Following on from this morning’s eurozone PMI beat and the subsequent EURUSD rally, all eyes rested on the UK flash November PMI data and whether the pound would find a similar tailwind.
Despite the UK flash composite PMI outstripping expectations by 0.2 points with a reading of 57.7 and activity in the manufacturing sector rising from 57.8 to 58.2 in November, a decline in activity in the service sector from 59.1 to 58.6 and an overall decline in the composite reading relative to October’s reading meant sterling traders had little incentive to change course with the pound this morning.
Despite the headline numbers marking a slowdown in economic activity in November, details within the report were more supportive of a stronger underlying economic backdrop. Customer demand is seen to have risen sharply in November, with overall new order growth rising to a five-month high. Much of the increase in new orders came from the services sector as international travel reopened, while the manufacturing industry remained restricted by supply chain issues. Despite the limitations to manufacturing activity, the overall index points towards sustained growth momentum towards year-end.
On the employment side, private sector employment increased in November, albeit at the slowest rate in 9 months, compounding positive labour market data from September’s ILO report. Survey evidence also showed hiring difficulties as the level of slack within the labour market remained tight and employees left for higher wages. Meanwhile, on the inflation side, the average cost burden was the fastest since the index began back in January 1998, driven by higher wages and rising input costs. While firms struggled to pass this on in overall prices, thus compressing profit margins, it is a further sign that inflation may not prove as transitory, should input cost pressures remain and force firms to share the burden with the consumer.
With inflation pressures still printing at historically strong levels, employment sub-indices remaining supportive of a non-disruptive end to the furlough, and growth momentum holding up, today’s PMI report suggests that the Bank of England is more likely to hike rates by 15bps in December than not.
However, with Covid concerns rippling through European markets, the prospect of tighter containment measures in the UK and the impact that will have on growth and employment continues to pose the biggest risk to our December BoE call. This is evident in market pricing, with the pound pinned by soured market sentiment which continues to limit sterling upside, despite the strong underlying PMI data this morning.
Sterling fails to follow the euro higher against the dollar following this morning’s deluge of PMI data
Author: Simon Harvey, Senior FX Market Analyst