Sterling Update

Dropping the ball

The Office for National statistics reported on Friday that UK unit labour costs went up by 1.6% in the year to June. Yesterday the ONS raised that figure to 2.4%. It made the adjustment because it had used the wrong set of GDP data the first time around. Sterling went up.

In its initial calculation of unit labour costs the ONS had used the second estimate of gross domestic product instead of the finalised "quarterly national accounts". Correcting that error lifted the figure for labour costs growth from 1.6% to 2.4%. The adjustment looks even more significant when viewed alongside the 1% figure projected by the Bank of England in its May Inflation Report.

Unit labour costs are not synonymous with wages; they reflect the efficiency of industry rather than workers' spending power. But they are a component of inflation and were mentioned a couple of months ago by the Bank of England governor as a consideration in monetary policy decisions. Investors see the ULC adjustment as strengthening the hand of those in the Monetary Policy Committee who would take interest rates higher.

Passing the ball

In parliament yesterday prime minister Theresa May was very clear that the ball is in the EU's court when it comes to making the next move in Brexit negotiations. By way of reply the EU promptly lobbed it back over the net.

The European Commission's Margaritis Schinas was quick to respond that "the ball is entirely in the UK court for the rest to happen". That exchange added little to the debate but the prime minister also told MPs that that Britain must be prepared for "every eventuality", including leaving the EU with no agreement in place.

For quite a while investor have been factoring in that possibility so they didn't rise to Ms May's bait. They preferred to focus on the ONS announcement and its potential to push interest rates higher. The pound was Monday's top performer, strengthening by an average of 0.4% against the other dozen most actively-traded currencies. It added quarter of a euro cent and three quarters of a US cent.

Going to the ball?

The only economic statistic to affect sterling directly on Monday was the BRC's like-for-like retail sales figure, which came out at midnight. Sales were up by 1.9% on the year, a number which went down tolerably well with the pound's supporters. Today's ecostat challenges are potentially tougher.

During most of the summer the UK data for manufacturing and industrial output fell short of forecast, even what analysts were predicting declines. The figures for June, which came out last month, beat expectations as manufacturing production increased by a monthly 0.5% and the broader industrial output went up by 0.2%.

Today economists are looking for another 0.2% increase in industrial production and a 0.3% rise in manufacturing. Better figures than those could help sterling to build on yesterday's recovery. A narrowing of the trade deficit wouldn't do any harm either.