UK labour market data offered a mixed picture this week. Unemployment fell to 4.7% in the three months to August, down from 4.9% and below expectations. However, job vacancies continued to decline, reaching their lowest level since 2021, suggesting that employers remain cautious about recruitment. Wage growth excluding bonuses also edged higher, from 3.6% to 3.7%, providing some support for household spending but potentially adding to inflationary pressures. Sterling initially strengthened following the labour market data.
This morning’s inflation release has added to the challenge facing the Bank of England. Headline CPI rose more sharply than expected, increasing to 3.5% in September up from 3.1% in August. While core inflation also strengthened, rising from 2.6% to 2.8%. Higher energy prices, amid the ongoing conflict in the Middle East, were a key driver of the increase. However, firmer underlying price pressures, particularly in services, raise concerns that inflation could become more persistent and spread beyond energy costs. With wage growth also picking up, the Bank of England faces the challenge of bringing inflation under control while supporting an economy which has proven to be more resilient than expected this year. The prolonged conflict adds uncertainty to the outlook. However, the latest data may strengthen the case for a rate hike at the Bank’s next meeting on 5th November.
While some central banks may be considering upward revisions to their inflation outlooks, we believe policymakers are likely to remain cautious. Inflation pressures can ease quickly if commodity prices or geopolitical risks subside, reducing the need for any urgency in raising interest rates further.
Technology stocks faced renewed selling pressure midway through the week, with weakness spreading across Asian and European markets. The declines reflect growing investor scrutiny of the substantial sums being invested in artificial intelligence (AI), with questions emerging over whether future returns will justify the cost of expanding infrastructure and developing new technologies. However, the underlying earnings picture remains encouraging, with major technology companies delivering results that have generally met or exceeded expectations so far. ASML, for example, reported strong quarterly earnings and raised its full-year sales outlook, citing sustained demand for AI-related equipment. This suggests that demand for AI infrastructure remains robust, even as investors become more selective about valuations and the long-term returns on investment.
Netflix shares fell by approximately 5% following the release of third-quarter results that fell short of expectations, with viewership growth also showing signs of slowing. The company also warned that revenue growth is expected to moderate further in the fourth quarter, forecasting revenue of $13.4bn. Against this backdrop, Netflix has recently brought in new talent to help reinvigorate its offering and support its next phase of growth, looking to regain momentum and strengthen its competitive position.
Still to come this week we have Japan’s inflation rate, UK retail sales and US Michigan consumer sentiment.
Nicola Tune, Portfolio Specialist