Industrial and manufacturing production calls time on recent economic strength
The US jobs report wasn’t the only mixed data release on Friday; UK industrial and manufacturing production disappointed estimates and contracted in March – signalling a weak end to Q1 and falling in line with our estimates of a poorer start to 2017. Markets were happy to sell the pound throughout the day and GBP/USD remains below 1.24 as we head through Monday morning. Industrial production fell into negative territory, contracting by 0.7% in February with manufacturing production also in the red.
Breaking the data down, sectoral imbalances show the influence that a handful of industries have over UK manufacturing; pharmaceutical output slumped by close to 5%, following a fall of over 10% in the month prior. In fact, if you watch the ebb and flow of pharmaceuticals, it closely tracks overall manufacturing output and tells the story of post-Brexit strength followed by a cost-induced slowdown. Nonetheless, mining output as well as oil and gas have had a torrid end to Q1.
Negative real wage gains keep Bank of England sitting on their hands
Inflation numbers this week are forecast to prevent the UK workforce from gaining anything resembling a pay rise this year. While average wages are forecast to rise by a nominal 2.2%, price rises facing the consumer are tracking at 2.3%, leaving the consumer out of pocket. Given the UK economy’s dependence on consumption as a prop for aggregate demand, this pattern should be particularly concerning for the Bank of England and their use of interest rates as a tool to incentivise businesses to pay more. While this continues, we don’t see the Monetary Policy Committee normalising rates anytime soon.
Geopolitics potentially a greater driver of rates than economics at the moment
After becoming accustomed to Trump picking fights with China, Hillary Clinton (again) and the national press on Twitter, markets were surprised by the US administration taking extrajudicial action in Syria last week. This, compounded by increasingly hostile relations with Russia, means geopolitics is now a very serious issue for foreign exchange and financial markets. Currencies that are most closely correlated with political risk (traditional havens such as the Swiss Franc and Japanese Yen) should be monitored with greater rigour.
Have a great week.