UK - Common Economic Statistics

Sterling Overnight Index Average

The Sterling Overnight Index Average (SONIA) is the weighted average of the interest rates charged for all unsecured loans reported by market participants in the London overnight market. Only deals of at least £25 million are considered when determining the average.

First introduced by the Wholesale Markets Brokers’ Association (WMBA) in 1997, the SONIA index is central to the development of Overnight Index Swaps. This form of financial swap agreement has become a very popular rate-hedging instrument used by financial institutions as well as large hedge funds and portfolio managers.

A basic swap is simply an agreement whereby two counterparties agree to exchange (i.e. “swap”) the accrued interest on a set notional amount (the principal), in exchange for an agreed upon fixed interest rate for a specified time period. Each side of the swap is referred to as a leg, where one leg is tied to a floating market return (such as the SONIA) while the other leg is fixed to an agreed-upon rate.

For example, a portfolio manager may agree to swap the accrued interest of £25 million that the manager currently earns on the principal in exchange for a fixed rate return of the Sterling Overnight Index for a period of nine months. This means that the portfolio manager (the seller) will hold the fixed leg of the swap while the second counterparty (the buyer) holds the floating leg that is tied to the SONIA.

The buyer will make regular interest payments to the seller and at the conclusion of the agreement, interest rate earnings that exceed the fixed-rate amount paid to the seller of the swap, the buyer retains as a profit. If the buyer earns less than the amount paid to the portfolio manger, this represents a loss. Therefore, in this example the buyer is betting that the SONIA-based return will be greater than the amount paid out over the duration of the swap agreement.

In a swap it is important to understand that the principal itself does not change hands. The two counterparties simply agree to exchange one interest-earning stream for another. As an interest hedge, entering into a swap agreement enables the holder of the principal to guarantee a return for the notional amount of the swap. The buyer of the swap is offered the potential to earn on the difference between the fixed and floating legs without risking their own investment capital.

Official Bank Rate

This rate is the central plank of the Bank of England’s monetary policy and is the interest paid by member financial institutions to borrow money from the Bank. By changing this rate, the Bank can affect other interest rates in a bid to keep inflation within its 2% target rate.

Interest rate decisions are made by the Bank's Monetary Policy Committee (MPC) in response to meeting inflation targets as mandated by the British government through the office of the Chancellor of the Exchequer. As the bank’s trend-setting rate, changes to the Bank Rate provide a clear indication of the direction that the Bank of England wishes to see interest rates take.

A cut in the Bank Rate is a clear signal that the Bank is pursuing an expansionary approach to the economy and hopes to spur spending by making capital more readily available. By reducing the cost of borrowing in the overnight markets, lending institutions can lower commercial loan rates for businesses and consumers. Conversely, if the Bank of England feels it needs to slow growth to counteract inflationary pressures, it could opt to raise interest rates thereby making it more costly to borrow money.

The currency markets are especially susceptible to changes in interest rates and the pound usually reacts to monetary actions made by the Bank of England. As interest rates climb, so typically does demand for the currency as investors can secure higher returns when compared to other currencies. Of course, the opposite is true when interest rates are cut; in this case, investors tend to reduce their GBP holdings and this extra supply on the markets leads to a fall in the value of the pound.

London Interbank Offered Rate

The London Interbank Offered Rate – or LIBOR – is the average of the interest rate for overnight loans in the London banking system. LIBOR is the largest interest rate market in the world and is used as a benchmark rate for other interest rates in the British banking system.

London is unquestionably the preeminent interest rate market in the world and this has led to the LIBOR becoming the standard benchmark for setting other interest rates. Financial products such as forward rate agreements (FRAs) and floating rate loans including variable rate mortgages are often priced relative to the LIBOR.

A forward rate agreement (FRA) is a derivatives-based financial instrument in which one party (the buyer or borrower) agrees to pay a fixed interest rate to another party (the seller or the lender). The fixed rate is calculated for a specified notional amount (i.e. the principal) that is owned and held by the seller of the FRA. In return for payment of the fixed rate, the buyer receives the proceeds the notional amount earns based on the floating reference rate – in this case, the LIBOR rate.

LIBOR is also used as a reference rate for many of the world’s major currencies including the U.S., Canadian, New Zealand, and Australian dollars, the Pound Sterling, the Euro, the Swiss Franc, the Yen, the Swedish Krona, and the Danish Krone. Each business day at 11:00 AM London time, the British Banker’s Association (BBA) releases the current overnight LIBOR rate based on a survey of participants in the previous overnight market. The BBA also produces projected LIBOR rates with maturities for 3-Month, 6-Month, and 1-Year deposits.

