Last week we saw sterling test the upper end of its recent trading range as positive economic data continued to reinforce the declining probability of rate cut from the centre bank in the short and medium term. It was suggested at the January Bank of England meeting that we could see an economic bounce following the result of the general election. The UK’s economic readings last week saw manufacturing rise by the fastest pace since last April, retail sales increased, and inflation pushed higher, however the pace of wage growth slowed but is still surpassing inflation comfortably.
Sterling was on the back foot following the release of the UK’s mandate for its negotiating terms with the EU which stipulated that they are prepared to walk away and exit with no deal from negotiations if there is no "broad outline" of an agreement. This was countered by France's European Affairs Minister, who stated that the EU will not be pressurised by "artificial deadlines" in its post-Brexit trade talks with the UK. As a result, Sterling weakened across the board. Negotiations start this week. An interest rate cut has now been put back on the table with the probability growing from 15% to 63% in the last week as a result of the trade talk comments and the concerns to growth from the coronavirus. The market will focus closely on the Budget which is released on 11.03.20 to see what measures the government is willing to take to maintain growth.
On Friday we saw volatility increase for several reasons rather than a single defined matter. It was month end; coronavirus fears and growth concerns grew and from a Sterling perspective repositioning ahead of the EU trade talks. Sterling has now moved back to the levels seen pre-General Election in October/November.
This past weekend saw the Chinese PMI data released, which provided the market with the first gauge of how coronavirus has impacted the economy with the manufacturing purchasing managers’ index plunging to its lowest ever level of 35.7 in February from 50 the previous month as workers were quarantined. A reading below 50 signals contraction in the sector. It will be interesting to see how other global territories are affected. As the outbreak started in China it might not be until next month until we see the full global affects. The week ahead will be focusing on the ever-developing coronavirus story and what impact this will have on global growth, interest rates as well as credit ratings. Economic data will be closely scrutinized to help anticipate the path of interest rates.
The first round of trade talks between the UK and EU are going to be monitored for signs of cooperation, tension and the future road map for trade talks moving forward.
- UK PMI Manufacturing (2nd reading)
- US ISM Manufacturing
Following on from this morning’s Chinese manufacturing numbers, the market will be keen to see what near term damage has been done following the outbreak of coronavirus. The UK’s reading will be an updated figure but there will be more interest in the US ISM manufacturing data which posts its first of two readings.
- Eurozone Inflation
- US Super Thursday
Eurozone inflation is due to hit the wires but more of a focus will be news from the US and political developments as “Super Tuesday” takes place. In the US, this is the day in the presidential primary process when the greatest number of states hold their contests. In this case, 14 states including the two largest of California and Texas. By the end of the day the market will have a greater understanding who the front runners are.
- Chinese PMI Service
- UK PMI Services
- US ADP Employment
- US ISM Non-Manufacturing
Economic data will be closely monitored today to provide a clearer picture of the potential disruption we could see in the future as a result of the coronavirus outbreak. Today we have service sector data from China, the UK and US. In addition, as it is the first week of the month, we have the US labour data out. The headline US labour data is due on Friday but today the ADP employment report is due which can provide some insights as how the figures could look on Friday. The market doesn’t always react on the back of this release due to the historic disparity between the two readings.
- OPEC Meeting
- BoE Gov Carney speaks
OPEC ministers are due to meet in Vienna at a time when crude prices have plummeted as the coronavirus outbreak. Brent crude has dropped since the start of the year by close to 30% as the growth picture has created an uncertain outlook for global oil demand. In addition, BoE Carney is due to speak at the University of London.
- US Non-Farm Payrolls
- US average earnings
- US Unemployment rate
The monthly US labour data always draws attention to whatever is happening; we don’t expect this month to be any different. The market will be focusing on the headline figure but also the if salary growth is continuing to go in the right direction.