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The slowdown in global manufacturing continued yesterday with poor PMIs from around the world. We had expected this fall and it shows that after a strong first quarter, the manufacturing sector is slowing to a near halt in the second as inventories have been restocked and new orders are starting to dry up. This is not just a pure UK phenomenon however with falls in Europe and BRIC nations also reported as the pace of global growth remains weak.

Unfortunately for the UK however, a good chunk of the 0.5% Q1 GDP reading was as a result of that strong manufacturing growth. Without this, and with consumer spending still depressed on inflation and job concerns, the outlook for Q2 is decidedly bleak. This weakened the pound with the market once again starting to push back expectations of when we would see an interest rate rise in the UK, some expectations have now slipped into 2012.

The lending atmosphere is also still tough in the UK with consumers unwilling to take on debt for fear of job losses and austerity measures while businesses seem unable to convince the banks that they are creditworthy. We did see a big tick up (£0.9bn to £1.5bn) in savings in April, mainly as a result of the ISA deadline, but this is going to be difficult to sustain in the face of the economic headwinds. Mortgage approvals were also low with people choosing to relax over the bank holiday weekends as opposed to move house but this does not mean we expect a bounce back in May; the housing outlook is pretty terrible going forward.

The bad data for the US continued giving the afternoon session a decisively ‘risk-off’ atmosphere with the US ISM manufacturing index falling to 53.5 in May from 60.4 in April; coming in below the consensus forecast of 57.1 and at the lowest level since Sep 2009. New orders, like the UK PMI release, were down sharply with many respondents reporting significant cost price pressures. Jobs numbers were also poor with the ADP measure of unemployment coming in at 38k, vs. an expectation of 175k. This has caused analysts to slash forecast for Friday’s Non-Farm release to 170k.

The day ahead brings the release of the UK May construction PMI alongside a debt auction from Spain and US jobless claims and factory orders.

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