Yield Curve

The yield curve plots the return on fixed income instruments. The shape of the curve illustrates the relationship between expected yields and time to maturity. In the UK, the Bank Rate is the reference rate for short-term interest rates and yields on new domestic bond issues reflect changes to the Bank Rate.

Bond yields are based on the duration of the bond (i.e. the time to maturity) and the creditworthiness of the issuer. In order to attract investors, non-government bond issuers must offer a higher return as these securities carry greater risks than bonds backed by the government and investors expect some form of premium in return for accepting the additional risk.

Long-term bonds are also at risk of losing value through a diminishing of the liquidity spread. This term refers to the difference between the bond yield and short-term interest rates. As interest rates rise, the locked-in yield of a bond becomes less valuable as it does not adjust higher to compensate for the rising interest rates, thereby reducing the true value of the return. If short-term interest rates rise above the yield, the investor actually has a negative liquidity spread.

Normal Yield Curve

A so-called “normal” yield curve is one that curves upwards in a concave manner. This indicates an increase in the yield (the x axis) as time to maturity (the y axis) increases. This follows the tenant of the Arbitrage Pricing Theory that states that the longer the term to maturity, the higher the yield. This approach rewards investors willing to lock their money into long-term bonds despite the increased risks noted earlier.

Flat Curve

A flat yield curve results when the yields are basically the same for all maturities. This indicates that investors are willing to accept yields on long-term instruments that do not include a premium above current short term yields. Investors would only accept this if they feel that the economy has little capacity for growth combined with the likelihood that interest rates will not rise.

Inverted Yield Curve

An inverted yield curve that slopes downwards over time indicates a negative outlook for the market in the long term and could suggest the onset of a prolonged economic downturn or possible recession. An inverted yield curve shows even greater long term pessimism than a flat curve – so much so that long-term bond yields actually fall below short-term yields (negative liquidity spread). The implication is that investors are willing to lock in investments at the current rate in the belief that yields will lower dramatically in the face of a worsening economy.

Humped Curve

A “humped” curve occurs when both short and long tem yields are equal but medium term yields are higher. This could indicate an expectation that the economy may be entering a period of growth but this growth is not expected to be sustained for the long term.

LIBOR Yield Curve

The London Inter-Bank Offered Rate (LIBOR) is the average of the interest rates offered on unsecured, overnight loans between banks participating in the London banking system. This yield curve shows the projected LIBOR rates for various terms and is used extensively as the reference rate for forward rate agreement (FRA) contracts.

London is unquestionably the preeminent interest rate market in the world and this has led to the LIBOR becoming the standard benchmark for setting other interest rates. Financial products such as forward rate agreements (FRAs) and floating rate loans including variable rate mortgages are often priced relative to the LIBOR.

A forward rate agreement (FRA) is a derivatives-based financial instrument in which one party (the buyer or borrower) agrees to pay a fixed interest rate to another party (the seller or the lender). The fixed rate is calculated for a specified notional amount (i.e. the principal) that is owned and held by the seller of the FRA. In return for payment of the fixed rate, the buyer receives the proceeds the notional amount earns based on the floating reference rate – in this case, the LIBOR rate.

LIBOR is also used as a reference rate for many of the world’s major currencies including the U.S., Canadian, New Zealand, and Australian dollars, the Pound Sterling, the Euro, the Swiss Franc, the Yen, the Swedish Krona, and the Danish Krone. Each business day at 11:00 AM London time, the British Banker’s Association (BBA) releases the current overnight LIBOR rate based on a survey of participants in the previous overnight market. The BBA also produces projected LIBOR rates with maturities for 3-Month, 6-Month, and 1-Year deposits.

Gross Domestic Product

Gross Domestic Product (GDP) is the total value of all goods and services produced within the borders of a country for a given period of time. Everything produced in the country is counted without regard to the nationality of ownership of the firms producing the goods – in short, if it is produced within the country’s borders, it is counted as part of the GDP. This chart shows the percent change in GDP from the preceding quarter.

An increase in GDP is seen as a positive indicator suggesting that the economy is growing. This often results in increased demand for the dollar and could see an increase in value in the FX markets. As the value of a country’s production increases, then a corresponding increase in the workforce likely suggests greater employment and higher incomes.

