Manufacturing a case for a rate hike
The UK Purchasing Managers’ Index (PMI) manufacturing index declined to 55.9 for September from a revised 56.7 the previous month and was slightly below consensus forecasts. The reading was above the long-term average of 51.7 with strong export growth. Delivery times lengthened at the fastest pace since 2011 and output prices rose at the fastest pace for four months.
The manufacturing data in isolation would underpin the case for higher interest rates from the Bank of England (BoE), but the key element will be the services sector data which is due out for Wednesday amid further underlying doubts surrounding the outlook.
Overall Sterling sentiment remained weaker during the day with expectations that recent buyers were liquidating positions. There was a decline to three-week lows near levels of around 1.3250 for GBPUSD with no compelling recovery, while GBPEUR failed to hold its best levels and consolidated around 1.1325. Markets will also remain vigilant for any comments from the BoE officials ahead of the very important policy meeting at the beginning of next month.
The US ISM manufacturing index yesterday showed a firm reading, increasing to 60.8 for September from 58.8 the previous month. This figure was the strongest it has been since 2004 and clearly above consensus expectations of 58.0. Further, strong growth in new orders indicates firm employment growth while prices increased at the fastest pace since the second quarter of 2011.
Overall, the ISM data gave the Dollar a boost yesterday as the single currency strengthened against its rivals. Cable declined to lows of 1.3241 across the day but closed at 1.3283, whilst against the Euro, the pair chopped and changed in and between 1.1738 and 1.1762. Going forward, sentiment should receive a boost in the manufacturing sector and a suggested increase in inflation pressures.
Minneapolis Fed President Kashkari maintained a dovish approach yesterday with a view that raised interest rates were causing low inflation as Dallas head Kaplan made comments that the FOMC needed to look harder for hiking rates again in December.
The Euro remained under pressure throughout yesterday’s European trading session with violent clashes in Catalonia continuing to undermine sentiment amid an initial decline to lows of 1.1730 against the Dollar. The central government in Madrid threatened to remove Catalan autonomy if the region attempted to declare independence while a general strike was due to be held in Catalonia on Tuesday.
The European Central Bank’s (ECB) Chief Economist Peter Praet stated that the central bank would re-calibrate monetary policy during Autumn, but that it was still necessary to maintain a supportive monetary policy given that inflation was increasing very slowly.
Data To Watch:
9:30am GBP PMI Construction (Sep)
10:00am EUR Producer Price Index (YoY) (Aug)