Is UK Data Good Enough for a Hike?

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Market Drivers Nov 02, 2015

UK PMI much better but 1.550 caps GBP move
CNY data shows further slowdown
Nikkei -2.10% Europe 0.37%
Oil $46/bbl
Gold $1138/oz

Europe and Asia:
AUD Building Approvals 2.2% vs. 1.8%
CNY Caixin PMI 48.3 vs. 47.7
GBP Manufacturing PMI 55.5 vs. 51.3

North America:
CAD RBC Manufacturing 9:30

USD ISM Manufacturing 10:00

UK PMI Manufacturing printed much better than expected but couldn’t quite push cable through the key 1.5500 level in morning London dealing. The UK PMI came in at 55.1 – much stronger than the 51.3 forecast by the market.

The internals of the report were impressive as new orders rose to 56.9 from 52.9 and exports were at their strongest level in more than a year. Export orders primarily from Middle East, East Asia and US all helped fuel the gains and with commodity prices low companies restocked at the best rate in five years.

Still Manufacturing only makes up about 15% of UK GDP so it is unlikely to have an outsize impact on the economy, but the rise was nevertheless impressive as it demonstrates yet again that UK has one the strongest performing economies in G-10. This week the UK calendar is sure to dominate trade as markets will get a look at Construction and the all important Services PMI figures as well.

It’s looking increasingly likely that the BOE will have to consider a rate hike sooner rather than later as the fundamentals in UK continue to outshine the rest of the G-7 partners. Still the central bank is likely to tread lightly and is certainly unlikely to announce anything new at the meeting this Thursday. Several analysts have pointed out that should BOE turn unambiguously hawkish, it could “light a rocket” underneath the pound and send the currency soaring damaging the prospects for further export growth.

That why the conventional wisdom remains that the BoE is unlikely to act before the Fed, and will let the US central bank take the lead in normalizing monetary policy across the G-10 universe. Still if the chooses stand down in December the pressure on Mr, Carney and company will begin to ratchet as 2016 comes into view.

Elsewhere today the trade was relatively lackluster as commdollars swooned a bit on slightly weaker Chinese PMI data but generally held support with Aussie holding above 7100 while kiwi traded on either side of of 6750.

In North America today the focus will be on ISM Manufacturing with markets looking for just a slightly lower reading of 50 from 50.2 the month prior.As with UK, this is shaping up to be a do or die week for US data with ISM Services and the all important NFPs due Friday. With the Fed having communicated a relatively hawkish message in its last statement the market will be looking for any supporting fundamental data to see if the rate hike is likely come December.

Boris Schlossberg
Managing Director

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