Manufacturing a recovery

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What are you all worried about, huh? UK manufacturing PMI came out of the traps like a rocket yesterday, bouncing back into positive territory with the strongest number since May 2011. Orders also rose at the fastest pace since March but, as we like to caution, one swallow does not make a summer and the manufacturing sector is by no means secure at the moment.

The release did drive the pound onwards yesterday with gains against the dollar and the euro immediately after the announcement. Markets will be closely watching the services number on Friday for a closer look at the UK economy. Unfortunately we are quite bearish on Friday’s services number and expect the figure to show little to no growth and this could very easily stop the pound’s advance in its tracks.

The one thing I don’t think the newly found manufacturing strength has done is changed the market’s nor the MPC’s views on further quantitative easing for the UK economy. When the latest pump of cash was injected last October the committee emphasised that it was more as a result of European headwinds than problems with the UK that caused the decision. Now, while a Lehman Brothers type event has been averted courtesy of the ECB’s new lending operation, recession and diminished confidence cannot be spirited away and herein lies the problem. The European recession will have less deep but a more protracted effect on the UK economy and that’s why the money will come from the Bank of England.

In fact given the fall-off in the money supply numbers seen last week it could quite possibly be more than the £75bn the markets expect; a lot will depend on Friday’s services numbers and any sniffs they can get of the January retail sales number before it’s released in a fortnight.

In the EU we saw inflation remain low yesterday with CPI coming through at 2.7% on the year. I reckon it’s 50/50 whether we see an interest rate cut from the ECB this month. I would expect that they will wait until March and use the combination of a rate cut and a new injection of bank funding to obtain the most klout.

In an update to the story that never dies, we have heard nothing new as to whether the parties involved are any closer to striking a deal on Greek PSI. The market has given up caring to be honest and even comments from Fitch, who 3 months ago would have caused mass hysteria in bond markets, are now greeted with a cursory glance and a sigh. The prospect of a deal still remains as a euro-positive but the magnitude is diminishing as time goes by.

The one to watch today ahead of tomorrow’s jobs figures is Ben Bernanke’s testimony to Congress during which he is likely to be quizzed heavily on how the Federal Reserve aims to keep its Zero Interest Rate Policy (ZIRP) intact through until 2014. He testifies at 15.00 GMT. The most closely watched event out of Europe today will be the French bond auctions due at 10am.

Indicative Rates Sell Buy
GBPEUR 1.2030 1.2057
GBPUSD 1.5812 1.5837
EURUSD 1.3127 1.3148
GBPJPY 120.34 120.61
GBPAUD 1.4760 1.4786
GBPNZD 1.9000 1.9027
GBPCAD 1.5787 1.5816
NZDUSD 0.8313 0.8334
GBPZAR 12.13 12.18
USDZAR 7.6705 7.7024
GBPPLN 5.0406 5.0672
EURJPY 99.90 100.17

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