Services PMI in Shock Slump, Joins Construction and Manufacturing Disappointments

The UK economy is losing steam suggest three key data releases.

The UK economy is losing momentum meaning the solid economic growth that has sustained the pound over the past two three years could be ending.

The Markit/CIPS Services PMI read at 52.7, well below the 55.1 forecast. With the services sector making up about 80% of UK GDP this data is used by analysts to determine just how well the UK economy is performing on a month-by-month basis.

It therefore matters for the pound which has enjoyed a strong relief rally this week. A disappointment here appears to have halted gains.

“The extent of the slowdown will be a shock to policymakers and surely puts to bed any talk of the Bank of England raising interest rates," says Chris Williamson, Chief Economist at Markit.

Williamson thinks the focus will instead increasingly shift to whether policymakers may soon, "need to dig deeper into their toolbox to introduce new measures to shore up the economy with additional stimulus, and what tools might be used."

This is a massive statement - are we entering the domain of interest rate cuts again? There is no saying how low the pound will go if this is indeed the case.

Data this month has been poor and does not bode well for the remainder of 2016 with the pound already feeling heat from the EU referendum risk factor.

On Wednesday Markit and the CIPS announced that their Construction PMI survey gave a reading of 54.2, down from last month's 55 and coming in well below market forecasts for a reading of 55.4. 

24 hours earlier Manufacturing PMI fell to 50.8 in February from 52.9 in January, much weaker than an expected 52.3.

Construction output growth has therefore hit a ten month low, lead by the weakest rise in housing activity since June 2013.

"Though overall growth was maintained, business confidence for the future was at its lowest since December 2014. The next few months will be critical to the understanding of whether this dampened optimism was justified and whether there are still more serious issues to be unearthed," says David Noble, Group Chief Executive at the CIPS.

UK Manufacturing in the Doldrums, Weaker Sterling Offers Glimmer of Support

Softer readings in today’s report did seem likely given the weakening in the CBI’s monthly Industrial Trends survey for February, and feebler outturns in ‘flash’ Eurozone manufacturing PMIs.

"March's report does little to change the economic narrative around recent trends in manufacturing, as anxiety mounts over the global outlook while the relative strength of domestic demand provides the residual support," say Lloyds Bank in a reaction to the data.

The recent weakening in the sterling effective exchange rate might have been expected to provide an invigorating tonic to export orders.

"With the pace of sterling’s depreciation in effective terms accelerating over the course of February, manufacturing export orders firmed a little, with the PMI export balance recovering to 49.3 in February from 48.8 in January," say Lloyds.

The weaker headline reading falls below the long-term average of 51.5 – and as such suggests little, if any, growth in the manufacturing sector.

That picture is now more in line with recent official data, which show no growth in manufacturing output since 2014 Q4.

It must be remember that manufacturing accounts for less than 20% of UK economic activity. It is for that reason that Thursday’s Services PMI will be closely watched.

"Although manufacturing is a minor part of the UK economy if the same trends appear in the services report due later in the week it would suggest that UK economy is slowing more than the market anticipates and the downward pressure on cable should resume," says Boris Schlossberg, Managing Director of FX Strategy at BK Asset Management of the pound / dollar pair.

In the meantime however, traders shrugged off the news and sent sterling flying through the 1.4000 figure squeezing late shorts.

"The volatility in the pair may continue with 1.4000 likely the key battle for the rest of the day, but the current rally won't have legs if data doesn't prove supportive," says Schlossberg.