Manufacturing fashions a bullish beginning

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The run of good data in 2012 continued yesterday with PMI figures from China, the UK and US all surprising to the high side leading to a broad rally in risk. Equities pulled higher while the dollar and yen were sold to pay for forays into riskier assets. There is still a fair amount of liquidity to come back onto the table with traders still returning to their desks and we expect the positioning bump of investors making their plays for 2012 to last for another few days at least.

Manufacturing data has been poor of late on a global scale, not just in developed nations, so a bounce back into positive territory, or closer to it, was welcomed by the markets. The UK figure bounced back to 49.6 from a previous reading of 47.3 but this still means that we are in contractionary territory in manufacturing. This was the 5th reading below 50.0 in the past 6 months and shows that a shallow recession in manufacturing in the UK through Q4 is now more probability than possibility. The key services sector number is released tomorrow and will have a larger impact on sterling and analysts’ expectations for Q4 GDP given its sectoral size. Today we receive news of the construction sector which is likely to stay above 50.0.

US data was also strong yesterday with the ISM number showing growth to 53.9 from a previous figure of 52.7. This is in keeping with our expectation that the US is less likely to fall into a double-dip recession in 2012 than the UK or Europe. All measures within that ISM number were higher, with new orders, production and employment all enjoying a boost.

Currencies remained in a tight range over the course of the session yesterday with GBPEUR trading between 1.1940 and 1.2006, EURUSD was around a per cent higher on the day with GBPUSD also joining in on the dollar weakness to add around 80bps. The euro weakened into the close of play as the ratings agency Fitch made its first jump into Europe in 2012 by cutting its economic forecast for Spain. The company expects no growth in Spain in 2012 and a solitary 1% in 2013.

Part of those downgrades will be as a result of a faltering services sector and we will see how Europe’s got on in December at 09.00 with constituent countries publishing theirs beforehand. We doubt that we will see anything that will dissuade us, or the market, that a recession in the EU is not right round the corner. We also have US factory orders at 14.00 which may give risk another bump as New York opens for business.

We also have bond auctions from the UK and Germany and a 3 month bill sale from Portugal today.

Indicative Rates Sell Buy
GBPEUR 1.1971 1.1998
GBPUSD 1.5644 1.5669
EURUSD 1.3050 1.3073
GBPJPY 119.83 120.10
GBPAUD 1.5088 1.5114
GBPNZD 1.9812 1.9842
GBPCAD 1.5836 1.5865
NZDUSD 0.7886 0.7905
GBPZAR 12.58 12.63
USDZAR 8.0447 8.0772
GBPPLN 5.3354 5.3649
EURJPY 100.00 100.26

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Manufacturing fashions a bullish beginning

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