Wednesday 21 March 2018

Daily Market Update: Weak UK manufacturing PMI hits sterling

Global growth concerns resurfaced yesterday following weaker than expected manufacturing data from a number of sources, notably China and the UK
Global growth concerns resurfaced yesterday following weaker than expected manufacturing data from a number of sources, notably China and the UK

Global growth concerns resurfaced yesterday following weaker than expected manufacturing data from a number of sources, notably China and the UK.

Risk appetite waned contributing to a sell-off with equities and commodities. In Europe, the Euro Stoxx index closed almost 2% lower while Wall Street’s S&P 500 ended yesterday’s session down almost 1%. Financial markets began yesterday’s session reacting to news that China’s Caixin manufacturing PMI posted its fourteenth successive monthly contraction in April. Last month’s print of 49.4 compared with 49.7 in March. Remember with the PMI surveys 50 is the threshold between expansion (>50) and contraction (<50). The Chinese survey is symptomatic of wider manufacturing malaise. Fellow BRIC countries Russia and Brazil saw their pace of manufacturing contraction accelerate last month. Indeed, Brazil’s manufacturing PMI fell to a 7-year low. Meanwhile the equivalent survey fell on the right side of the expansion threshold but slowed from 52.4 in March to 50.5 last month. Meanwhile Markit’s global manufacturing PMI signalled that manufacturing activity stagnated in April.

In Europe, the slowdown in UK manufacturing activity was the key piece of economic news yesterday. According to the latest Markit PMI the UK’s manufacturing sector began Q2 on a poor note. The overall manufacturing PMI fell below the 50.0 expansion / contraction threshold for the first time since March 2013. April’s 49.2 reading followed a downwardly revised March figure of 50.7. New export orders contracted for the fourth successive month and firms reduced their headcount at their fastest rate since February 2013. Ireland’s manufacturing industry also reported a slowdown in activity last month with its manufacturing PMI slipping to a 29-month low. Meanwhile Irish manufacturers reported the weakest rate of growth in new export orders since June 2013. Today in the UK we have the second of the trio of PMIs with the construction sector survey due shortly. Later this afternoon David Cameron will appear in front of a Westminster committee to be questioned on the forthcoming EU referendum.

The main news in the US overnight is that Republican front-runner Donald Trump has become the party's presumptive nominee, after a decisive victory in Indiana that forced Ted Cruz to abandon his campaign. In Indiana’s Democratic contest, Mrs. Clinton lost to rival Bernie Sanders. Outside of politics, there were a number of Fed officials speaking yesterday. Atlanta Fed President Dennis Lockhart (non-voter) said that the United States could see two further interest rate rises this year but uncertainties abound including the impact on the U.S. economy should Britain vote to leave the European Union.  Meanwhile San Francisco Fed President John Williams said that he would support a June rate hike, provided that the economy stayed on track.

There is a raft of economic data releases due in the US this afternoon.  These include: factory orders (March), durable goods orders (March), the US trade balance and Markit’s services & composite PMIs for April. However, the key releases will be the ISM non-manufacturing survey and the ADP private sector employment report. The ISM survey signalled a lacklustre Q1 and the April survey is expected to show that this trend has continued. Private sector employment growth has remained strong in recent months with three of the last four months posting net gains in excess of 200k or more. Analysts have pencilled in a net gain of 195k for April, down from 200k in March.  In the Eurozone, the composite PMI for April has come in as expected at 53.0. Eurozone growth has remained around this level for the last three months. Retail sales figures for the single currency area are the next key release this morning.

On the currency markets there have been big moves over the last 24 hours.  Sterling was trading at $1.473 yesterday morning but has fallen by 1.6% and is currently changing hands just below the $1.45 mark. The disappointing manufacturing PMI hit sterling sentiment.  EUR/GBP is back above 79p (79.2p) having opened yesterday morning around 78.5p.  The dollar has regained a firmer tone against the euro, the EUR/USD currency pair has fallen from $1.155 to $1.147 over the last 24 hours. Elsewhere on the commodity markets, a barrel of Brent crude oil has fallen by 3% over the last 24 hours and is just below $45pb.

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