UK Services PMI point to economy grinding to a halt
February 6, 2019
Sterling was among the worst performers in the G10 against the US Dollar yesterday, after weak Purchasing Managers’ Index data in the morning suggested the economy practically ground to a halt in January. Yesterday’s Services PMI came out at 50.1, barely above the 50 level that indicates overall output growth among the surveyed businesses. The report noted that survey respondents “overwhelmingly” linked the slowdown in growth to political uncertainty. Care should be taken before assuming these readings are indicative of longer or even medium-term growth, however. PMI readings plummeted in the third quarter of 2016 followed the EU referendum result, but quickly recovered. The UK economy ended up growing at a reasonably solid pace in 2017. Although the current slowdown in survey data has been a steady decline since the middle of last year as opposed to a plunge of the sort seen in 2016, the results should nonetheless be taken with a grain of salt by sterling watchers. No headline UK data will be released today.
The euro had another session on the back foot against the dollar, falling down from support levels of the last couple of weeks. A stronger dollar was the main cause, although weak data from the Eurozone did not help. Yesterday, the final January Purchasing Manager Indices were slightly revised upward from initial estimates, showing marked heterogeneity between a moderate Germany and Spain as opposed to a weaker Italy and France. The French biggest lender BNP Paribas has reported a downgrade in the revenues forecast, after “extreme market conditions” have shrunk 40% of trading income in Q4. A year ago, the bank had envisioned to outperform its 2020 profitability target.
USD traded up against EUR for the second day in a row yesterday and is on the offensive this morning as well after the State of the Union Speech by President Trump revealed nothing about progress in trade talks with China. This inspired a risk-off move of which the greenback profited as there was some hope in markets beforehand that the President would announce the US and China had gotten closer on trade. Trump did announce a meeting with North Korean leader Kim-Jong Un in Vietnam at the end of February and the order to send another 3,750 military troops to the Mexican border to stop a migrant “caravan”. Besides fending off migrant caravans Trump also jabbed at the Democrats, blaming them of executing a strategy of “resistance”. This can be seen as a sign that the President and Democrats are operating in a polarized climate, which suggests more government shutdowns and other legislative gridlocks may follow this year in the US. Today at 13:30 GMT the US Trade Balance is due, together with Quarterly Unit Labour Costs.
The loonie stood at the middle of the G10 currency board yesterday with gains against EUR and GBP, but losses against USD. In the absence of Canadian data coming out the loonie held quite steady against the background of a 2% slump in WTI crude oil prices. Today may prove more lively, with Bank of Canada’s Deputy Governor Timothy Lane speaking at 13:35 GMT, followed by the Ivey PMI at 15:00.