15 July 2014

Factory data divergence driving sterling

Sterling continues to shine as a sharp rise in UK factory output is mirrored by disappointing US manufacturing figures.
​​​​​​​platform_auto_tn_300.pngStrong output, new orders and jobs in June rounded out a robust second quarter for the UK’s manufacturing sector, according to the latest purchasing managers’ index from Markit.

The PMI showed a reading of 57.5 last month, its second highest in 40 months and the 16th successive month that manufacturing output has risen.

Rob Dobson, Senior Economist at Markit, said: “UK manufacturing continued to flourish in June, rounding off one of the best quarters for the sector over the past two decades. With levels of production surging higher, and order books swollen by a further upswing in demand from both domestic and overseas clients, job creation accelerated to its highest for over three years.”

UK manufacturing production is likely to have expanded in the second quarter at a pace above the 1.5 percent registered in the first quarter, he added, which brings output that bit closer to pre-crisis levels.

Earlier, regional US factory data had disappointed as the Chicago purchasing managers’ index slid to 62.6 this month from 65.5 in May. It came in below expectations and fuelled speculations that the June non-farm payrolls figures will come in sluggish.

The effect on the currency markets was to drive sterling to its highest in six years against the US dollar.

GBP/USD surged beyond the 1.71 mark as cable tapped on a level not seen since the financial crisis of 2008. Sterling has gained ten per cent in the last 12 months, the strongest performer among the majors, as investors eye a rate hike from the Bank of England.

Neil Staines, head of trading at the ECU Group, believes the UK manufacturing PMI is a sign of deeper strength.

“UK manufacturing data highlights that momentum is far from waning in the UK and, to paraphrase the Bank of England governor Mark Carney, as the UK moves from recovery to expansion, the drivers of growth are increasingly moving away from consumption to investment and, ultimately, productivity growth,” he says.

Productivity remains a sticking point for Mr. Carney and so far he’s been at a loss to explain why it’s failed to improve.

But more good news came as official figures showed UK labour productivity improved, albeit marginally. Output per hour grew by 0.2 percent in the first quarter in service industries, and by 0.5 percent in production industries. Manufacturing unit wage costs fell by 1.8 percent in the first quarter of 2014 and were 0.3 percent lower than a year earlier; representing the first quarter since Q1 2012 where there has been a year-on-year fall in manufacturing unit wage costs.

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The value of your investments can go down as well as up.
Losses can exceed deposits on margin products. Please ensure you understand the risks.