Article / 01 July 2016 at 5:00 GMT

3 Numbers: Manufacturing PMIs to provide insights into Brexit effect

Blogger / MoreLiver's Daily
  • Full effect of Brexit unlikely in the Eurozone's June final manufacturing survey 
  • European Central Bank officials to speak, but no new messages expected
  • US ISM manufacturing survey expected to remain solid

By Juhani Huopainen

Investors are still paralysed by the aftermath of Britain’s vote to leave the European Union. News feeds and commentaries are dominated by the event and other economic data or speeches have been paid little attention. Slowly but surely this will change, and the obvious first candidates will be the eventual policy path of the Federal Reserve and the European Central Bank. 

 Stormy weather ahead? It's still too early to know the full effects of Brexit but today's June PMIs for Europe and the US may provide some insights. Photo: iStock

The ECB will have to soon present changes to its bond purchase programme, as the bank is running out of German bonds to buy. In the UK, it will be interesting to see how badly the business sentiment has been hurt by Brexit – the first glimpse will probably be the July business sentiment surveys, but it will take a month from now before we get that. Today’s manufacturing survey for June is expected to show a small increase to 50.3 – but still close to the lowest levels seen since early 2013.

Euro area June Manufacturing Purchasing Manager Index (0830 GMT). The June flash index had a surprisingly perky reading of 52.6, and no change is expected in the final reading. That is the highest since January 2016, which means the real economy was not fazed by the looming Brexit threat. Maybe that was because Remain was expected to win, or maybe Leave is not expected to lead to long-lasting damage to the European economy. 

Whichever way it is, the full effect will probably not show yet in the June data.  

European Central Bank’s officials central bank speeches. The ECB’s Peter Praet (1000 GMT) and Bank of England’s Andrew Haldane (1500 GMT) will be speaking at the FT Festival of Finance.

ECB’s Benoit Coeure will speak at the 60th anniversary of Club de Paris (0715 GMT). The Paris Club is an informal group of officials from creditor countries. Permanent members include countries like Spain, Italy and Ireland, which is an interesting twist as many of the so-called creditor countries are either deeply in debt or have been bailed out themselves. 

Maybe Coeure will address this irony and discuss the future of sovereign debt restructuring –which will include restructuring the debt of some of the club members. I doubt it, because even mentioning restructuring would hurt the trust in the peripheral euro area and be counterproductive to the ECB's policy aims.

US June ISM Manufacturing Survey (1400 GMT). The Institute for Supply Management’s manufacturing survey in May had the composite index at 51.3, clearly higher from last winter’s recessionary levels, and it is expected to have risen to 51.4 in June. 

That would be the fourth monthly expansionary (above 50) reading in a row – a clear indication that the first quarter’s weakness is behind us. The New Orders Index stood at 55.7 in May, suggesting that the outlook for production activity will remain high for some time.

Source: Saxo Bank

Real activity has remained subdued, as production is still hurt by the lower investment due to cheap oil and a strong USD.

The Federal Reserve's ability to hike rates during the rest of the year is seriously questioned. This has not hurt the USD much, as the currency’s safe haven role has kept the demand high. As Brexit becomes generally better understood and accepted, the USD could see some initial weakness but that could be followed by renewed expectations of rate hikes.

The report will be published here.

– Edited by Gayle Bryant

Juhani Huopainen is a blogger and a macro analyst at MoreLiver’s Daily. Follow Juhani or post your comment below to engage with Saxo Bank's social trading platform.


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