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Daily Market Digest: UK jobless rate falls to 11-year lows

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UK’s unemployment rate fell to 5.0%, marking an 11-year low while wage growth accelerated. MSCI, the global index provider, denied inclusion of China’s A-shares in its index. The markets look to the FOMC meeting where the Fed is expected to hold interest rates unchanged at 0.50%

Today’s Economic events

  • Australia Westpac consumer confidence m/m -1.0% vs. 8.50% previously
  • Australia Westpac consumer confidence 102.2 vs. 103.2
  • France CPI m/m 0.40% vs. 0.40%; y/y 0.0% vs. -0.10%
  • UK unemployment rate 5.0% vs. 5.10%
  • UK claimant count rate m/m 2.20% vs. 2.10%
  • UK weekly earnings excl. bonuses 2.30% vs. 2.0%
  • US Empire state manufacturing 6.01 s. -4.0
  • US PPI m/m 0.40% vs. 0.30%; y/y -0.10% vs. -0.10%
  • US core PPI m/m 0.30% vs. 0.10%; y/y 1.20% vs. 1.0%
  • Canada manufacturing sales 1.0% vs. -0.90% previously

Coming up

  • The US capacity utilization
  • The US industrial production
  • Bundesbank, Weidmann speech
  • New Zealand GDT price index
  • ECB’s Constancio speech
  • Weekly crude oil inventories
  • FOMC rate, economic projections, press conference
  • New Zealand PMI business
  • New Zealand GDP q/q

MSCI shuns China’s A shares for the third time

MSCI Inc. the global index company denied China’s mainland shares into the MSCI Index, according to reports. It was the third time that MSCI excluded entry for the mainland shares in China. Previously, expectations for the inclusion of Chinese mainland stocks or A-shares increased with the company said that it was laying out plans for inclusion into the index and that it was working closely with Chinese regulators to address long-running issues.

MSCI said “the inclusion of A-shares could occur within the next year, outside of the normal review period which falls every June. If we see further developments in terms of regulation and in terms of how we access the market as investors from a foreigner perspective, then indeed we could see inclusion.”

On Tuesday, MSCI said that investors preferred the index provider to take a more cautious approach and said that capital mobility was one of the biggest issues facing China’s A shares. It is estimated that over $1.5 trillion is benchmarked to the MSCI emerging markets index and that the addition of China’s A-shares would have boosted the index greatly.

Catherine Yeung, investment director for Asia ex-Japan equities at Fidelity International said, “What’s important to note is that while we have seen some significant improvements in terms of how foreign investors access domestic Chinese stocks, regarding the MSCI criteria that was set last year, a lot of it still needs to be fulfilled.”

UK unemployment rate falls to 11-year lows

Data from the UK’s Office for National Statistics showed that the UK’s unemployment rate fell to 5.0% after remaining at 5.10% for five months previously. The decline in the unemployment rate was the lowest in 11 years. Participation rate also jumped higher, to 74.2%, marking the biggest jump and the highest on record so far.

Besides the unemployment rate improving, UK wages also accelerated, outperforming the market expectations. Wage growth increased 2.30% excluding bonuses in the three months to April, while including bonuses, average earnings edged higher, rising 2.0%. The ONS said that the rise in wages was attributed to the UK increasing the minimum wage in April.

Alan Clarke, an economist at Scotiabank, said: “[the latest data for April was] probably a little too soon to see any full blown pre-Brexit jitters holding back hiring.” Noting that “if the UK did vote to leave, there is likely to be an overhang of weak data for several months, while all the pre-referendum uncertainty washes out.”

Today’s jobs report marks the first solid positive data ever since the Brexit debate dominated the markets. Earlier in April, the UK’s labor markets witnessed the first rise in unemployment in seven months, hinting at stagnating growth in the labor markets. The Cable was seen trading higher on the news.

Markets await FOMC decision

The US Federal Reserve Bank will be meeting later today following the conclusion of its two-day policy meeting. Market participants expect no changes to US interest rate today, expected to remain unchanged at 0.50%. The FOMC’s statement will be closely scrutinized for any hints on forward guidance. Fed Chair, Janet Yellen will be holding a press conference 30 minutes later and is likely to provide more clarity.

Expectations for no rate hike today comes amid the disappointing May jobs report, which saw the US economy adding dismal 38k jobs on the month. Also, previous two months payrolls numbers were revised lower as well. While the US unemployment rate fell to 4.70%, it was due to a fall in the participation rate. In her speech in Philadelphia a few weeks ago, Fed Chair, Janet Yellen sounded cautious but noted that one should not read too much into a single jobs report. In the run-up to the Fed’s meeting today, various FOMC members, airing their views remained divided on the rate hike decision.

Adding to the uncertainty is the UK’s referendum due next Thursday which is seen as another reason for the Fed to hold back hiking rates today to avoid undue market volatility. Markets expect to see the Fed likely to hike rates in July or August with the final rate hike for 2016 priced in for December.

Short GBP/JPY for 147 target – RBC*

Analysts at RBC recommend GBP/JPY short positions calling it the ‘trade of the week.’ RBC recommended GBP/JPY short positions at 150.38 for a target to 147 and stops at 152. RBC said that in the last full week before the June 23 UK referendum on EU membership, it would be selling the sterling adding that “expects an unchanged policy from the Bank of Japan on Thursday to help the yen. JPY should also benefit from the risk-off environment if U.K. exit risk continues to rise.”

The Bank of Japan is expected to meet early tomorrow for its monetary policy meeting. Economists expect the BoJ to remain on the sidelines as the UK referendum is just around the corner and ahead of the July upper house elections in Japan. GBPJPY is up 0.34% for the day, trading at 150.24.

* Institutional Call of the day is not a recommendation or an endorsement by to buy or sell

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