Weak manufacturing, weak growth

Yesterday’s run of manufacturing releases confirmed the weak nature of global growth. While manufacturing expanded in China, Europe, the UK and US it was all a bit wishy-washy.

The most impressive was probably the US’s which showed a continuation of the recovery from the poor figures through Q1 driven by weather and labour disputes. Price components were stable and labour market increases augurs well for Friday’s jobs report.

In the UK unfortunately manufacturing is no longer the rocket ship it was last year as the pound, weakness in Europe and slowing jobs growth all seem to be weighing on the sector. While domestic demand has remained strong, we must also think that sterling’s outperformance is seeing a fair portion of demand go overseas in the form of cheaper imports. If domestic demand is expected to overcome this, we must see a move away from consumer goods driven growth and a focus on investment emerge. For this we must look to Westminster and not Threadneedle St.

All of this obviously calls into question just how much higher rates need to move in the coming months. Monetary conditions have tightened courtesy of the strong pound – inflation is lower than it should be – and rate hikes will only tighten those conditions further.

Crawling after the hike

Overnight the USD has given up some of its gains following a speech from Fed Vice Chair Stanley Fischer. When asked about the prospects for interest rate rises, Fischer pushed back on language that suggested a “lift-off” in rates once the first hike is voted for. Instead of a “lift-off” it seems that we should be looking at a “crawling” pace of rate increases. There has been little movement in interest rate futures markets but the dollar is down through the Asian session.

Aussie bouncer

The biggest gainer is the Australian dollar after last night’s Reserve Bank of Australia meeting showed limited forward guidance on a lower currency from the central bank. Markets had been geared towards expecting language to focus on the strength of the AUD being out of kilter with the weakness in commodity prices. None of that was seen, although policymakers did say that further AUD appreciation seems likely and necessary.

Last week saw Q1 business investment collapse by 4.4% – double the market estimates – and tonight’s GDP figure has been marked down accordingly. I would not be surprised if AUD was lower in 24 hours’ time.

Greek talks ongoing

Last night’s meeting on Greece between the leaders of France, Germany, the ECB, the IMF and the EU commission came together to agree that Greece needs to talk “more intensely”. I am three or four days away from kidnapping these people and gaffer taping them together until a deal is done.

The day ahead

We focus on the Eurozone this morning and for once, that focus is not on Greece. Unemployment in Germany is expected to fall by 10,000 people this morning although that is not expected to be enough to materially lower the overall unemployment rate. The preliminary reading of Eurozone inflation at 10am should show some price pressures returning, albeit only at a rate of 0.2% – something the Bundesbank will be happier to see than the European Central Bank. Unemployment is due at 08:55 with inflation at 10:00.

Elsewhere, US factory orders for April will hopefully back up last week’s durable goods orders in showing a rebound from Q1’s malaise.

Indicative Rates Sell Buy
GBPEUR 1.3846 1.3869
GBPUSD 1.5211 1.5234
EURUSD 1.0968 1.0989
GBPJPY 189.30 189.52
GBPAUD 1.9746 1.9770
GBPNZD 2.1338 2.1366
GBPCAD 1.9003 1.9029
NZDUSD 0.7121 0.7137
GBPZAR 18.610 18.639
USDZAR 12.223 12.247
GBPPLN 5.7087 5.7318
EURJPY 136.59 136.81