UK Manufacturing Misses a Beat in September, Pound Sterling Driven by External Events

Monday’s data comes at the beginning of a week that is heavy in both political and economic news, with the Conservative Party conference and more PMI numbers set to dominate the agenda. 

The Pound slipped during early trading Monday after the UK manufacturing industry was seen cooling at a modestly faster pace than was expected in September.

IHS Markit and the CIPS’ manufacturing PMI came in at 55.9, against expectations for a reading of 56.3, and down from the 56.7 level recorded in August. Input cost inflation was also seen returning to a six month high during the month.

Despite the miss in the headline number, the index level remains consistent with a solid rate of expansion, while the survey compiler reported that output, new orders and employment continued to grow at a healthy pace during the four weeks to the end of September.

As such this is no game-changer for Sterling we believe and will do little to alter the view that the Bank of England are going to raise interest rates in November.

“On balance, the continued solid progress of manufacturing and export growth is unlikely to offset concerns about a wider economic slowdown,” says Rob Dobson, director at IHS Markit.

Above: Manufacturing activity remains at historically elevated levels.

Other economists are less worried about the deceleration seen in September, noting that some pullback was "always likely" in the wake of two back to back months of solid gains, while the recent rise in the Pound could mean input cost inflation begins to fall from here. 

"The manufacturing PMI has pointed to much stronger manufacturing output growth than has been evident in the hard data for some time now," says Ruth Gregory, UK economist at Capital Economics. "But July’s official data showed that the sector made a good start to Q3. Indeed, it would take two consecutive monthly falls of almost 1% in August and September for Q3’s outturn to match Q2’s 0.3% fall."

The Pound extended losses against the US Dollar after the release, with a 0.40% loss fast becoming a 0.60%, to trade at 1.3306.

Sterling gave back earlier gains on the Euro, with a 0.14% gain becoming a 0.06% loss, leaving the Pound-to-Euro exchange rate trading at 1.1325.

The British currency also underwent a reversal against the Japanese Yen and Swiss Franc while remaining in the red when stood next to the Canadian and Australian Dollars. 

However it is worth noting that Sterling was falling into the release of the data which leaves us coy about suggesting the Pound's performance has been linked to the release. Rather it appears external drivers are at play.

Watch the Euro's ongoing reaction and political fallout to the Catalonia referendum on independence and the US Dollar's broad-based recovery move.

Monday’s data comes at the beginning of a politics heavy week for Sterling, after the Conservative Party conference got under way at the weekend.

The annual gathering of members from the UK’s ruling party runs until Wednesday after kicking off on Sunday with a series of speeches and statements from various ministers.

“It will be awash with stories of potential challenges to Theresa May’s leadership and with fierce arguments about the shape that Brexit should take,” says Guy Stear, an economist at Societe Generale.

But the coming days are also littered with a series of key data releases, with PMI’s for the construction and services industries due over Tuesday and Wednesday.

This is while a Thursday speech from European Central Bank chief Mario Draghi and Friday’s monthly US nonfarm payrolls number will also influence Sterling pairs from the opposite direction.

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