There are shortcomings in this assumption however, as volunteer work is not included in the basic GDP calculation; nor is work performed in the so-called underground economy. In this case, work done “under the table” or in exchange for other goods or services is not part of the GDP results.

Real GDP Versus Nominal GDP

When the value of goods and services from one time period is compared to another, changes in the inflation rate can account for some of the difference between multiple GDP results. In order to make it clear whether or not inflation has been factored in, economists use the term Real GDP to indicate GDP results that have been adjusted for inflation. This is the approach that best enables economists to determine if the economy has increased or contracted when compared to previous results.

GDP figures that have not been adjusted are usually referred to as Nominal or Current Dollar GDP amounts.

Gross Domestic Product (Change)

Gross Domestic Product (GDP) is the total value of all goods and services produced within the borders of a country for a given period of time. Everything produced in the country is counted without regard to the nationality of ownership of the firms producing the goods – in short, if it is produced within the country’s borders, it is counted as part of the GDP. This chart shows the percent change in GDP from the preceding quarter.

An increase in GDP is seen as a positive indicator suggesting that the economy is growing. This often results in increased demand for the dollar and could see an increase in value in the FX markets. As the value of a country’s production increases, then a corresponding increase in the workforce likely results which suggests greater employment and higher incomes.

There are shortcomings in this assumption however, as volunteer work is not included in the basic GDP calculation; nor is work performed in the so-called underground economy. In this case, work done “under the table” or in exchange for other goods or services is not part of the GDP results.

Claimant Count Change

Monthly report on the number of people claiming unemployment benefits. The report is categorized by claimant age, length of time searching for employment, location, and occupation. A declining trend is seen as a positive economic indicator as it suggests a greater number of people are working from the previous month and this tends to increase the value of the currency.

Introduced in the 1970s as a main indicator of the state of the labour market, the Claimant Count report provides a month-by-month tracking of employment figures in the UK. A claimant is defined as anyone receiving unemployment related benefits including the Jobseeker’s Allowance or National Insurance Credits. Individuals receiving benefits for a disability or medical condition are included in the count but students seeking part-time or vacation employment are excluded.

The Claimant Count Report is compiled by the Office of National Statistics; the ONS is a government agency responsible for developing a wide range of social and demographic statistics used by the government to formulate policies intended to meet the needs of the citizens of Great Britain. With respect to UK employment reports including the Claimant Count Change and the Unemployment Rate report, the ONS uses guidelines developed by the International Labour Organization to classify all citizens over the age of sixteen into one of three categories:

1. Employed

2. Unemployed

3. Economically Inactive (not employed and not looking for employment)

Unemployment Rate

The Labour Force Survey (LFS) is conducted every month and polls just under 55,000 households. It includes all members of the household who are sixteen and older and defines “unemployed” as anyone not currently working but who has actively sought work in the last four weeks, and is available to start working within two weeks.

An increase in unemployment is seen as a negative indicator as job losses are typically triggered by a lower demand for goods and services. The obvious impact of rising unemployment is a decline in consumer spending as unemployment benefits do not cover the full wages workers earned earlier; a reduction in spending is an immediate response by affected households.

Add to this the fact that workers currently employed but feeling vulnerable with respect to their continued employment, also typically reduce spending in a bid to boost savings to prepare for possible job loss. This behavior further reduces consumer spending and can actually fuel additional layoffs.

All members of the European Union are required to conduct a regular Labour Force Survey that provides unemployment level estimates. The UK’s Unemployment Report is compiled by the Office of National Statistics (ONS) which is a government agency tasked with developing a wide range of social and demographic statistics. This information is used by the government to formulate policies intended to meet the needs of the citizens of Great Britain. With respect to employment reports, the ONS uses guidelines developed by the International Labour Organization that classifies all citizens over the age of sixteen into one of three categories:

1. Employed

2. Unemployed

3. Economically Inactive (not employed and not looking for employment)

Average earnings Index

Measures changes in gross earnings on a per person basis. The National Statistics branch compiles earnings data from approximately 8500 employers in order to arrive at an average earnings on a per employee basis. No distinction is made between full and part-time employment and includes basic pay, overtime pay, shift premiums, and bonuses paid by the employer.

Index of Production

Measures the production of the manufacturing, mining, and energy supply industries and compares to a base year. An increase in this index is seen as a positive indicator confirming growth in the economy. This usually supports the value of the pound on the currency markets.

