The Bank of England grows some teeth as UK Manufacturing rebounds!

Week Commencing Monday 1st April 2013

Overriding Market Themes

We finish a long weekend to some surprisingly good news from the BCC, who believes a strong performance by Britain's service industries during the first three months of the year has kept the economy growing. According to the Chamber’s survey of 7,000 UK firms, there was a marked improvement in the manufacturing sector despite weakening employment, and the Service sector continued to expand at a substantial rate. It is also worth noting that a weakened pound has boosted international demand for British products, no doubt aiding both these sectors. This, if proven accurate in this month’s GDP release, will no doubt give the UK a boost and start the process of repairing its tattered economic image. Politically also, this should work in the favour of the current embattled Chancellor and should allow him the political capital to continue his budget reduction plans. 


The Bank of England officially takes on powers to regulate the financial industry this week, marking another step in one of the biggest revamps of the institution in its three centuries. Legislation came into effect yesterday to scrap the Financial Services Authority and restore regulation to the central bank, which it lost when it was given independence in 1997. In addition to this new remit, it will also wield considerably more powers for financial stability. The 6 year banking crisis has allowed the bank to think in more aggressive terms and is already embracing an assortment of new tools in its arsenal. Last week, it ordered banks to raise more capital against potential losses and to better account for risks within their balance sheets for example. No doubt further changes are underwat as officials revamp the bank’s monetary policy mandate before the arrival of incoming Bank of England Governor Mark Carney, set to replace Sir Mervyn King in the summer. Banking supervision will now be the responsibility of the Prudential Regulation Authority.  


Over to the Far East and Japanese retail sales bucked the recent trend and fell by more than forecast in February, underlining the challenge the new Japanese government is facing to stoke inflation and consumer demand. Sales dropped by 2.3% from this time last year whilst most European analysts forecast a smaller 1.2% drop. The Japanese have been trying to boost domestic demand to offset the recent decline in export, as increased competition from China and India continues to erode its manufacturing base. This is viewed as the only way to revive its stagnant economy which has struggled for year against deflation and falling prices, which prompt consumers to hold off purchases in the hope of a better deal in the future.  PM Shinzo Abe, who came to power last year, has already put inflation amongst his top priorities, causing the Bank of Japan to double its inflation target to 2%. Many forecasters have said that boosting consumer price growth is key to reviving domestic consumption. We will have to wait and see if he is successful!


Finally back to poor old Cyprus, who will seek easier bailout terms in talks with representatives of the European Union and IMF today, before a meeting of euro-area finance officials later this week. The Cypriot government is seeking more time to reach targets required in return for a 10 billion Euro injection after agreeing to impose losses on uninsured depositors at the countries 2 biggest banks. Under the agreement reached for the country’s banks, 40 percent of deposits above 100,000 euros held at Bank of Cyprus will be temporarily frozen to ensure liquidity. This money will not be used to recapitalize the bank, and will receive interest 10 basis points above current levels and be released shortly, according to the central bank. 

GBP This Week

Tuesday signals the start of Sterling’s week with Manufacturing PMI’s release. This indicator has shown some improvement of late, with two readings in 2013 above the 50-point level, which points to expansion. The estimate for the April release stands at 48.9 points, and the markets would be thrilled to see the index cross back above the 50 line. Then moving to Construction PMI of Wednesday, we still view the construction sector as dire for the UK, with releases below the 50-point level since November. Little change is expected in the April reading, with an estimate of 47.7 points. Thursday is the highlight of the week, with Services PMI kicking off the list of releases. With the exception of the January 2013 release, recent readings have been above the 50-point level, indicating expansion in the services sector. The estimate for the April release stands at 51.4 points, which is slightly below the March reading. On the QE and MPC statement also due on Thursday, we expect no change in monetary policy stance from the Bank of England. Votes may well be split for expansion in asset purchases however, but we doubt that the expansionists will have the majority.


After collapsing into the 1.48 region on Cable during the middle of last month, Sterling has performed well as it continues to find support in the 1.52’s. With the UK economy continuing to remain lethargic we doubt that Sterling has much impetus to gain further, despite a relatively bad week for US data and the continuing issues in the Eurozone. We look for solid PMI figures this week to see any further gains in Sterling.

USD This Week

ISM Manufacturing kicked off the week on Monday, with a worse than expected release of 51.3 against expectations of 54.2. Moving to Wednesday, ADP Non-farms and ISM Non-Manufacturing are expected, with a gain and decline expected respectively as ADP Non-farms continue to see improved employment conditions whilst a slight drop in optimism leads to a decline in business conditions. Moving to Thursday, Unemployment Claims is likely to be the highlight of the week. The number of Americans seeking unemployment benefits soured last week, and we expect a slight reversal to 354,000 this week. 


US Data was surprisingly bad last week, and gave the dollar very little momentum against other majors to extend its gains. This week we expect the picture to be rosier, so we will be looking for increased pressure against both GBP and the EUR, especially if we can see some solid improvement in those employment numbers. 

EUR This Week

The European week starts off with the Italian Manufacturing PMI release on Tuesday, which should come in relatively flat against last month’s release as confidence remains stagnant. Moving to Thursday, the Spanish 10 year bond auction should see yields drop being the 5% level, signalling international confidence in the countries budget busting plans. Mario Draghi’s press conference and the Minimum bid rate should also be uneventful, although we expect increased rhetoric from the central bank leader on Cyprus and the banks determination to prevent contagion. 


While banks are back open in Cyprus, the damage to the European image and therefore confidence has been profound. The question is now being asked why people should hold more than EUR 100K in European banks, which can only be damaging to a European banking sector which is on its knees. The crisis could also spread to Slovenia, the latest country look fiscally deficient, despite the lack of commonality between the countries. Also, larger European countries are not faring well, with Italy no closer to forming a government, whilst France and Germany are struggling and Spain is talking the largest unemployment rate in modern history. Draghi will find it tough to paint a rosy picture, and simply does not have the tools to help correct the situation. With the UK and the all-powerful US returning more positive figures, we expect the Euro

to be the biggest looser this week.

In Other News

North Korea says it will restart all facilities at its main Yongbyon nuclear complex, including a reactor mothballed in 2007. In a statement, the North Koreans said the move would bolster their nuclear forces in both quality and quantity. So here is to hoping that global Armageddon with not upon us! At least before the end of the world, the Chancellor should approve the new M4 relief road in South Wales as a toll road. So when everyone is fleeing the carnage, at least the government’s purse won’t go without! 


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