Sterling rallies, markets bounce back ...

Sterling bounces back, markets rally ...
This is the week of the Markit / CIPS updates on UK manufacturing, construction and service sector. At first sight, they made for dismal reading … according to the headlines ...

Manufacturing …
UK manufacturing hit a 34 month low in February, as the index dropped to 50.8 down from 52.9 in January.

Construction …
Construction growth hit a twelve month low in February, led by the weakest rise in housing activity since June 2013. The headline index registered 54.2 in February down from 55.0 in January. “The latest reading pointed to one of the weakest rises in construction output seen over the last two and a half years” according to the release.

Services …
Service sector growth was the weakest in nearly three years. The seasonally adjusted Business Activity Index fell to 52.7 in February, from 55.6 in January. This signaled the slowest rise in service sector activity since March 2013.

ONS data …
There were no releases from the ONS. The Markit / CIPS data grabbed the headlines. It is said that nature ignores a vacuum. Economics should ignore the vacuous. The Markit/CIPS offers a great data set with established pedigree and lengthy history. The headlines are often written with red top leaders betraying the integrity of the data within.

There was lots of good news in the releases. All indices were in positive territory above the neutral 50.0 level. That implies all sectors are growing albeit at various rates. Service sector output has risen continuously for 38 months, the second-longest sequence of expansion in the survey history.  

The UK economy continues to expand at a fair rate despite the slow down in manufacturing and the year on year comparison on construction.

The Saturday Economist UK Economic Outlook March 2016 …
This week we released the UK Economic Outlook for March 2016. We expect growth of 2.6% in the UK this year supported by strong growth in the leisure sector and the service sector generally. We expect manufacturing growth of just 0.9% and construction growth of 0.5%. Household spending will increase by 3% with a 4% growth in investment. Employment will rise, borrowing will fall, inflation will increase and the trade deficit will deteriorate. There will be no rebalancing … and certainly no “march of the makers”. The UK is in danger of drinking it’s way to deficit with strong growth in hotels and restaurant spending. Transport growth will accelerate as “Deliveroo” “Just Eat” “Hungry House” and others make progress.

You can download the update here. It offers over twenty pages of reviews and analysis. It is our benchmark for the year ahead based on the latest ONS data. Should be be so optimistic for UK growth? …

Car sales …
This week the SMMT reported car sales were up by over 8% in February compared to the same month last year. Registrations were up by 5% year to date. Private car sales were up by 22% in the month. Not a bad start to the year …

House Prices …
The Halifax House Price Index reported prices were up by 9.7% in February. The more moderate Nationwide series suggested prices were up by 4.8% but that’s up from 4.4% in January. Strong car sales and a strong housing market would support our positive outlook for the year ahead. The employment data in February suggests the UK jobs market is over heating as does the situation in the USA …

USA jobs data …
In the US, we expect growth of 2.4% this year. The broad consensus forecast is 2.2%. Why so optimistic? In February, total non farm payroll employment increased by 242,000. The data for December was revised up from plus 262,000 to 271,000. The January data was revised from plus 151,000 to 172,000.

The American labor force increased by 555,000 people in February. Over the last three months, that number totals 1.52 million, the highest it has been in 16 years. The unemployment rate was unchanged at 4.9 percent. The jobs data suggests strong growth continued into 2016 following growth of 2.2% last year.

China sets Growth Range …
China has set the growth target for 2016 at 6.5% to 7% indicating the government will continue to support the growth plan. In opening the National People’s Congress on Saturday, Premier Li Keqiang laid out policies and goals for the year that aim to stimulate growth and encourage restructuring of industries afflicted with overcapacity.

Oil prices and markets …
Markets are bullish. Oil prices Brent Crude closed at over $38 Brent Crude basis, Sterling bounced back to $1.42 and the FTSE closed up at 6,199. In the US the Dow closed above the sensitive 17,000 level. Gilt yields rallied, copper, iron ore prices are on the rise.

Remember two weeks ago when we talked of the GOBI desert on Planet ZIRP. As markets tumbled we talked of the Great Opportunity to Buy In on market weakness. Since then the FTSE has rallied by 600 points!

So what of rates …
Our view remains.  US rate rises will continue into 2016. Negative rates will be reversed in Europe and Japan. The Bank of England will be forced to act this year, as growth continues, the labor market tightens, earnings increase and inflation trends return. We expect UK rates to rise in the second or third quarter this year as inflation accelerates in the third quarter 2016 …

So what happened to Sterling?
Sterling closed up against the Dollar at $1.422 from $1.387 and up against the Euro at €1.293 from €1.270. The Euro moved up against the Dollar to €1.100 from €1.091.

Oil Price Brent Crude closed at $38.55 from $35.68 The average price in March last year was $59.58. The deflationary impact continues but will begin to unwind in the third quarter this year.

Markets, rallied - The Dow closed at 17,008 from 16,711. The FTSE closed at 6,199 from 6,096.

Gilts - yields moved up but not much. UK Ten year gilt yields were at 1.45 from 1.40. US Treasury yields moved to 1.85 from 1.77.

Gold closed at $1,268 ($1,220). A little flutter from the old relic.

John

That's all for this week. Don't miss Our What the Papers Say, morning review! Follow @jkaonline or download The Saturday Economist App!

John

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