UK PMI's set to continue north as US action in Syria causes jitters

Week Commencing Monday 2nd September 2013

This week in Brief

  • IMPORTANT - We have a massive week for UK PMI’S with Construction, Manufacturing and Services all due to be released. We expect Manufacturing and Construction to continue to expand while Services is likely to contract slightly owing to last month’s better than expected release.

  • In the US we have a swath of employment reports due to be released this week. These will likely form a base for Federal Reserve policy makers to decide whether to taper the current rates of QE or not this month.

  • In Europe we have a slightly quieter week with a number of Italian and Spanish PMI’s set to be released. Mario Draghi is unlikely to change base rate however will do his best to talk down the single currency.

  • IMPORTANT – If the US Senate vote to approve military action against Syria in light of the recent chemical weapon attacks in the outskirts of Damascus expect significant capital flight back into safe havens. Despite of the lack of participation by the UK government in any military strike, expect Sterling to be effected (especially against the US Dollar) should any attack occur.

Market Themes & Current Events

We start this week’s news with the British Chamber of Commerce sharply upping its 2013 growth forecast for the UK economy. The business lobby group now expects 1.3% growth this year, up from 0.9%. Its forecasts for the next two years were upped to 2.2% and 2.5%. It did however continue to warn that overseas risks remain a drag on economic growth, with the Eurozone in particular posing a threat to the recovery. Diving inside the report, the chamber said it expected the unemployment rate to fall to 7.5% (currently 7.8%) of the workforce by the autumn of next year and to reach 7% by the end of 2015. This figure is critical as this is where BoE governor Mark Carney stated that the MPC would once again review interest rate levels. Despite the more upbeat tone used by the group, it did warn that the government’s austerity plan may have to continue until 2019 in order to totally remove the current budget deficit. It seems that the economy, although growing and returning to its pre-crisis highs, still has some way to go before it is totally out of the woods!

In more growth news, Brazil's economy grew by 3.3% year-on-year in the second quarter, according to official government figures. The IBGE stated that the economy grew 1.5% in the quarter, beating market estimates of a 0.9% growth. The farming industry, which saw production surge 3.9%, was responsible for most of the growth in Latin America's biggest economy between April and June, following on from 9.7% growth in the first quarter. Meanwhile, manufacturing expanded at a rate of 2% whilst the services sector expanded by 0.8%.

Moving to the US, Consumer spending barely increased in July despite anticipations of a better than expected result. Spending increased by a mere 0.1% according to the US Commerce Department with large value items (such as cars and white goods) seeing the biggest declines. The mediocre gains were blamed on real wages being squeezed by government spending cuts, and with 70% of the economy spending driven, many analysts are starting to tone down Q3 GDP estimates. Despite the spending report however, US Q2 GDP was revised upwards to 2.5% from 1.7%, much to the surprise of economists who were anticipating a 1.7% rise.

Finally, the Eurozone's unemployment rate remained steady at its record 12.1% during July, despite some positive employment data out from Germany last week. Diving into the figures, the total number of people out of work in the 17 nation area fell slightly (not enough to more the official rate however) by 15,000 to 19.23 million. This was the second consecutive fall, after a drop of 35,000 in June, adding to hopes of overall economic improvement in the Eurozone.

Sterling Outlook

A have a busy week for the UK economy, with the three core PMI figures dominating the first half of the week, followed by the MPC monetary policy decision on Thursday. The first release of the week comes in the form of the manufacturing PMI figure on Monday morning, which is expected to continue the positive recent trend set by UK PMI’s. Market forecasts project a rise to 55.2 from the July figure of 54.6, which would be the highest figure in over two years. Despite the manufacturing sector not being as substantial as some other industrialised economies, this will certainly watched closely.

The same goes for the construction PMI figure, which is due out on Tuesday. Outlook remains positive with a high likeliness of a strong figure after five consecutive months of upward movement. Expectations are for a rise to 58.4 from 57.0 and given the recent perceived strength within the housing sector, there is a strong potential for another market beating report this month.

