Sterling slides as PMI surveys signal a recession

The British Pound Sterling falls to a three-week low as the services sector enters contraction and manufacturing output falls.

British Pound

Reuters: Sterling fell on Tuesday, underperforming all other major currencies, after data showed economic activity weakened further in January, underlining the risk that Britain could slip into a recession in 2023. Private-sector economic activity fell at its fastest rate in two years in January, the S&P Global/CIPS flash composite Purchasing Managers’ Index (PMI) survey showed, as businesses blamed higher Bank of England interest rates, strikes and weak consumer demand. “At best, the UK economy will stagnate this year. Realistically we’re likely to see a recession at some point,” said Simon Harvey, head of FX analysis at Monex Europe. “As we start to see the economic reality coming through, this will likely lead to sterling underperforming over the coming months,” Harvey added.

The pound was the worst performer in the G10 and was last down 0.67% against the dollar at $1.2293. On Monday it hit its highest level in seven months at $1.24475. The euro was up 0.67% against sterling to a one-week high of 88.40 pence after euro area business activity data signalled modest growth in January, adding to signs the downturn in the euro zone may not be as deep as feared. The Bank of England is still expected to raise its key interest rate for a tenth consecutive time on Feb. 2. Market pricing is indicating just under a 70% chance of a 50 basis point rate increase. A 25 basis point hike is fully priced in, according to data from Refinitiv. Separate data showed Britain’s government borrowed more last month than in any December since monthly records began 30 years ago, reflecting the huge cost of energy support and soaring debt interest costs.

“The government reported horrendous borrowing data,” said Scotiabank chief FX strategist Shaun Osborne. “Fiscal policy — and foreign investor participation in the UK Gilts market — remains a potential weakness in the GBP outlook,” Osborne added. On Monday, British Prime Minister Rishi Sunak said he had asked his independent ethics adviser to look into a tax case involving the chairman of his governing Conservative Party because there were “questions that need answering”. “The backdrop is one of political turmoil, labour shortages, industrial action, higher inflation pressures and weak consumer outlook,” Monex’s Harvey said. “It’s not a pretty investment picture and the political noises are definitely not helping,” Harvey added.

US Dollar

Reuters: The dollar edged lower against the euro after data showed euro zone business activity made a surprise return to modest growth in January, while U.S. business activity shrank for a seventh straight month. While U.S. business activity shrank in January, the downturn moderated across both the manufacturing and services sectors for the first time since September and business confidence strengthened as the new year began.”It just looks like another piece of data showing what the Fed has been preaching: the economy is resilient enough to take on more hikes,” said Juan Perez, director of trading at Monex USA in Washington. Fed fund futures see only two more quarter-point rate hikes by the Fed to a peak of around 5% by June, before it starts cutting rates later in the year. The Federal Reserve itself has insisted it still has 75 bps of increases in the pipeline. “It is clear looking at PMIs that the Fed has prevented expansion, but the economy has not taken a hit like many thought,” Perez said.

Still, the dollar, which briefly gained on the euro after the U.S. data, slipped to trade lower on the day, not far from the 9-month lows hit in the previous session. The euro was 0.09 % higher at $ 1.0881 , just shy of the 9-month high of $ 1.0927 touched on Monday. The common currency was backed by survey data supporting the view that the euro zone economy was weathering a winter of intense price pressures reasonably well, analysts said. Surveys showed euro zone business activity made a surprise return to modest growth in January, and service-sector activity in Germany expanded for the first time since June, although price pressures remained sticky. A stronger economy could potentially allow the European Central Bank to raise interest rates more aggressively as it tackles inflation. “But if earnings and other items put a negative light on the globe, the euro is more quickly to suffer the consequences than the buck,” Monex USA’s Perez said.

