3 Numbers: PMIs to provide first glimpse of Brexit effect
- Eurozone flash purchasing manager index to decrease slightly
- UK’s PMI expected to plunge – a chance for a positive surprise?
- US manufacturing PMI remains muddled
By Juhani Huopainen
After investors have had their opportunity to estimate the effects of the UK’s referendum on leaving the European Union, we finally get some post-referendum economic data today. The flash purchasing managers' indices for July are published today. The Markit's press releases will be published here.
During the weekend, the G-20 finance ministers and central bank governors meet in Chengdu. The big hope is that some sort of coordinated fiscal response to the deteriorating outlook is in the pipeline, and this is probably the first post-Brexit meeting where such things will be seriously discussed.
expected to only show a modest hit. Photo: iStock
Euro area July purchasing manager index (0800 GMT). The euro area’s composite July PMI index is expected to fall to 52 from 52.6 in June – a notable, but not an unheard drop. The consensus forecast sees the German manufacturing sector being hit the hardest, but in June that particular number was the biggest positive surprise. The French (0700 GMT) and German (0730 GMT) data will be released earlier, so the market reaction could happen then.
Even if the euro area's data has some surprises, investors could want to see the UK's numbers first. The logic is that if the euro area data is different than expected, the validity of the outlook needs to be confirmed by the UK's numbers. Let's say the outlook for the euro area is gloomy, but the UK data surprises to the upside – it should then be assumed that the euro area's managers have been too fearful of the UK's slowdown.
UK July purchasing manager index (0830 GMT). The flash manufacturing index is expected to decrease to 47.8 from 52.1 in June, while the flash service index is seen to fall to 48.9 from 52.3. This means both sectors would have an index reading below 50 and suggesting contraction, and the indices would be around levels last seen in 2012 during the height of the euro crisis.
The PMI and GBPUSD tend to move together
The close-up view shows the consensus forecast as well
The International Monetary Fund this week cut its growth forecast especially for the UK, but also for the world as a whole. Despite its decreased outlook, it did not see the UK entering a recession. In fact, the IMF believes the UK’s growth rate will exceed Germany’s and France’s growth.
The Bank of England has also released its first post-Brexit estimates, and it was not as gloomy as many had feared – or hoped. On page three of the Agent’s summary of business conditions the central bank notes that while a slowdown seems probable, no larger shocks will be had.
The purchasing managers' index and GBPUSD tend to be positively correlated. A reading not as bad as had been feared could push GBPUSD higher from its recent trading range and then toward the post-referendum highs.
GBPUSD has been range-trading and the post-referendum highs close to 1.35 is an obvious resistance level, while the recent lows just below 1.31 should act as a support. If the UK data manages to beat expectations, or if the negative index level is largely seen as a temporary reaction in case of a lousy, badly negotiated Brexit, a test of the 1.35 could be coming next.
The GBPUSD chart shows the price coiling tighter and the next probable targets
Industrial production in June posted a positive surprise last Friday, so it seems the manufacturing sector is finally turning around. Even if the Markit’s index has been lagging the ISM index, it should begin to catch up now.
The improving US data is bringing back the possibility that the Federal Reserve will go ahead with at least one rate hike before the year is over – something that investors are not expecting at this point. A shift in the rate-hike expectations should be USD-supportive. I discussed the US industrial production in last Friday’s edition of 3 Numbers.