Is UK Economy Heading Into Contraction?

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Market Drivers October 3, 2017
UK PMI Construction Contracts
RBA holds rates unchnaged
Nikkei 1.05% Dax 0.58%
Oil $51/bbl
Gold $1271/oz.

Europe and Asia:
AUD RBA No Change
GBP UK PMI Construction 48.1 vs. 51.0
EUR EZ PPI 2.5% vs. 2.3%

North America:
No Data

The pound was weaker in early London morning trade after UK PMI Construction data revealed the first contraction in the index in a year, suggesting that UK economy is starting to slow.

UK Construction PMI printed at 48.1 versus 51.1 eyed as it plunged below the 50 boom/bust line for the first time since September of last year. According to Markit, “The latest decline in work on commercial development projects was the second-sharpest since February 2013 (exceeded only by the post-EU referendum dip seen last July). Survey respondents widely commented on a headwind from political and economic uncertainty, alongside extended lead times for budget approvals among clients.”

With 2 out of 3 UK PMI gauges missing their mark this week, the focus will turn to tomorrow’s UK PMI Services report which is the most important of them all. With services comprising nearly 80% of UK economic activity the market will watch for any large deviation from expectation. The forecast for Services PMI is 53.3 and any sharp decline towards 50 is sure to stoke worries that UK economy may be on the verge of tipping into a contraction.

The slowdown in growth comes at a particularly difficult time for BOE which is grappling with higher than target inflation and the uncertainty of Brexit. If UK economy does begin to show serious signs of a slowdown, the BOE will be hard pressed to raise the rate in such an environment putting further downside pressure on cable. Sterling traded back below the 1.3250 level in late morning London dealing and could see a test of 1.3200 as the day progresses.

In North America today the economic calendar is barren and trading may be choppy and rangebound. EURUSD tested and then bounced off the 1.1700 figure in a sharp short covering rally, but the problems with Spain persist and could remain a drag on the pair as the day proceeds, especially if US yields see a boost and push the greenback higher. For now, US data continues to support Fed’s hawkish stance and that should translate into more positive dollar flows as we get closer to Friday’s NFPs.

Boris Schlossberg
Managing Director

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