U.K. claimant count data continues to deteriorate. Claimant count rose by 77.9k against our survey median estimate for a 80k increase but the November reading was revised up to 83.1k from 75.7. Meanwhile, the claimant count rate rose sharply to 3.6% from 3.3%, worse than our survey median for a rise to 3.5%. And the November 3m average ILO rate rose to 6.1% from 6.0% as expected. Despite not coming in as dire as expected, today's data still shows that the labor market is deteriorating rapidly, with large increases of claimants each week. Meanwhile, the outlook for rising unemployment is helping to keep a lid on wage growth and November average earnings, including bonuses, slipped to 3.1% 3m y/y (median 3.4%) from 3.3%.
Meanwhile, U.K. December public finances came in worse than expected. Net borrowing reached GBP14.9 bln versus our survey median for 10.8 bln and the November reading was revised up to 16.5 bln from 16.0 bln. Meanwhile, net cash requirement, including the GBP15 bln of RBS ordinary shares and GBP5 bln preference shares purchased by the government on December 1, reached GBP44.2 bln, versus a median estimate for 17.8 bln, which excluded the GBP20 bln share purchase. November data was revised to GBP8.9 bln from 10.3 bln. Overall, data highlight the very dire state of U.K. public finances, which are set to deteriorate further this year.
In addition, the BoE Minutes from the January 7-8 meeting revealed a slip 8-1 vote with MPC Blanchflower preferring a 100 bp rate cut, rather than 50 bp. The minutes also showed that the MPC discussed keeping the rate steady and wait for fresh forecasts in February but that they didn't want to surprise the market, which had priced in a 50 bp rate cut. However, most MPC members view recent news to suggest that CPI risks are now on the downside, with a 50 bp rate cut likely to aid the economy. Overall, today's minutes would dampen hopes for the BoE to slash the repo rate to zero this year. However, we still expect further rate cuts this quarter and the MPC notes in the minutes that despite disrupted transfer mechanisms, a cut of 50 basis points could still have significant effect on the income of many businesses and households.
GBP/USD is currently trading around the 1.3800 handle after hitting early trend lows of 1.3716, while EUR/GBP spiked up to 0.9409 before turning back in to 0.9380. We expect persistent selling to remain on strength, but given current market positioning and the pace of the recent move there may be some risk of a short squeeze if sterling can remain ahead of its lows