May’s Confirmation Sends Sterling Lower

Brexit jigsaw puzzle concept marc

Sterling has a bad case of the Monday blues.  Even the moon looks distraught.  Prime Minister May has confirmed earlier suggestions that she will trigger Article 50 to formally begin its divorce proceedings from the EU at the end of Q1 17.    Several officials have already hinted this time frame, though many have been skeptical that Article 50 would be triggered at all, given the complexities of the issues. 

Sterling’s is the weakest of the major currencies today off about 0.8% against the dollar to move within a half cent of the low seen in early July (~$1.2798).    Sterling has been sold to new three-year lows against the euro (~GBP0.8745).

News that the manufacturing PMI rose to a two year high helped stabilize sterling in mid-morning dealings in London.  The manufacturing PMI rose to 55.4 from 53.3.  The median expectation, according to a Bloomberg poll was 52.1.  The monthly average for Q3 stands at 52.4 compared with 50.7 in Q2 and 51.6 in Q1.    The immediate impact of the referendum on the UK economy has been modest, and cushioned to some extent by lower rates and a softer sterling. Nevertheless, it is the medium and long-term consequences that are the causes of investors’ angst.    It is clear that re-establishing strict controls over immigration is preferable to maintaining access to the common market.

The eurozone also reported the September manufacturing PMI.  At 52.6 in was in line with the flash estimate.  However, the details are interesting.  Germany matched its flash reading of 54.3.   France was revised higher to 49.7 from 49.5.  Italy offered a pleasant surprise.  Its manufacturing PMI rose to 51.0 from 49.8.  The median guesstimate was for 50.3.  Spain also beat expectations.  The 52.3 reading was better than the 51.5 forecast after 51.0 in August.   There is no major takeaway.  The eurozone economy is broadly steady with growth near trend.

The Japanese Tankan survey was a little disappointing as sentiment among large producers was largely flat.  Capex plans edged higher from 6.2% in June to 6.3% now, but this trailed expectations for a 6.5% rise.   Last week, Japan reported softer inflation figures and a larger than expected fall in overall household spending.  Local press reports suggest that BOJ is considering reducing its inflation forecast to 1.0%-1.4% from 1.7%.  The Tankan results are consistent with an economy that is struggling to sustain positive momentum.   The dollar remains stuck in last Thursday’s range (~JPY100.65-JPY101.85).

China reported its official PMI over the weekend before the start of this week’s national holidays.  The manufacturing PMI remained steady at 50.4, near a two-year high.  The non-manufacturing PMI rose to 53.7 from 53.5.  The Q3 GDP estimate is due out October 11.  The world’s second largest economy expanded by 6.7% in Q1 and Q2 according to official estimates.  The yuan formally joined the SDR on October 1.  There is no immediate implication trading for the yuan’s exchange rate.

Lastly, we note that the Hungarian referendum on the EU’s immigration policies did not get sufficient turnout to be regarded as valid.  This is a blow to Prime Minister Orban, but there seems to be little market impact.

The US reports manufacturing PMI and ISM and construction spending.  However, it is September auto sales that may be the most important.  A recovery back above the 17 mln annualized unit pace (16.91 mln in August) would help reaffirm that American consumers are not retreating, after the disappointing personal consumption reported before the weekend.  Consumption rose 4.3% in Q2.  This pace cannot be sustained.  A pullback back toward 3% this quarter appears to be offset by less of a drag from inventories and, perhaps, a positive contribution from net exports