A New Dynamic Emerges: Sterling Weakness is Good for the Ftse and British Economy

October 3, 2016

The view that Brexit is an unqualified bad thing is dead. The June referendum has depressed sterling, but the economy has performed better. An initial drop in consumer sentiment has reversed. Second-quarter GDP growth of 0.7% turned out better than anticipated and stronger than the first-quarter result. Among a slew of manufacturing PMI survey results for September reported today, the largest favorable surprise involved the British report, where the purchasing managers index had a 27-month high reading of 55.4, up from 53.4 in August and 48.3 in June. To be sure, U.K. inflation has risen as sterling weakness elevates import prices, but the more competitive pound also has lifted export orders, suggesting stronger business spending ahead. Over the weekend, Prime Minister Teresa May said the implementation process of Brexit will begin in the first quarter of 2017.

The dollar advanced a further 0.8% today against sterling but otherwise is steady relative to the yen and Swiss franc, down 0.3% against the loonie and 0.2% vis-a-vis the Australian dollar but up 0.1% versus the euro and kiwi.

Several markets are closed for holiday. Today is German Unification Day, Australian Labour Day, South Korean National Foundation Day, and the first day of the Jewish New Year, Rosh Hashanah. China will be closed all week in observance of the anniversary of the Communist Revolution in 1949.

Among open markets, Japan’s Nikkei rose 0.9%. Stocks rose 1.4% in India, 1.9% in Indonesia, 1.3% in Hong Kong, and 0.7% in Taiwan. Equities in Europe have climbed 1.1% in the U.K., 0.8% in Greece, 0.5% in Switzerland and 0.2% in France but fallen 0.3% in Spain and Italy.

The ten-year Japanese JGB is two basis points higher, while the gilt yield is steady.

West Texas Intermediate crude oil continued to respond favorably to the recent Opec accord to cut production, climbing 0.8% to $48.69 per barrel. Gold firmed 0.3% to $1,320.40 per ounce.

The Bank of Japan published its quarterly survey of corporate conditions and expectations. There’s been little change in the corporate mood since June, nor in their planned business spending. Businesses do anticipate a slight decline in conditions between now and December.

Japan’s manufacturing purchasing managers index improved to 50.4, the first score above the 50 level that separates expansion from contraction since February and the best result since January. August’s PMI was 49.5.

Over the weekend, China’s government reported its manufacturing and non-manufacturing PMIs. Manufacturing printed at 50.4, the same reading as in August but indicated a weak pulse. Non-manufacturing rose to a 2-month high of 53.7 from 53.5 the month before.

Euroland’s manufacturing PMI in September was a 3-month high of 52.6, but results in the common currency area are not moving upward together. The French and Greek readings of 49.7 and 49.2 remain in sub-50 territory, meaning that conditions continued to deteriorate. Spain (52.3), Ireland (51.3) and Italy (51.0) recorded considerably lower PMI scores in manufacturing than they had experienced in the first quarter of 2016. Germany (a 3-month high of 54.3), Austria (53.5, also a 3-month high) and The Netherlands (53.4, a 2-month low) are the region’s main growth engine in manufacturing. Inflation has perked up a little.

In other manufacturing PMI releases,

  • Vietnam’s PMI improved 0.7 points to a 16-month high of 52.9.
  • Taiwan’s PMI reading, 52.2, was at a two-year high.
  • Thailand’s purchasing managers index, a relatively new data series of merely ten months, hit a record low of 48.8.
  • The Filipino PMI, also young at nine months, was at a series high of 57.5 in September.
  • Indonesia’s PMI improved 0.5 points to a 3-month high of 50.9.
  • But India’s PMI settled back to 52.1, a 2-month low, from 52.6 in August.
  • Turkey’s PMI climbed 1.3 points to 48.3, a 4-month high.
  • Russia’s PMI of 51.1 was 0.3 points higher and the best score since June.
  • Switzerland’s PMI rose 2.2 points to a 4-month high of 53.2.
  • Sweden’s PMI score, 54.9, was 4.2 points better than in August but not as high as July’s reading.
  • Norway scored a 2-month high of 52.6.
  • The Czech PMI of 52.0 was a 4-month high.
  • Poland’s 52.2 reading was at a 6-month high.
  • Australia recorded a second straight sub-50 reading, 49.8, but it was 2.9 points better than in August.

Swiss retail sales volume fell 0.6% in August and resulted in a larger year-on-year decline of 3.0%.

Japanese motor vehicle sales posted loser on-year growth in September of 3.7%.

Indonesian consumer price inflation accelerated 0.3 percentage points to 3.07% in September.

Thai CPI inflation was less than 0.1% in September, while producer prices were 0.7% lower than a year earlier.

Turkish CPI inflation slowed much more than anticipated to a 4-month low of 7.28% in September. Turkish producer prices also recorded a lessening 12-month increase, just 1.8%.

U.S. data releases today will include monthly construction spending, motor vehicle sales, and the manufacturing purchasing managers survey.

Copyright 2016, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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