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UK PMIs point to an encouraging start in 2020

This morning has been somewhat different from the recent past. We’ve been used to the market and sterling trading heavily off Brexit-related news, while investors paid much less attention to hard UK macro data. So, the mild excitement leading up to the just-released PMIs has been a welcome change!

The release didn’t disappoint as all data showed the strongest evidence yet of a post-election boost to the economy. The composite PMI, which combines manufacturing and services, rose to 52.4 from 49.3, the highest reading since September 2018 and beating the 50.6 consensus forecast. The reading for British factories was also better than expected, rising to 49.8 from 47.5, the highest level since April last year, while the vast services sector returned to growth in January for the first time since August.

Decisions, decision for the BoE…

These flash reports for the new year are an important input for policymakers, ahead of next week’s BoE interest rate announcement. Evidence from other published surveys had also suggested a post-election recovery in both the services and manufacturing sectors, while leading indicators, like the CFO survey have indicated we would see a decent PMI rebound.

A key consideration for the Bank of England has been to what extent the weakness in UK economic activity last year was a result of elevated uncertainty, both domestic and international, which may be starting to subside now after the election and potential Boris-bounce.

The strength of the forward-looking components, with new orders showing the sharpest rise since September 2018, has now pushed this data point closer to neutral policy territory for the MPC. The composite PMI is also now well above levels usually seen when the bank has eased rates in the past. That said, one set of figures isn’t a trend and the manufacturing figures still signalled the ninth month of contraction.

Flip a coin for a cut next week?

Based on market prices, expectations for a BoE rate cut to 0.5% next week have eased back from 70% last week to around 50%, helped by firmer labour data. We wrote recently how we viewed this jump in odds as premature and think the BoE’s decision may be based more on in-house agent’s talk with businesses instead, as Governor Carney has suggested. Do the MPC keep their powder dry and reassess with a new Governor when GDP data for the post-election period in January is available? Money markets still see a high possibility for a cut in March.

Choppy pound

Sterling spiked to three-month highs on the initial headlines but has surrendered those gains in choppy trading. It seems profit-taking is the name of the game here as traders de-risk ahead of next week’s meeting. Dovish signals are still expected from the bank which means further near-term gains in sterling may be capped.

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