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Main News Daily Update

Sterling hit a three-week low against the euro on Wednesday after a UK purchasing managers’ survey came in sharply lower than expectations, raising concerns the UK economy could struggle in the coming months. Against the dollar, the pound rose strongly, however, as the U.S. currency came under pressure against a range of currencies after upbeat data from China and Australia soothed worries about the health of the global economy and boosted risk appetite. In United Kingdom, CIPS/Markit survey points slower output growth in manufacturing (PMI at 54.3 in August). The headline PMI fell to 54.3 in August from 56.9 in the previous month. The slowdown in production growth was most noticeable in the consumer and intermediate goods sectors. The survey shows that orders expanded for the fourteenth straight month but at a markedly lower speed than in the preceding months. Employment conditions in the manufacturing sector continued to improve in August for the fifth consecutive month. Moreover, output prices were rising, mainly driven by higher raw material costs.

This is a data heavy week with a variety of key economic indicators being published for the Eurozone and US. Today, the latest wave of PMI business survey data is released for the Eurozone, as well as for two of its largest markets, France and Germany. In contrast to the general tone of US data, Eurozone PMI surveys have performed well recently on the back of robust Asian demand for exports and relief following the recent EU bank ‘stress tests’. While this picture of growth has been mirrored in the German market, a slight cooling has been evident in France with both PMIs for manufacturing and service sector falling back somewhat in Q2. Lloyds TSB expect this trend to continue, with a modest correction also being seen in Germany and the EU more generally, as the market pauses to consider the longer term impacts of the recent developments. Nonetheless, they expect all sectors to remain firmly in the expansion territory. A further indicator released today is the European Commission Consumer Confidence Indicator, which Lloyds TSB expects to remain around its long term average, consistent with a gradual recovery in consumer confidence. Today the market will focus on the ECB meeting to see if the ECB is still optimistic after the more depressing numbers out of the US lately. The market will also look for information about the liquidity programmes going forward.

In US, The manufacturing PMI surprisingly edged up in August (to 56.3 from 55.5). The manufacturing Purchasing Managers’ Index (PMI) edged up in August, to 56.3 from 55.5. Even though the PMI is weaker than over the March–May period, such a reading indicates solid growth in the manufacturing sector. However, given the flow of weaker manufacturing data in recent months, this improvement in the PMI must be interpreted cautiously. The production index improved significantly, to a comfortable level (59.9). By contrast, components on orders all deteriorated m/m, casting doubt on the sustainability of the improvement. According to the ADP survey, private sector employment declined in August for the first time since January, by 10,000. These poor data illustrate that labour market conditions have deteriorated in most recent months. The BLS “labour report” – which will be released on Friday – might also indicate a small drop in private payrolls in August – and a larger decline in overall non farm employment. The U.S. economy is so bad that the chance of avoiding a double dip back into recession may actually be pretty good. The sectors of the economy that traditionally drive it into recession are already so depressed it’s difficult to see them getting a lot worse, said Ethan Harris, head of developed markets economics research at BofA Merrill Lynch Global Research in New York. Inventories are near record lows in proportion to sales, residential construction is less than half the level of the housing boom and vehicle sales are more than 40 percent below five years ago. Federal Reserve policy makers agree that a renewed contraction is unlikely, although the risks have risen. “I expect the economy to continue to expand in the second half of this year, albeit at a relatively modest pace,” Fed Chairman Ben S. Bernanke said in an Aug. 27 speech.

Yesterday, PMIs for August were published across the EMEA region. In general, PMIs in most of the EMEA countries surprised on the upside, increasing from July’s level, with the exception of Hungarian and Turkish PMIs. Furthermore, PMIs on all EMEA countries remained above the critical 50, indicating continued expansion in the EMEA economies. Increased PMIs in August could mean that the expected slowdown in industrial production in the coming months will be less pronounced. The calendar regarding economic news and data is fairly thin today. The only economic figure due for today is the South African vehicle sales for August. With improved risk sentiment and the EUR/USD trading higher, CEE FX markets stabilised somewhat yesterday. Yesterday the Hungarian central bank (MNB) reiterated again that the central bank may need to hike if the risk to CPI stemming from a weaker HUF prevails or the risk assessment worsens. The Hungarian central bank clearly continues to deliver hawkish comments and even though market rates and yields in Hungary stayed almost unchanged after the MNB comments yesterday.