James Smith, Developed Markets Economist at ING, suggests that as the Bank of England tries to gauge how much of the recent dip in UK’s economic activity was temporary, the message from the latest services PMI is that the snow wasn’t entirely to blame and at 52.8, the index is now at its second-lowest level in around 18 months (superseded only by last month’s weather distorted figure).
Key Quotes
“The accompanying press release makes it clear that much of this has to do with weak consumer demand – and we don’t expect these difficulties to fade rapidly. Whilst disposable incomes are no longer falling, higher food and fuel costs are still largely offsetting rising pay packets. And with consumer credit growth having fallen sharply in March, there are few obvious ways that shoppers can finance higher spending in the near-term. Combined with rising minimum wage costs and higher business rates, retail margins are likely to remain under pressure.”
“But the big question for markets is whether the recent run of weak data is enough to write-off an August rate hike.”
“We therefore still think policymakers have a preference for tighter policy, and they will be acutely aware that it could get more complicated to raise rates later in the year as Brexit talks heat-up.”
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EUR/USD treads water just above 1.0400 post-US data
Another sign of the good health of the US economy came in response to firm flash US Manufacturing and Services PMIs, which in turn reinforced further the already strong performance of the US Dollar, relegating EUR/USD to the 1.0400 neighbourhood on Friday.
GBP/USD remains depressed near 1.2520 on stronger Dollar
Poor results from the UK docket kept the British pound on the back foot on Thursday, hovering around the low-1.2500s in a context of generalized weakness in the risk-linked galaxy vs. another outstanding day in the Greenback.
Gold keeps the bid bias unchanged near $2,700
Persistent safe haven demand continues to prop up the march north in Gold prices so far on Friday, hitting new two-week tops past the key $2,700 mark per troy ounce despite extra strength in the Greenback and mixed US yields.
Geopolitics back on the radar
Rising tensions between Russia and Ukraine caused renewed unease in the markets this week. Putin signed an amendment to Russian nuclear doctrine, which allows Russia to use nuclear weapons for retaliating against strikes carried out with conventional weapons.
Eurozone PMI sounds the alarm about growth once more
The composite PMI dropped from 50 to 48.1, once more stressing growth concerns for the eurozone. Hard data has actually come in better than expected recently – so ahead of the December meeting, the ECB has to figure out whether this is the PMI crying wolf or whether it should take this signal seriously. We think it’s the latter.
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