work fell by 167,000 to 2.32 million in the period, while the number of people claiming job seekers allowance dropped by 24,000 to 1.25 million in December.
Released at the same time, policy makers of the Bank of England were unanimous in the decision to hold the interest rate and quantitative easing at their meeting on January 8 and 9, according to the minutes of the meeting. The nine-member Monetary Policy Committee voted to retain the record-low 0.50% interest rate and asset purchases at GBP375 billion per month.
However, with the unemployment rate now just 10 basis points above the self-imposed 7% threshold for considering increasing interest rates, "the issue for the Bank of England is that its forward guidance policy is now outdated after just five months," said UFX Markets Managing Director Dennis de Jong.
"Mark Carney and co. must decide if they cut the unemployment threshold to 6.5% or 6%, or base future interest rate decisions on wage growth rather than solely unemployment," he added.
Opinion is already divided. Capital Economics economist Samuel Tombs believes that there is now a strong chance that the MPC will alter its forward guidance alongside next month's inflation report in order to provide the recovery with more support.
The BoA Merrill Lynch Global Research report, however, takes a different view, saying, "we do not think evidence thus far strongly supports cutting the threshold notably further, and ultimately we maintain our expectations of a first rate rise in February next year."
After a positive open, stocks were pushed into the red in the aftermath of the data, before closing at similar levels to which they opened.
The FTSE 100 closed down 0.1% at 6,826.33, while the FTSE 250 closed marginally higher at 16,147.17, and the AIM All-Share index closed up 0.1% at 882.06.
"The continued strength of the pound could also help to explain why the FTSE 100 continues to struggle to push towards 1999?s record highs," said Michael Hewson, Chief Market Analyst at CMC Markets.
The surprise improvement in employment sent the pound racing higher against other major currencies Wednesday, and at the close of the UK equity market, the pound trades at its highest level for three weeks against the dollar at USD1.6577. The currency made a new 12-month high against the euro, currently trading at EUR1.2221.
Also released in a busy morning of UK data, the ONS showed that the budget deficit narrowed by GBP 2.1 billion from the previous year to GBP 12.1 billion in December.
In the US, the Mortgage Bankers Association's released its weekly report on mortgage applications. The MBA said its seasonally adjusted index of mortgage application activity increased by 4.7% in the week ended January 17, significantly lower than 11.9% recorded in the previous week.
At the individual UK equity level, Sage Group, up 3.3%, closed as the leading gainer in the FTSE 100. The company reported that it is on course to deliver its target of 6% organic revenue growth in 2015, saying that it has seen trading in line with expectations in the first quarter.
FTSE 250-listed, WH Smith was another big winner, up 2.7%, after it said it has delivered a good profit performance in the 20-week period to January 18, as profit margins improved and costs were well managed across the business.
JD Wetherspoon, up 2.5%, was also amongst the index's top gainers. The British pub chain reported that total sales and like-for-like sales are both up in its most recent trading quarter, and in the year to date. Total sales were up 10.6%, for the 12-week period to January 19, with like-for-like sales up 6.7%. In the year to date, which is the 25 weeks to January 19, JD Wetherspoon said that total sales increased by 9%, and like-for-like sales increased by 5.2%.
In the data calendar Thursday, there is a raft of manufacturing PMI data, starting with the HSBC manufacturing purchasing managers index for China over night. Markit Economics releases manufacturing PMI information for France at 0758 GMT, ahead of the German reading at 0828 GMT and the EU's at 0858 GMT. The US Markit manufacturing PMI figure is released at 1358 GMT.
The Chicago Federal Reserve releases its national activity index at 1330 GMT, at the same time as US jobless claims data. Consumer confidence for the eurozone is released at 1500 GMT.
In the corporate calendar, blue-chips London Stock Exchange and easyJet release interim management statements. FTSE 250-listed Kentz Corporation and Petra Diamonds, amongst others, release trading updates. Also in the FTSE 250, ST James's Place releases its fourth quarter trading update.
By James Kemp; [email protected]; @jamespkemp
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