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Article / 22 July 2016 at 5:00 GMT

3 Numbers: PMIs to provide first glimpse of Brexit effect

Blogger / MoreLiver's Daily
  • 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. 

Unfortunately, with the US elections and later the German and French elections getting closer, finding an acceptable and effective compromise on such a delicate matter will be very hard indeed, so we should be expecting another empty “we remain vigilant” statement after the meeting.

 While sharp falls are expected for today's UK PMI data, Europe's figures are
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.

PMI table
 Source: Saxo Bank

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
UK PMI long
Source: Saxo Bank

The close-up view shows the consensus forecast as well
UK PMI shorter
Source: Saxo Bank

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
Source: Saxo Bank

US July Flash Manufacturing purchasing manager index (1345 GMT).  The Markit’s US manufacturing PMI in July is expected to have increased to 51.9 from 51.3 in June. The ISM manufacturing index has made a convincing turn higher, but the Markit index has been falling since its mid-2014 highs and has barely recovered from its lows in the first quarter.

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. 

– 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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