The dollar rose to a near 1-week high against the yen, before giving up those gains to trade down 0.44% to 130.095 yen. Last week, the dollar fell to as low as 127.215 yen, its weakest since May, ahead of a Bank of Japan policy review at which investors bet the central bank might signal the end of its stimulus program. The BOJ, however, left policy unchanged, giving the dollar some respite. Sterling was one of the worst-performing major currencies against the dollar, falling 0.34 % on the day to $ 1.2334 , after a survey showed British private-sector economic activity fell at its fastest rate in two years in January. “Looking forward, we expect sterling to start underperforming neighboring European currencies as economic data highlights widening growth differentials,” said Simon Harvey, head of FX Analysis at Monex Europe. Meanwhile, bitcoin was little changed on the day at $22,973, steadying after having jumped by about a third in value since early January, as investors shook off pessimism after the high-profile collapse of crypto exchange FTX.

South African Rand

Reuters: South Africa’s rand weakened against the dollar on Tuesday as investors awaited the central bank’s decision on monetary policy later this week. At 15:20 GMT, the rand traded at 17.2525 against the dollar, 0.28% weaker than its previous close. The dollar was 0.27% firmer against a basket of major currencies. The South African Reserve Bank (SARB) will announce its rate decision on Thursday, with 11 of the 20 economists polled by Reuters predicting a hike of 50 basis point (bps) to 7.50. Eight projected an increase of 25 bps and one no change. Most economists polled by Reuters see no further rate hikes after this week.

“The rand could gain somewhat on a 75bp increase in the repo rate instead of 50bp this week, although the ongoing loadshedding remains a substantial, overshadowing negative effect on the domestic currency,” Investec analyst Annabel Bishop said. Loadshedding, a term for scheduled power cuts, has become a daily occurrence in South Africa, crippling business activity and weakening investor confidence. The government’s benchmark 2030 bond was up on Tuesday, with the yield down 3.5 basis points to 9.745%.

On the Johannesburg Stock Exchange, the Top-40 index and the broader all-share index closed down about 0.1%.

Global Markets

Reuters: Asian equities extended their winning run to scale their highest levels in seven months on Wednesday, with South Korean stocks leading the way, and the Australian dollar hit multi-month highs as surging inflation made higher interest rates more likely. MSCI’s broadest index of Asia-Pacific shares outside Japan advanced 0.4% to a seven-month high, with South Korean shares gaining 1.3% as trading resumed after the Lunar New Year holidays. The MSCI gauge has rallied 9% so far this year after slumping nearly 20% in 2022. Trading volume was depressed as Chinese and Taiwan markets were closed for holidays. Nikkei gained 0.1% and Singapore jumped 1.7%. Globally, stocks have posted strong gains this year after a torrid 2022, based on expectations that inflation is close to peaking and the rise in U.S. interest rates will taper off. The dismantling of COVID controls in China and the re-opening of its borders have further boosted investor sentiment.

“It appears that markets are increasingly seduced by “Goldilocks” outcomes of tightening risks tamed yet recession risks tempered,” Mizuho analysts said in a note. U.S. stock indexes closed mixed on Tuesday after companies warned of a tough year ahead along with some profit beats, while data showed U.S. business activity contracted for a troubling seventh straight month in January. Microsoft Corp rose in after-hours trade as its better-than-expected results showed some strength in the face of a weak economy. MSCI’s all-country world index eked out a fresh five-month closing high on Tuesday. Stronger-than-expected economic data in Europe has eased market worries of a sharp recession in the euro zone as energy prices decline, though interest rates are still seen creeping up.

The euro held near a nine-month peak against the dollar, as trades were encouraged by a rosier growth outlook for the euro zone against signs of a recession looming in the United States. Australian equity markets slipped 0.2% on Wednesday after a shock surge in inflation to a 33-year high last quarter added to the case for the Reserve Bank of Australia to keep raising interest rates. Investors sharply narrowed the odds on the Reserve Bank of Australia (RBA) lifting its cash rate by a quarter point to 3.35% when it meets on Feb. 7. Analysts had thought there was some chance the RBA might even pause its tightening campaign, but the pace of inflation put paid to that. The Kiwi however slid nearly 0.4% to $0.648 after New Zealand’s annual inflation of 7.2% in the fourth quarter came in below its central bank’s forecast of 7.5%.

U.S. crude oil prices were stable at $80 a barrel after falling in the previous session as preliminary data indicated a bigger than expected build in U.S. oil inventories. Gold prices held steady at $1,938 per ounce, hovering near a nine-month peak touched in the previous session.

Originally published by Mercury

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