Moneycorp Update

STERLING SURVIVES THE WEEK
But was it by luck or judgement? The UK economic data were hardly compelling. Dollar still on the retreat after weak employment figures.

Sterling added another two cents over the week. Most of the gains came in the first two days with the rest of the week spent in consolidation. It opened in London this morning at the top of its range facing strong psychological overhead resistance.

It was a strange sort of a week for sterling. Despite making one small error after another it came through virtually unscathed. Except against the euro, where it lost a couple of dozen ticks, sterling was either steady or higher this morning compared with last Monday’s starting level. Its best result was the two cents it gained against the US dollar.

But there were plenty of unforced errors. After several weeks of bouncy economic data the UK delivered some decidedly unimpressive figures. The manufacturing sector Purchasing Managers’ Index (PMI) measures the robustness of manufacturers’ activity on a scale of 0-100. A reading above 50 means that, on average, their business is growing. Monday’s figure was 57.3. It was not absolutely a bad figure but was softer than the previous month’s 57.5. Also moving in the wrong direction were the construction PMI (54.1 v 58.4 a month earlier) and the services sector PMI (53.1 v 54.4). UK industrial production was another disappointment, falling by -0.5% in June when it should have gone up (according to the analysts) by nearly that much. Manufacturing production, a narrower measure which does not include things like mining and electricity generation, went up by just 0.3% on the month, half what was expected.

The Bank of England did exactly what was expected on Thursday; nothing. Although inflation is still above its 1%-3% target, and factory gate prices are going up at an annual rate of 5%, the Monetary Policy Committee (MPC) decided, predictably, to stick to its 0.5% Bank Rate for an 18th month. The MPC remains convinced that inflation will come back into line without the need for higher interest rates. Although the MPC has no brief to help the economy it is bound to be aware that it is not a credit binge that is pushing prices higher; higher interest rates will not prevent the price of bread or petrol going up.

While sterling had another good week the dollar had another bad one. Where investors were ready to forgive the UK economy its occasional wobble they seemed to watching, hawk-like, for any sign of weakness in the US. They did not have to look too hard. Monday’s manufacturing sector PMI, like Britain’s, went backwards from 56.2 to 55.5. Tuesday’s personal income and personal spending figures were both zeros; neither had changed between May and June. Factory orders fell by -1.2% in June. Pending home sales (contracts exchange but yet to complete) were down by -2.6% in June after a -30% fall in May. The one chink of light was a half-point improvement in the services PMI, which went up to 54.3 in July and was worth a quick half-cent to the dollar.

One chink was not enough though, and the benighted dollar ended the week on a low note after the important monthly Employment Report delivered much softer figures than expected. The loss of 131k jobs was twice as bad as the market had been expecting and there was no easy way to put a positive spin on it. Even harder to gloss over was the downward revision to June’s non-farm payrolls figure; instead of the -125k announced a month ago there were -221k job losses. Comparing net outcome with net expectations, that meant 162k fewer working people than the market had anticipated. To put it another way the outcome was two and a half times worse than predicted. Even the unchanged 9.5% unemployment rate was suspect (as it is in Britain and elsewhere) because it fails to take into account those who have given up on finding a job and dropped out of the reckoning.

In the last couple of weeks sterling has overcome everything that has been put in its way. Or, more accurately, the dollar has fallen through every line of support that might have held it steady. Sterling’s biggest test this week will be Wednesday’s UK employment figures. Over the last three months unemployment has been going down. If investors hear the same story again they should be able to maintain their modestly positive attitude to sterling but they would be far less enthusiastic about any reversal of that trend. Buyers of the dollar should protect themselves with a ’stop’ order in case sterling’s fortunes suffer a reversal at the same time.


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