UK manufactures a recession side-step

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The UK manufacturing industry managed to defy expectations yesterday by punching in a PMI reading that was the highest for 11 months. The figure hit 52.1 vs expectations of 50.7 and put a lot of its industrialised neighbours in the shade. German, French, Italian and Spanish PMIs were all below 50.0, denoting contraction, with only the Irish and Austrian manufacturing industries expanding.

This hints at two things; firstly, the OECD’s prediction that the UK is currently in recession looks increasingly wide of the mark. The second is that the UK may be just about ready to pull away from the European problem and start being mentioned as one of the western world’s bright spots. Risks obviously still remain and while the UK services sector is not expected to tumble on Thursday, it poses a bigger risk to the recovery than the manufacturing number.

The US figure was also strong with the survey showing an expansion figure of 53.8. This bullishness managed to push the S&P 500 to a near 4 year high and USD remained offered through the afternoon session.

As if to hammer home the situation in the EU, we saw that unemployment has risen to a 15yr high of 10.8%. Anyone looking for evidence that the Eurozone doesn’t work in its current form need only know that a currency union 12 years old, has the worst unemployment numbers in 15yrs. The greatest unemployment was of course in the periphery with Spain now an eye-watering 23.6%.

One of the biggest movers in currency markets over the past few weeks has been Aussie dollar. It lost ground overnight once again following further dovish chat from the central bank at its monthly meeting. Although the RBA held rates yesterday at 4.25%, they added in a line to the accompanying statement that they “thought it prudent to see forthcoming key data on prices to reassess its outlook for inflation, before considering a further step to ease monetary policy”. Of course, a lot will have to do with the impact of Chinese data as well and we think a rate cut at the May meeting may be a good bet.

With little to speak of in European markets today it will be the Federal Reserve minutes published at 19.00 BST tonight that will be the main market focus. Given the pickup in dovish comments from members of the FOMC we would suspect that these minutes would further expand on why the committee does not trust the revival in the jobs market.

You can join us for a run-down of sterling’s prospects over the next month with Jeremy Cook as he deciphers the impact of Thursday’s morning’s Bank of England announcement.

The 1st quarter has shown the broad splits in the growth prospects for industrialised nations through the end of 2011 and into 2012. How different will Q2 be and what are the major risks to watch out for?

Indicative Rates Sell Buy
GBPEUR 1.2000 1.2028
GBPUSD 1.6022 1.6047
EURUSD 1.3335 1.3359
GBPJPY 131.45 131.73
GBPAUD 1.5404 1.5431
GBPNZD 1.9445 1.9479
GBPCAD 1.5852 1.5880
NZDUSD 0.8227 0.8248
GBPZAR 12.21 12.26
USDZAR 7.6157 7.6490
GBPPLN 4.9515 4.9783
EURJPY 109.39 109.64

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