The third and most important of the UK PMI’s is the services PMI figure, which is due out on Wednesday. This is by far the most important of the PMI releases, and as such the market will be paying considerable attention to the result. Market expectation is for the first reduction in over eight months, with market estimates placing the figure at around 59.8 against the 60.2 figure seen last month. It is worth bearing in mind however that the PMI figure has outperformed expectations on several occasions, and thus there is some potential for a positive and welcome surprise this month.

Finally, we have the MPC interest rate and QE decision on Midday Thursday. The recent strength of the UK economy, coupled with an emphasis on stability from Mark Carney points to very few surprises in this meeting. With this in mind and given that forward guidance has effectively removed speculation on rate increases; we do not anticipate this being a notable market mover. Interest rates are expected to remain at 0.5% and asset purchases at GBP375 billion.

US Dollar Outlook

We are now fast approaching the first possible meeting where the Federal Reserve could begin tapering quantitative easing. With this in mind, markets have been repositioning somewhat in anticipation and as such there are questions as to whether some form of tapering has already been factored into the markets. The release of key employment data throughout the week should be the catalyst of any move towards tapering, and increase the likeliness of volatility despite a four day week owing to the Labour Day bank holiday on Monday.

We start with August ADP non-farm employment change figures on Thursday, which is the first of four releases this week. The market expectation is for a reduced figure of around 187k after the July figure broke the 200k barrier for the first time in seven months. Usually given second place to other employment reports, however with the tapering decision looming markets will likely be more volatile than ever. Watch out for a rise above expectations as this is likely to be dollar positive, with the opposite being true should it disappoint.

This is closely followed by the weekly unemployment claims figure, also set to be released on Thursday. Owing to the regularity of this figure, the markets largely see the claims data as somewhat insignificant in normal markets. However, given the proximity to potential tapering, along with a perceived lack of employment data, this figure has become increasingly important over recent months. We expect a marginal drop from 331k to 330k, which would sit well on the current downward trend and strengthen the taper argument.

Friday will certainly be the day to watch in terms of volatility and importance, given the release of both the non-farm payroll and the headline unemployment rates. The non-farm payroll figure is generally considered the most important of all the employment releases and will most likely cause significant volatility regardless of the impeding tapering decision. Market expectation is for a rise to 175k from 162k, and any rise above expectation would likely bring about increased probability of a reduction in asset purchases later in the month.

The final employment release is the unemployment rate, which is largely expected to remain at 7.4%. Lawmakers originally suggested that QE would be halted if a target of 7% unemployment was achieved. Thus the ability of this measure to fall is crucial for Federal Reserve members to consider the environment conducive to both tapering and an absolute halt of asset purchases.

Euro Outlook

We have had a very strong previous month for the EZ, with both PMI’s and GDP all pushing back into growth, stoking a more optimistic tone to the markets. With a relatively quiet week ahead, we anticipate the majority of focus to shift to the peripheral countries with a brief emphasis on the ECB rate decision on Thursday.

The first half of the week brings both Spain and Italy into the fame with the release of manufacturing and services PMI figures on Tuesday and Wednesday respectively. With the likes of Germany and France stealing the limelight, it is easy to forget that an expansion in the ‘weaker’ EZ economies would stabilise the zones current two tier system. With only the Italian manufacturing PMI above the key 50 mark, markets will be hoping to see as many of the remaining PMI’s to move into expansion.

Finally, Thursday sees the ECB announcing its latest interest rate decision, which almost certainly will remain stable at the current 0.5% level. Despite talk on negative rates from Mario Draghi, we doubt that he would risk any changes as the EX economic recovery gathers pace. That said, Draghi has done a good job talking the euro down throughout this year’s press conferences and this meeting will most likely only provide another opportunity for him to do so again. 


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