UK Service Sector Stronger than Expected
Sterling proved resilient this week after a series of IHS Markit Purchasing Manager Indices (PMIs) revealed steady, but slowing UK growth. Today’s PMI shows that growth in the dominant services sector grew at a faster pace than anticipated last month, with companies reporting an increase in business activity. Uncertainty about Brexit was blamed for the slower growth in hiring and business investment which jeopardise Britain’s long-term business prospects.
The weakened US Dollar was only briefly lifted by the release of the Federal Reserve’s Open Market Committee meeting in December. The minutes point to a cautious pace of interest rate hikes in 2018 because the policy makers want to avoid overheating the market and causing inflation to rise to levels that would challenge consumer spending. Tomorrow’s releases of Unemployment Rate and the Nonfarm Payrolls may be the start of a US Dollar rally, since the unemployment rate is expected to drop further.
Pound Sterling – UK Markets
Sterling has held onto most of its recent gains against the US Dollar, with the exchange rate set at $1.35. Sterling slid slightly against the Euro, exchanging at €1.12.
The three December UK PMI releases that have come out this week will be analysed extensively by economists for clues as to how uncertainties surrounding Brexit might be slowing down British business growth. So far, the PMIs point to the UK enjoying steady growth that might be more robust if businesses were not beset with Brexit worries. Today’s important Services PMI indicates December’s growth was the second-highest of the year since April. The reading was up to 54.2 from November’s figure of 53.8.
On 2 January, Manufacturing PMI showed an unexpected decrease in factory output to 56.3, down from November’s reading of 58.2. UK’s construction growth also contracted, but, due to the strong performance of the previous month, the last quarter of 2017 was the strongest in 3 ½ years.
International Trade Secretary Liam Fox has led an informal discussion about the UK joining the Trans-Pacific Partnership (TPP) to boost British trade after Brexit. In Beijing, China on a three-day business relationship building trip, Fox said the UK wants to “explore all the possibilities.” Although the economies of many current TPP countries are growing quickly, combined, they made up under 8% of UK exports in 2017, compared with Germany accounting for 11%.
The Bank of England reports that British consumers increased their borrowing by the smallest amount since mid-2015, which appears to signal that consumers are spending less. In the three months to November, annual credit growth dropped from 9.3% down to 8.5%.
The 19 May wedding of Prince Harry and Meghan Markle will generate around £500 million in additional revenue for the economy, according to business consultancy Brand Finance. The firm estimates £200 million will come from increased tourism, noting the Office for National Statistics recorded 350,000 more visitors in 2011, when Prince William married Kate. Sales of celebratory commemorative items will provide the balance of the revenue. Also, due to the weaker Pound, estimated record 41.7 million tourist arrivals in 2018 are expected to generate £26.9 million in revenue, according to research by VisitBritain.
US Dollar – US Markets
The US Dollar remains weak, exchanging against the Pound at $1.35 and lower against the Euro with the exchange rate set at €0.83. The US Dollar Index (DXY) has dropped to 92.01.
The minutes of the Federal Open Market Committee held on 12-13 December indicate that policymakers disagreed over fiscal stimulus, arguing that it has the potential of overheating the market which could dangerously spike inflation. Easy financial market conditions that excessively boost output beyond the presently sustainable levels would necessitate a steeper path of rate hikes. Policymakers expect the new tax cuts to increase growth slightly, which strengthens the likelihood of the first of three “gradual” interest rates hikes beginning in March.
Yesterday’s ISM Manufacturing Index for December beat expectations and brought the 2017 average figure to the highest annual reading since 2004. The December reading of 59.7 marked the second fastest rate of expansion in six years. Tomorrow, the major data releases for the Dollar are the Unemployment Rate and Nonfarm Payrolls.
The US Congress returned yesterday, after their winter recess, to face a busy agenda with the pressing issue of restarting tough negotiations to avert a partial government shutdown on 19 January. The negotiations will be complex since Republicans and Democrats are determined to add several other issues to the critical bill. Among the most contentious are continuing the Deferred Actions for Childhood Arrivals programme which protects over 700,000 unauthorised immigrants who came to the US as minors. Healthcare, government surveillance powers and an increase in disaster relief are also divisive fiscal issues to be negotiated by the legislation.
Euro – European Markets
The Euro has proved resilient against the US Dollar, with the exchange rate set at $1.20. The Euro has lost strength against the Pound, exchanging lower at €0.88.
IHS Markit Service PMIs were released for several Eurozone member countries, today. Both Spain and France’s service sectors contracted while Germany’s remained consistent. This resulted in a higher than excepted Eurozone PMI of 56.6 as well as an upbeat Eurozone Composite reading that came in above expectations at 58.1. This marks the strongest European company growth in seven years.
The Eurozone economy gathered momentum toward the year of 2017, commented Chris Williamson, chief business economist at IHA Markit. “Manufacturing is enjoying its best growth spell since data were first collected over two decades ago while the service sector closed off its best year since 2007,” Williamson said.
Yesterday German chancellor Angela Merkel sought to build trust between centre-left Social Democrats (SDP) and her party the Christian Democratic Union (CDU). In a meeting with SDP leader Martin Schulz and Horst Seehofer, head of Bavaria’s CSU conservatives, Merkel’s agenda was to have the parties agree to the structure for talks that start on Sunday which may open the door to official coalition negotiations in the coming weeks.
Other Currencies – Highlights
Sterling has risen against the Australian Dollar, trading slightly lower at 1.72 AUD. The Housing Industry Association released October’s New Home Sales data which indicate that the market is cooling as sales of new homes in November 2017 were 6% lower when compared to the previous November. The trend is expected to continue through 2018.
The New Zealand Dollar fell against the Pound, exchanging lower at 1.90 NZD. ASB’s chief economist Nick Tuffley predicts that New Zealand’s economy faces more offshore political risks than internal hazards such as the uncertainty of having a new government. China’s move to fill the region’s power vacuum after Trump’s presidency is among the risks cited.
Sterling has picked up some strength against the Japanese Yen, exchanging at 152.46¥. The Nikkei Manufacturing PMI for December fell short of expectations, coming in at 54.0, which was also lower than November’s 54.2 figure.