PURCHASING MANAGERS’ INDICES BOOST STERLING
British PMIs lead the way in manufacturing and services sectors. Non-controversial G20 communiqué welcomed by markets. Canadian economy shrinks for a sixth consecutive month.
The pound climbed steadily throughout most of the week. Starting from $1.77 last Monday it peaked at $1.84 on Thursday and again on Friday. It was trading a little easier at $1.83 when London opened this morning.
Little as the market cares for economic statistics at the moment it could not ignore two minor triumphs for the UK economy last week. Purchasing Managers’ Indices are compiled by national professional associations in several countries. Precise methodologies differ from place to place but there is a common theme. Firms are canvassed about their perceptions of current trading activity and their plans for the future. Those who think things are going well or who expect improvement in the months ahead register a plus. The pessimists go in as a minus. When all the results are in they are consolidated into a PMI that covers a range of 0-100. An index of 50 is neutral; as many firms are doing well as are doing badly, implying zero growth. Publication of the figures for Britain, the Euro zone and the United States is coordinated to happen on the same day. First come the manufacturing sector PMIs, followed a couple of days later by the services sector numbers.
For a year or more the indices in every country have been significantly below that breakeven point for obvious reasons. Last week however, the UK economy delivered better results in both categories than either the Euro zone or the United States. Britain’s manufacturing PMI came in at 39.1, four points better than the previous month and three points ahead of the nearest opposition. The services PMI did even better, less than five points short of breakeven at 45.5 and comfortably ahead of the US at 40.8 and Euroland at 40.9.
Adding to the positive tone for sterling, mortgage approvals rose in February to their highest level since May last year and consumer confidence improved from -35 to -30, still negative but heading in the right direction. Nationwide and the Halifax told contradictory tales about the direction of house prices in March, effectively cancelling each other out.
The G20 meeting managed to meet investors’ modest expectations so was considered a result. President Sarkozy did not walk out and the free-marketeers compromised on the matter of heavier regulation for the financial sector. A G20 agreement was never going to revitalise the global economy at a stroke. On the other hand, public disharmony could have postponed recovery by denting confidence. It did not happen, for which we must be grateful.
The G20 effect, both before and after the event, was to raise confidence levels among investors. That worked against the dollar and to the benefit of riskier currencies, including the pound.
There was nothing in Canada’s few economic data to help the situation for the Loonie. Increases in both the industrial product price index and the raw materials price index were of no consequence with the Reserve Bank of Canada’s benchmark interest rate down at 0.5% and going nowhere. Canada’s monthly assessment of GDP identified a 0.7% decline in January following December’s 1.0% drop. It was the sixth successive month of economic contraction and represents a total fall (so far) of 3% from the peak last summer.
This week’s meeting of the Bank of England’s Monetary Policy Committee should be less of a challenge than usual for the pound. With the Bank rate already down to 0.5% the MPC has little scope – and probably even less inclination – to take it lower. The general paucity of economic data ought to allow the pound to build on last week’s foundations but experience shows that recovery for sterling is almost never a one-way street. Buyers of the Canadian dollar should continue to hedge their exposure, fixing a price for half of whatever they need and using a stop order to protect the balance against unexpected nightmares. If price certainty is essential there is no alternative but to cover the whole amount.
Posting courtesy of TTT Moneycorp