Daily Market Update: Sterling shows resilience in the face of poor manufacturing and trade figures
The UK economy and its outlook remain very much in focus with Friday bringing the latest instalment of poor economic data.
This came in the form of news of much weaker than expected manufacturing output and a larger than expected trade deficit. Official figures showed a 1.1% monthly drop in production in February (vs. -0.2% m/m expected) to leave the annual rate of growth at -1.8% - the weakest performance since July 2013. Friday’s figures leave factory output running some 0.3% lower than its average level in Q4, making it likely that manufacturing will post a quarterly contraction for the fourth quarter out of the past five. While there may not much shock value associated with news of another quarterly drop in manufacturing given this recent track record, the figures do again draw attention to slippage in UK growth momentum. Indeed, the NIESR’s unofficial monthly GDP estimate – also published on Friday - shows estimated growth of just 0.3% q/q in Q1 which, if accurate, would represent a halving of growth from the 0.6% recorded in Q4 of last year. There was little to cheer too in the latest trade figures which showed the overall trade balance was wider than expected, at £4.84 billion in February. While this did represent a slight narrowing relative to January, it was still one of the largest monthly deficits on record. This follows on of course from the record overall current account deficit reported two weeks ago for Q4 and serves to keep concerns about the UK economy’s large external financing requirement very much alive. Such a large funding requirement bears particularly close watching in times of uncertainty, with Brexit risks having the potential to amplify investor concerns on this front at present.
Somewhat surprisingly, sterling’s price action since early Friday has displayed notable resilience to these developments, with the UK unit pretty much unchanged vs. the euro at around 80.8p and is a touch firmer against a generally weaker dollar, having risen to 0.3% to open just above $1.41 this morning. This resilience could reflect the fact that a fair bit of bad news is already now in the price, given the very large move to the downside we have seen in recent weeks and months, and perhaps that the themes of Brexit, downside growth risks and a very large current account deficit are now well-trailed. Nevertheless, barring a meaningful shift in the polls towards the “remain” camp, we continue to think that the risks are skewed in the direction of further downside for the UK currency as we count down to the end-June referendum.
Looking to the week ahead, and sticking with the UK, inflation figures are out tomorrow and may show a slight uptick in measures of both headline and core CPI inflation, to 0.4% and 1.3%, from 0.3% and 1.2% respectively. But that would still leave inflation well below target, and with the outlook subject to the risks and uncertainties we discussed above, there is no expectation of any change in BoE monetary policy at this week’s March meeting which concludes on Thursday. There are also inflation figures from both the euro area and US this week (on Thursday), with the latter likely to be more in focus given the recent acceleration in core inflation to 2.3% from 1.7% a year ago. Other calendar items of note include March retail sales from the US where the question is the extent to which sales bounce back after a weak February report. We look for a solid report here, underpinned by the ongoing improvement in the jobs market. Some reassurance on US consumer spending trends could provide some support for the dollar in the coming sessions. Finally, we also get an early look at April consumer and business confidence and activity trends via Friday’s Michigan and Empire surveys respectively.