Risk on was the dominant theme on the first full trading day of the year in FX, with both Sterling and the Euro setting fresh highs in the wake of stronger than anticipated UK PMI manufacturing data, and hotter inflation readings from the Eurozone. Sterling rallied nearly two cents against the Dollar as risk appetite came roaring back. The first trading day of a new year often ends green across global markets however this was a notably positive session, with the FTSE 100 finishing nearly 2% up on the day. For the UK, manufacturing has offered new hope that the recovery is gathering momentum and coalition plans for a rebalancing of the economy are paying off, following the sector’s strongest performance for 16 years in December. Activity last month grew at its fastest pace since 1994 as exports drove new orders. The acceleration, reflected in the closely watched Markit/CIPS manufacturing purchasing managers’ index (PMI), was sharper than expected at 58.3 – where any figure above 50 indicates expansion. Economists had forecast a reading of 57. The Coalition is banking on a manufacturing-led recovery, with export growth offsetting a slump in demand from consumer and government spending as the austerity measures kick in.
In the US, the release of the FOMC Minutes from the December 14 Meeting saw the economic outlook improving, but “members generally felt that the change in the outlook was not sufficient to warrant any adjustments to the asset-purchase program”, with some members indicating “that they had a fairly high threshold for making changes to the program”. While the FOMC expects a gradual pickup in growth with slow progress on employment, there are still downside risks from the housing market, the US fiscal position and the European debt problems. Data from the US had been overwhelmingly positive almost from the immediate aftermath of the Fed’s QE2 decision back in November.
In the UK the services measure is released tomorrow and instead today we get the construction PMI. Other data this morning includes eurozone producer prices (expected to show annual inflation unchanged in November) and industrial new orders, which are expected to show a solid rise in October. In advance of the nonfarm payrolls release in the US on Friday, today sees the ADP employment change indicator. Private payrolls are expected to rise by around 100K on this basis. The ISM non-manufacturing index for December is expected to show a rise from +55 recorded in November.