U.K. Manufacturing PMI Leaps as Eurozone Index Firms

A five-month-high reading in Britain reflects data largely compiled before the Brexit vote.
By James Skinner ,

The U.K. manufacturing purchasing managers' index released this morning highlighted a sharp rebound in forward-looking sentiment in the manufacturing industry. The index rose well above forecasts to reach a five-month high, although the collection period means that much of the post-Brexit reaction is yet to be reflected in Markit's survey.

Markit's European PMI survey results were also delivered en masse this morning, with improved manufacturing indices emerging from Spain, Italy, France and Germany in quick succession

The U.K. PMI's came in at 52.1, a full two points above last month's index and compared with analysts' expectations for a reading of 50.2. The index began to trend lower in December, from a fifteen-month high of 55.5, and slipped into contraction territory of 49.2 in April. 

It is possible that today's stronger number reflects increasing confidence within the U.K. ahead of the referendum since the majority of opinion polls had shown a consistent lead for the "remain" campaign ahead of the vote.

In the eurozone, the manufacturing PMI edged up to 52.8, while analysts had expected it to stagnate at 52.6. Spain and Italy stole the show on the continental stage, with both sets of surveys highlighting a meaningful improvement in confidence. The Spanish manufacturing PMI rose from 51.8 in May, to 52.2 in June, while the Italian index jumped from 52.7 in May to 53.5 in June.

The French PMI rose though remained in contraction territory and conditions in Germany held steady during June, with the French index increasing from 47.9 to 48.3 and the German reading coming in at 54.5, up from 54.4 in May. 

As with the U.K. survey, much of the data collected and used to compile the indices was gathered before the U.K.'s decision to leave the EU. Given the close trade links between the U.K. and many of the economies on the continent, it is possible that European confidence could deteriorate over the coming weeks.

Currency markets clearly didn't think much of the survey reading as it did little to lift the value of pound, which ceded ground to all of the majors during early trading in London.

The pound fell by around 0.3% against the Swiss franc, Japanese yen, dollar and the euro. It fell by around 0.7% relative to commodity currencies such as the Australian dollar and the Canadian dollar.

U.K. 10-year government bond yields were recently down 5 basis points at 0.81%,  indicating that the bond market hasn't been fooled by the stronger data either.

The euro rose against the pound, U.S, dollar and Scandinavian currencies, but fell against majors, the Japanese yen and Swiss franc. European stocks were mixed, with the German Dax and Spanish Ibex hovering slightly above the session's break-even line and France's Cax 40 falling by 0.1%.

The FTSE 100 large cap index of stocks rose by 0.4% during early trading, although the total exposure of London's large caps, to the domestic economy, is relatively limited. The mid-cap FTSE 250 index of stocks fell by 0.9% in early trading, reflective a pull-back in domestic-focused stocks, which comes closely on the heels of several days worth of gains.

Ruth Miller, a U.K. economist at Capital Economics in London, said that the U.K. manufacturing industry risked slipping back into recession during the second quarter, in a note emailed to clients.

The PMI data reflects sentiment among manufacturers and not actual output, while it is the output data that would dictate whether or not the industry falls into recession.

 Miller highlighted that the fall observed in the manufacturing PMI during April and May would be consistent with a 0.5% fall in the value of output during the first half of the year.

Stephen Brown, European Economist at Capital Economics, noted that the morning's continental releases were compiled before the Brexit vote was announced and now that a vote to leave has been declared, continental employers may decide to defer hiring plans. 

He goes on to label unemployment as a key metric to watch in Europe although, despite a small fall to 10.1% in the eurozone unemployment rate during June, Brown said that jobs growth may already have peaked in Europe and that it is unlikely to grow strongly enough for it to prompt any meaningful wage growth in the near future.

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