Manufacturing not so much of a laggard
News from the global manufacturing sector yesterday was not as bad as most had expected with strong gains seen in Germany, and particularly in the UK.
New orders for UK manufacturing surged in October, driving the manufacturing sector to its fastest growth level in 16 months. Orders from the Middle East, Asia and the US were the main drivers and this is encouraging following a weakening of foreign demand through the summer. The improved order picture is also bullish for the sector’s employment dynamics, with October being the 30th consecutive month of job gains.
UK strength needs SMEs to continue
This an encouraging release but will do little to change policymakers’ minds on the UK economy in the short term; a run of three or four months of similar gains and expansion would give policy discussions a more hawkish tint.
The balance of this remains – as it has done for most of the post-Global Financial Crisis landscape – with the nation’s SMEs. If they can join this expansion with improved output, employment, wages and confidence then we have a much better chance that these gains will not be lost before they had a chance to flourish. For now, the gains seem to be exclusive to larger companies.
Sterling moved higher following the announcement, driving to 10 week highs against the euro and remaining strong against a resurgent USD.
Aussies hold policy overnight
The only real news from the overnight session has been the hold in policy by the Reserve Bank of Australia. The decision was widely expected and RBA Governor Stevens told the markets that “the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand.” AUD/USD is around a per cent higher this morning with GBP/AUD lower by around 0.85%
In the short term, we have to think that policy rates in Australia will remain at 2% into the New Year unless we see a dramatic dip in employment or inflation measures in the coming weeks and we are not forecasting that to happen.
Korean canary
In fact, inflation pressures are starting to build in some parts of the world. The South Korean economy is frequently used as a “canary in the coalmine” for the global economy and inflation numbers released overnight seem to suggest that deflationary trends are coming to an end. Local energy and electricity prices are moving higher and will continue to benefit from the base effect changes from last year’s oil price decline no longer being part of the yearly calculations.
Today’s data calendar is the quietest of the week with the UK construction PMI due at 09.30 and US factory orders at 15.00.