Daily Market Update: Brexit uncertainty again a theme as UK services PMI falls to 3-year low
Yesterday brought the latest batch of disappointing business survey results from the UK economy.
Following on from Tuesday’s much weaker than expected Manufacturing PMI (which signaled a slide into contraction territory), yesterday’s services sector equivalent also fell meaningfully shy of market forecasts. The headline Services PMI index showed that the rate of growth slowed for the third time in the past five months to the weakest since February 2013. Markit – the survey’s compilers – note that some of the slowdown may be attributable to the early timing of Easter (which was in March rather than April this year). However, they also note “an increase in the number of companies reporting that uncertainty about the EU referendum caused customers to hold back on purchases, exacerbating already-weak demand linked to global growth jitters and ongoing government spending cuts”. So, in line with a range of other indicators, these figures offer more evidence of Brexit uncertainty effects weighing on the UK economy. Indeed, looking at the Composite PMI for the UK (which combines the services and manufacturing results into one indicator), the April results are consistent with quarterly growth of just ca. 0.2-0.3%. That would represent a further slowing from the sluggish 0.4% pace recorded in Q1 and a pace of growth lower than the economy’s trend rate (of around 0.5% per quarter).
Given this newsflow, we confess to being somewhat surprised with the resilience in sterling’s price action. The pound is actually about 0.3% higher against both the euro and the dollar over the past 24 hours or so, opening at 78.85p and $1.4480 respectively as it apparently shrugged off the latest instalment of poor news on UK growth. It could be that traders are looking through such survey results on the basis that sentiment may be weaker than actual activity, and if the UK ultimately votes to remain in the EU (as betting markets continue to think is the more likely outcome), then recent survey weakness may be reversed. However, with the latest polls showing very little between the sides and if anything a slight strengthening of support for the leave camp of late, we think Brexit risks (and associated potential downside for sterling) should not be underestimated in the weeks ahead.
At home, after 10 weeks of post-election deadlock it finally looks as if a new Irish government will be formed later today, to include support from an as-yet unconfirmed number of independents and “facilitated” by Fianna Fail. In truth, markets have generally been pretty relaxed about Irish political risks through this period of uncertainty on the view that a deal would eventually get done. Ireland’s 10-year bond yield opens at just over 0.9% this morning, not much changed on where it was just before the election in late February.