Good morning,

Manufacturing sector sitting on an inflationary time bomb

The latest figures from the UK’s manufacturing sector were relatively upbeat, although the pace of growth slowed somewhat. Persistently weak sterling helped factory owners and manufacturers attract overseas buyers as was evident in the rise in export orders as part of the release. Nonetheless, yesterday’s manufacturing PMI number was some of the strongest evidence yet that the UK is almost certainly in for an extended dose of inflation come the new year as purchase price inflation (the costs these factory owners are facing when sourcing raw materials and wholesale goods) rose to a 69 month high, hitting the fourth highest level since the survey began in 1992. Manufacturers therefore face a tough decision: swallow the higher costs and eat into their margins or pass on price hikes to consumers. In truth, the latter is the most likely outcome.

Today’s Construction PMI figures will likely tell a very similar story – they’re due at 0930GMT. It’s these inflationary pressures that kept a lid on the pound yesterday as markets now look ahead to tomorrow’s Quarterly Inflation Report.

UK housing market stalled in October

This morning’s Nationwide House Price Index is likely to garner some column inches – UK house prices failed to grow whatsoever in October, despite economists predicting a 0.2% rise following September’s strong showing. This kept the average UK house price at £205,904. House prices staying flat for one month is hardly one of the four horsemen, however there were other worrying aspects in the report itself. The velocity of residential housing transactions is lower by roughly 10% compared to a year previously, which is often a precursor to a slowdown in sentiment that leads to moderation in prices. So what’s the cause of the housing market hiccups? Brexit? Weak sterling? The fluctuations we’re seeing at present are more likely the result of stamp duty changes and policy revisions that make purchasing a buy-to-let property less profitable.

Federal Reserve likely to stand pat on rates given political pressures

Today’s Federal Reserve rate decision should pass by with little cause for animation, as next week’s presidential election is in far too close proximity for the committee to consider raising rates today. The market agrees, with a mere 7.2% chance of higher rates being priced in according to futures markets. The US dollar’s relative weakness this week is also testament to that, as investor’s flight to safety amid mixed presidential polls has pressed US Treasury yields lower, dampening the US dollar.

Elsewhere today, it’s Spain, Italy, France and Germany’s turn to release their respective manufacturing PMI numbers, which are likely to again show moderate, but not concrete, levels of growth.

Have a great day.