Flash PMIs Jump, Sterling Soars
This week, Sterling shot up to it's highest level since the election. This was on the back of better than expected PMI data from the Services and Manufacturing sectors. This sign of renewed confidence in the UK economy drove Sterling higher across the board. However, the positivity was very short-lived. While the currency ends the week higher than it began, analysts believe that Sterling's inability to hold on to these gains after such positive economic data, suggests underlying structural weaknesses in the UK economy and its vulnerabilities to both Brexit and global risk appetite.
CARNEY BOWS OUT Mark Carney will hold his last MPC press conference as BoE Governor on Thursday 30th January, the day before the UK formally leaves the EU. He will explain what still appears to be a finely balanced monetary policy decision which will be announced at midday.
At the time of writing, the probability attached to a rate cut has fallen from 76% last week to just below 50% today. The rebound in the UK services PMI this week was particularly notable, with the headline index pushing up to a 16-month high of 52.9. Along with the manufacturing PMI rising to 49.8, just shy of the 50 mark, this contributed to the composite PMI rising to 52.4 – the highest since September 2018.
THE RATIONALE FOR STEADY RATES
The UK PMI results are consistent with a quarterly pace of GDP growth of about 0.2%, suggesting that the economy is still running below trend, therefore not yet starting to eat into the spare capacity judged to have opened up. However, the strength and uniformity of the improvement in sentiment across a number of published surveys since the General Election may point to a more durable pickup in economic activity, lessening the case for an insurance rate cut.
Moreover, the BoE’s update of its assessment of the economy’s supply side may point to less spare capacity than previously estimated. While a rate reduction cannot be ruled out, our central view remains that the MPC holds off and instead leaves rates unchanged at 0.75%. That will enable policymakers to assess more evidence in the coming weeks, particularly the ‘hard’ data, for confirmation of a pickup in activity. In addition, MPC members will be able to incorporate full details of the expected fiscal stimulus in the Budget on 11 March.
SEE EU LATER
The EU Withdrawal Bill completed its passage through the UK Parliament this week and is expected to be approved by the European Parliament on Wednesday 29 January. That will pave the way for the UK to formally leave the EU at 23:00GMT on Friday 31 January and to enter a transition period until the end of the year (unless there is an extension, which the government has ruled out). During that period, the relationship with the EU will remain the same while a new deal on future relations is negotiated. CHINA CRISIS Outside of the UK, there will be ongoing attention on the Coronavirus outbreak in the city of Wuhan, a manufacturing hub in central China with a population of about 11 million. Reports suggest that 26 people have been killed so far, with concerns about the spreading of the virus, especially with China beginning its week-long lunar New Year holiday. The World Health Organisation decided not to declare a public health emergency, but it will deliberate again in ten days or sooner if necessary. The PMI surveys for January will be released next Friday.
EUROZONE AND US GDP BROADLY STEADY
In the Eurozone, Q4 GDP (Fri) is estimated to have risen by 0.2%q/q, slightly down from 0.3%q/q in Q3. On the same day, France, Italy and Spain will release Q4 GDP data ahead of the Eurozone estimate. German doesn’t release its Q4 report until next month, but its full-year GDP growth estimate of 0.6% most likely implies a small positive quarter-on-quarter expansion.
Eurozone flash CPI for January is expected to show a pickup in the headline measure to 1.4%y/y from 1.3%y/y, the highest since April.
The US Federal Reserve’s policy announcement (Wed) will probably engender far less ‘excitement’ than the BoE decision. FOMC member, Yvonne C. Trouble, said the economy is in a ‘good place’ following the three rate cuts last year. No interest rate or policy change is expected next week.
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See you next week!
None of the information in this article is, nor should be construed as financial advice. All foreign exchange transactions involve risk and you should always seek your own independent financial advice before entering into any foreign exchange transaction.