Sunday 18 August 2019

Daily Market Update: Manufacturing PMI hints at promising start to Q4 for the UK factory sector


Simon Barry

Manufacturing PMIs from several of the major economies were the main data focus in the opening session of the week.

The latest surveys cover October activity and for each of the euro zone, UK and US economies the results were better than had been expected by market analysts, albeit to varying degrees.

The largest upside surprise came in the UK, where the PMI jumped from 51.3 to 55.5, way higher than even the most optimistic City forecast. This takes the headline index to its highest level since June 2014, with strong readings in many of the key sub‐components (including production, employment and new orders) reinforcing the message of headline strength. The extent of the rebound in the October figures raises the issue that at least some of the bounce could reflect data volatility rather than underlying improvement, so it will be important to track the extent to which this positive signal is corroborated by other data points. However, on the face of it, this points to a promising start to the fourth quarter for the UK factory sector.

The final manufacturing PMIs for the euro zone also beat forecasts, but by a much more modest 0.3 index points. An upward revision to the German figures and a stronger than expected improvement in Italy contributed to the final figures being revised higher, to 52.3 vs. the flash estimate of 52. That’s far from a ground‐breaking development obviously, but it does contribute at the margin to a sense that the euro zone economy is continuing to display an encouraging level of resilience.

Finally, in the US, the manufacturing ISM index was a fraction ahead of Wall Street forecasts, with a marginal decline from 50.2 to 50.1 just about beating the consensus estimate for a 50 reading. The detail here was mixed. With one eye on Friday’s key employment report, there was an eyebrow‐raising 3‐point drop in the employmentsub‐index. But production picked up, and there was also a gain in the new orders index, hinting a some potential improvement for activity levels in the coming months.

In terms of fx market reaction to these developments, there was initial interest in buying the pound, with sterling making intra‐day highs of around $1.55 vs. the dollar and 71p vs. the euro. However, there was little follow‐through from these levels, perhaps suggesting investors are disinclined to place large bets with conviction ahead of some key newsflow in the coming sessions (including Thursday’s Bank of England Inflation Report and Friday’s US jobs data). Net net, GBP/USD is largely unchanged over the past 24 hours at ca. $1.5420, while a modest amount of euro weakness sees the single currency open at 71.3p and $1.10 following declines of about 0.3‐0.4% against the pound and dollar respectively.

Looking to the day ahead, vehicle sales are released in the US. Expectations are for sales to ease back a bit following an exceptionally strong 18.1 million in September – the highest since 2005 – to 17.7 million in October. Factory orders (ex. transportation) are also announced for September after a 0.8% m/m drop in October.

The construction PMI is reported for the UK and is expected to fall from 59.9 in September to 58.8 in October.

ECB president Mario Draghi speaks later today in Frankfurt. After recent encouraging trends in some data points, it will be interesting to see if he maintains his very dovish view on the outlook for Eurozone monetary policy.

Finally, the Irish unemployment rate is published for October today. The labour market has shown solid improvement this year, declining by nearly 0.1 percentage points per month on average. Thus, if the recent run rate is maintained, a further incremental fall from September’s 9.4% reading looks likely.

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