Good morning,
Manufacturing on a flyer
Sterling was the best performer in the G10 yesterday as markets reacted to the single largest month on month increase in the UK’s manufacturing PMI in the 25yr history of the data. It seems that after Brexit we have the Brebound and, maybe more pertinently, the currency effect.
Companies in the manufacturing sector seem to be getting back to business and we are seeing order flows pick up from across the world as the devalued pound boosts the competitiveness of UK exported goods. This has driven the rate of growth within the sector to a 26 month high. A continuation would obviously be welcome and there was a moderate rise in employment it seems but we believe that industry as a whole will hold off on a meaningful increase in employment until they are happy to call this a trend and not a blip.
Inflation’s impact still unclear for now
The other side of the devaluation coin is the pickup of inflation to a 5 year high and what will be crucial to the domestic sector will be how these translate into local demand and the wider consumption outlook. Tomorrow’s construction numbers and the service sector outlook due on Monday are a lot more important for what happens in domestic GDP terms but the near-term boost that a hopefully one-off devaluation of the pound can have is clear to see.
We maintain our belief that we still really have very little idea about what is really happening under the hood of the UK economy and the picture will only become truly clear as slower sides of the economy – inflation, jobs and investment – start to react. For now the pound is helping a sector that spent a lot of the Global Financial Crisis underperforming albeit only roughly 10% of the UK economy as a whole.
The construction reading is due at 09.30 and whilst we may see a bump in investment courtesy of that weaker sterling we will be looking at the domestic sentiment more closely.
Jobs jobs jobs
Today however is Non-Farm Friday of course and we think that the market will employ its typical tactic of being very boring until 1.30pm when the data is announced, currencies will stay volatile for an hour or so afterwards and then everyone will go to the pub.
We expect today’s number to be strong enough to keep the Federal Reserve in a hiking stance however limit the opportunity for a hike in September. Jobs growth of around 180,000 would be seen as OK but if wages remain limited to a rise of 2.5/2.6% then we may see some reticence emerge to take the USD higher into the weekend.
May in China
Over the weekend we have the G20 meeting in Shanghai which will see a rather turgid, pre-agreed statement released highlighting everyone’s willingness to cooperate to boost global growth and most certainly not weaken their currency in a bid to steal export growth from other countries (this means you Japan, China and Europe). There will be a lovely photo as well.
We know that Theresa May or her Chancellor Philip Hammond will not be as close to China as their respective predecessors – I doubt we’ll see either take XI Jinping out for fish and chips in the local – but the business and investment relationship between the UK and China must be strong and it can be restarted today.
The ties between China and the UK are not coincidental; The UK is the G10 country that relies most on its services sector and China is looking to transform itself into a services behemoth as it became a manufacturing giant in the 1990/00s. Export orders of British manufacturing goods are rocketing due to the devaluation of the pound and this is a great time for HM Government to be channelling our professional services sector at Chinese demand.
Britain turned its back on Europe on June 23rd. Making Brexit a success means we cannot do the same to China.
Have a great day and a better weekend.