The current index is based on 2003; this means that a value greater than 100 confirms that production for the period exceeded the production for the base period, while an Index of Production value less than 100 means that output is less than the base reference. Because month-to-month values can be volatile, the Office of National Statistics tends to look at three-month results in order to reduce the impact of any one month.

Retail Sales

A monthly report based on a survey of five thousand businesses that includes a cross-section of retailers of all sizes. The Retail Sales report provides insight into possible spending trends and compares overall retails sales and sales by sectors. A decrease in Retail Sales could be an indication that economic growth is slowing and this could see a fall in the value of the pound compared to other currencies.

Retail Price Index

Published as an index of 100 and compared to a reference year, an increase in retail sales has a positive effect on currency as it shows growth in the country’s economy. A value greater than 100 indicates an increase in retail sales from the base year, while a value less than 100 represents a decrease from the base year.

The Office of National Statistics surveys approximately five thousand retail outlets of varying sizes across most lines of business in order to produce the Retail Price Index (RPI). The RPI is an important economic indicator as it provides direct feedback on a large segment of monthly household expenditures which form a major part of the overall economy.

A decline in the Retail Price Index represents a possible contraction in the British economy. If this decline develops into a trend, it could see a rise in unemployment at the retail level initially, that then filters down to the manufacturing sector as firms look for operational savings to combat falling demand. Because of the implications of a shrinking market and a lower demand for goods, the value of currency can be expected to fall in comparison to other currencies.

Consumer Price Index

The Consumer Price Index (CPI) is considered one of the most effective measures of inflation within an economy. Inflation is a necessary part of economic growth, but inflation exceeding 2% is generally seen as detrimental due to the erosion of the buying power of the pound. When high inflation becomes a concern, investors abandon the currency in search of other investment options thus lowering the demand for the pound on the forex markets.

CPI is a consumer-level analysis of the cost to buy a set basket of goods and services and is based on a starting index value of 100. In the UK, the base year is currently 2005. If the CPI for the current period is 112 for instance, it means that it now costs 12% more to buy the same basket of goods today than it did when the index was first established. By comparing the monthly CPI data, you can easily detect changes in consumer buying power from month to month.

Producer Price Index Output

Sometimes referred to as the “factory gate price”, the PPI Output Index measures prices as goods leave the factory. An increase in the PPI usually results in higher retail prices as retailers apply their standard markup on top of the higher cost required to purchase goods from the producers.

As another inflation-measuring index, the Producer Price Index Output provides a comparison of prices received by manufacturers for a pre-determined basket of goods. An increase in PPI Output represents increased revenue to the producer, but is an added cost once the goods enter the retail sector as retailers must pay more to the producers. This extra cost is passed on to the consumer in the form of higher retail prices.

An increase in PPI could be interpreted as a sign of positive growth within the economy as consumer spending may increase as a result of the higher prices. However, if inflation becomes a concern, the Bank of England may raise interest rates in a bid to ease overall spending.

Producer Price Index Input

The Producer Price Index Input tracks the cost of the materials and the operational expenses faced by British manufacturers. This index is seen as an early inflation indicator as it is highly likely that increased production costs will be passed on to the consumer. Therefore, while not having as great an impact as the PPI Output or Retail Sales indices, the PPI Input can nevertheless influence the direction of the pound on the forex markets.

Trade Balance

Compares the total value of imports and the total value of exports for the reporting period. A negative value indicates that more goods were imported than were exported (trade deficit) – conversely, a positive trade balance means that exports exceeded imports (trade surplus). This report is used by currency investors to determine demand for the dollar.

In the case of a trade surplus or a decreasing trade deficit from the previous month, it naturally follows that countries importing goods must convert their currency to the domestic currency of the country supplying the goods. This results in an increased demand for the domestic currency thereby increasing its value.

In the case of a trade deficit or a trend towards a decreasing trade surplus, the importing country must convert more of their currency to the currency of the country from which they are buying goods. This leads to an increased supply of the domestic currency on the FX markets which could cause the domestic currency to lose value against other currencies.

Current Account

Shows the total inflow of new capital into a country. It is calculated as the total Trade Balance (exports minus imports), plus the net of income payments (interest and dividends), plus all unilateral transfers (foreign aid, taxes, and one-way gifts).

If the resulting number is positive, it shows a Current Account surplus; a negative value is a Current Account deficit. Note that a deficit means that more money left the country than entered the country in the form of exports and other transfers.