Sterling Slips after Manufacturing Slowdown
Sterling fell against the Euro following the first important data release of 2018: December’s Manufacturing Purchasing Managers Index (PMI). British manufacturing continues expanding strongly, with the average reading of 57.0 over the last quarter of 2017, the best figure since the second quarter of 2014. Output, new orders and employment continued to rise steadily, although the rate of expansion unexpectedly slowed down from 58.2 in November to 56.3 in December. This was in marked contrast to Eurozone PMI figures indicating much faster growth.
The US Dollar is unlikely to rebound this week from having lost 10% of its value over 2017. The Dollar had been boosted by investors’ expectation that Trump’s tax cuts would spur growth, however, analysts have become sceptical regarding the amount of growth that will be achieved by cutting taxes for the highest earners indefinitely and giving others tax cuts that conclude in 2024. Tomorrow’s release of the Federal Reserve’s Open Market Committee Minutes will be studied for more guidance on this year’s interest rate policy plans.
Pound Sterling – UK Markets
Sterling has gained ground against the US Dollar, with the exchange rate steady at $1.35. This morning, Sterling slipped against the Euro, with the exchange rate set at €1.12.
The UK’s IHS Markit/CIPS Manufacturing PMI was expected to fall from 58.2 in November to a modest 58.0 for December, so economists were surprised by the sharp drop down to 56.3. Although the pace of growth is slowing, the sector continues expanding, which has been attributed to the devaluing of the Pound boosting exports. JP Morgan economist Malcolm Barr concluded the output and new orders balances were “healthy” and “consistent with high frequency measures of growth in manufacturing output running at near a 4% pace.” He pointed out that “the new export orders reading is running slightly below that for new orders as a whole,” noting the PMI data does not support the assumption that manufacturing exports have been increased by a weaker Sterling exchange rate.
Last year, UK house-price growth lagged in London behind other UK regions, according to the Royal Institute of Chartered Surveyors. Today, the Bank of Scotland Plc’s Halifax division reported that Cheltenham’s house prices were up by 13% in 2017, averaging £313,150. House prices in the southwest town rose by almost five times above the national increase of 2.7%. The next highest increases came from the south coast towns of Bournemouth and Brighton, where house prices in each rose by more than 11%. Two of the biggest declines in prices were seen in the Scottish towns of Perth and Paisley.
US Dollar – US Markets
The US Dollar has slumped to most major currency pairs, falling against the Euro with the exchange rate down to €0.83. The US Dollar Index (DXY) has continued descending and is down to 91.81. Due out later today is the US Manufacturing PMI for December.
Last year, the US Dollar lost 10% in value, marking its worse annual performance since 2003 when it ended the year 14.6% lower. Neither expectations of a series of moderate interest rate increases nor the passing of the Republican tax bill have had a strengthening effect on the US Dollar. Given an expectation of lower inflation, the notes of the last Federal Reserve meeting, which are due out tomorrow, will be scrutinised for clues as to how cautious the central bank will be in raising rates this year. Much of the decline of the Dollar has been attributed to a market adjustment after the value of the currency rose to unsustainable levels following the election of Donald Trump.
The Federal Reserve Bank (Fed) is facing continuing changes in leadership after the current chair, Janet Yellen, is due to be replaced by Jerome Powell in February. There will also be a vacancy in the vice chair position in Reserve Bank of New York when president William Dudley retires in the middle of the new year. The position is said to be among the hardest in central banking to fill, with roles that include supervising big banks as well as managing the Fed’s policy rates and balance sheet. The New York president also has a permanent vote on monetary policy while they must closely monitor their own region’s diverse economy.
Euro – European Markets
The Euro has continued strengthening against the US Dollar, with the exchange rate up to $1.20. The Euro has held steady against the Pound, exchanging higher at €0.89. Today’s release of PMIs from Europe detailed impressive growth across many of the Eurozone’s manufacturing sectors.
Manufacturing across the Eurozone has hit a record high not seen since HIS Markit began the survey in 1997. The PMI reading for December surged to 60.6, for the first time, following a figure of 60.1 in November. Austria’s reading of 64.3 was also a record high. France’s reading of 58.8 marked the highest growth since 2000 with business confidence rising to over a five year high. Not every country shared in this bounty, however. Italy’s reading of 57.4 marked a three-month low and the Netherlands, at 62.2, saw a two-month low in manufacturing output.
Germany can celebrate a record-breaking year for manufacturing as evidenced by their IHS Markit PMI which rose to 63.3 from a previous strong reading of 62.5. Chief economist with IHS Markit, Phil Smith, noted the “current 37-month sequence of improving business conditions surpassed the previous record set in the run up to the financial crisis.” Smith also pointed out the need for increased capacity due to “new order growth [which was] at its highest for almost eight years and rising backlogs of work.”
Spain’s manufacturing PMI reveal that the industrial sector is struggling to continue its strong annual performance through December, as the reading fell from November’s 56.1 to 55.8, marking a 2-month low. New orders increased at the slowest pace in three months, but orders for exports sharply increased and the output sub-index was at a 31-month high. Spain’s average industrial PMI readings over 2017 have been the best since 2006.
Germany’s annual inflation for 2017 was at a five-year high, according to Friday’s release from Destatis. The Eurozone’s Harmonised Index of Consumer Prices (HICP), a measure of inflation across the bloc, rose higher than the 1.4% figure that economists expected. After a rise in November by 1.8%, year-on-year inflation for December increased to 1.6%. Annual average inflation for 2017 rose to 1.8% from 0.5% in 2016. The HICP inflation data leapt sharply from a former 0.4% to 1.7%, making both the highest figures seen in five years.
Other Currencies – Highlights
Sterling has slipped against the Australian Dollar, trading lower at 1.72 AUD. Australian house prices declined by 0.3% for the first time since April 2016, according to CoreLogic Inc. data. Tim Lawless, CoreLogic’s head of research, predicts this trend may continue through 2018. He stated: “Sydney’s housing market has become the most significant drag on the headline growth figures.”
The Pound is trading a little higher against the Canadian Dollar, exchanging at 1.69 CAD. Early this afternoon, the Royal Bank of Canada is scheduled to release Canada’s December Manufacturing PMI. The most critical release of the week for the currency will by the December unemployment report on Friday which is forecast to rise to 6%.
Sterling has dropped against the Japanese Yen, exchanging at ¥151.95. Today Japan’s Nikkei Manufacturing PMI fell from a November reading of 51.2 to 49.9 in December, showing a weakening across all sub-indices.