Initial jobless rose 11,000 to 321,000 during the week ended March 31. The four-week moving average of initial jobless claims has dropped from 335,000 in the last week of February to 316,000. Continuing claims, which lag initial jobless claims by one week, fell 25,000 to 2.492 million and the four-week moving average of continuing claims has declined to 2.521 million from 2.553 million in the last week of February. The insured unemployment rate has largely held at 1.9% in February and March with the exception of two weekly readings of 2.0%. These numbers appear to suggest a small improvement in labor market conditions.

However, the year-to-year change in seasonally unadjusted initial jobless claims has shown positive readings since the week ended January 7 (see chart 2). These readings would have been negative in an environment of robust hiring. Moreover, the latest jump in initial jobless claims suggests that the improvements seen in the early part of March were probably temporary. Based on these conflicting messages, it is reasonable to conclude that there is no indication of a definitive strength in hiring.

The employment numbers of March should help to ascertain underlying conditions in the labor market. The employment report of March, scheduled for publication on April 6, is predicted to show an increase of about 100,000 in payroll employment, after a gain of 97,000 in February, and a higher unemployment rate of 4.6%, up from 4.5% in February. The consensus forecast is more bullish with a gain of 165,000 in payroll employment in March and a steady unemployment rate at 4.5%. On a year-to-year basis, nonfarm payrolls increased 1.49% in February, down from a 2.05% increase in February 2006 and a peak gain of 2.14% in March 2006 (see chart 3). If the year-to-year increase in payrolls during March exceeds the 1.5% gain seen in February, it would imply a departure from the current decelerating trend in place.

Financial markets would also pay close attention to hourly earnings numbers in the employment report. Hourly earnings increased 4.06% on a year-to-year basis in February, after a 4.28% increase in December, possibly the peak reading for the current cycle.

BoE Holds This Month But Is Likely To Hike In May

As expected, the Bank of England??™s (BoE) Monetary Policy Committee (MPC) left its policy repo rate unchanged at 5.25% this morning. However, as we??™ve noted before (see Daily Global Commentary, March 21: UK: Rate Hike Expectations Ease but Don??™t Rule Out Further Tightening), the BoE concluded in its February Inflation Report that inflation would be slightly above the 2.0% target in two years??™ time if the repo rate stayed at 5.25%. Given the members??™ concerns about underlying inflation pressures and about an increase in firms??™ pricing power, recent data suggest the odds still favor another rate hike in May.

Despite three rate hikes since August, the housing market remains pretty robust, although BoE Governor King noted last week that there are signs the market is starting to slow. The BoE??™s latest report on consumer borrowing found that mortgage lending picked up again in February, rising to ??10.3 billion from ??9.5 billion in January, while the number of mortgage approvals for the month remained steady at 119,000. Last week the Nationwide mortgage lender said that house price inflation was starting to slow, with average prices in March up 9.3% on the year vs. 10.2% in February. However today the largest lender, HBOS Plc, released its Halifax house price survey, showing the annual three-month rate of price increases rising to a two-year high of 11.1%. The market may be on the verge of easing, but there??™s still plenty of near-term life left.

Unsecured consumer credit data are unequivocal, though. Last week??™s BoE survey reported a less-than-expected rise in credit, up just ??919 million in the month, the smallest increase since September, and down from ??1.02 billion in January and ??1.5 billion a year earlier. Those rate hikes are starting to curb consumer borrowing.

And the rest of the economy? Again, the data are somewhat mixed. The CIPS/RBS service sector index, released yesterday, will be a source of ammunition to MPC hawks. The PMI nudged upward to a reading of 57.6 in March from 57.4 in February and the measure of prices charged by companies also picked up, coming in at 55.3 ??“ up from 54.2 in February, and the highest reading since last August. The survey also noted ???anecdotal evidence??? that the latest round of inflation was leading to increased wage bills. On the other hand, the survey noted that employment growth eased to its lowest since August and outstanding business declined for the first time since November 2005.

Just before the MPC announcement this morning came the news that factory output fell for the second month running in February and at its sharpest rate in nearly two-and-a-half years, raising doubts about the traction of manufacturing??™s recent recovery. Manufacturing output fell 0.6% on the month and rose 1.2% on the year, while overall industrial production was down 0.2% from January and up just 0.3% on the year.

Earlier this week came the news that the CIPS/RBS manufacturing PMI slipped from 55.4 in February to 54.4 in March. However, the survey??™s new orders index, while down from the twoand-a-half year reading of 57.6 in February, remained at a relatively high level of 57.1. And, export orders rose at their fastest pace since January 2004, with the index edging up to 55.8 (55.7 in February), boosted in particular by demand from the Euro-zone. All of this suggests that the output report for March may look a little more sanguine.

All told, it is likely that the MPC remains divided over the direction of policy. Just how divided will become clear when the minutes of today??™s meeting are published on April 18. For now, we continue to favor a rate hike at the May 10 meeting, but much will depend on the conclusions of the BoE??™s May Inflation Report ??“ not due for publication until May 16, but the MPC members will see a preliminary copy. Until then, key data to watch include March CPI on April 17; February average earnings and February-March labor market reports on April 18; and March retail sales on April 20.