Market Brief: Eurozone manufacturing sector hits record

03 Jan 2018

Shaun Garrett

Dealing Team

Yesterday saw the release of UK PMI Manufacturing data: the December index fell by more than expected to 56.3 from 58.2 in November.

Today's data releases
  Key levels
08:55 EZ Unemployment (Germany)   Support Resistance
09:30 UK Construction PMI GBP/USD 1.3302 1.3657
15:00 ISM Manufacturing GBP/EUR 1.1125 1.1438
19:00 FOMC Meeting Minutes      

Market overview

Yesterday saw the release of UK Manufacturing PMI data: the December index fell by more than expected to 56.3 from 58.2 in November (consensus 57.9, Investec 58.0). However, it is worth noting that November marked a 51-month high and that the latest reading remains in very firm territory, one which is consistent with a buoyant global economy. The input cost reading moderated to a four-month low. Sterling initially eased slightly but then continued its gains throughout the afternoon.
In the Eurozone, the final manufacturing PMI was confirmed at a record high yesterday. Strong readings for output, new orders and employment pushed the final IHS Market Eurozone manufacturing PMI to 60.6 in December, the highest level since the survey began in mid-1997. It compares with 60.1 in November. For Germany in particular, the manufacturing PMI index hit a record high at the end of 2017. This reading continued a 37-month sequence of improving business conditions. The goods-producing economy carries strong momentum into 2018, with new order growth at its highest for almost eight years and business confidence rebounding back up to an elevated level.
The euro did ease yesterday afternoon, taking a breather from a rally prompted by optimism over the Eurozone’s economy and expectations the European Central Bank will wind down its bond-buying programme in 2018. EURUSD moved from a four-month high against the dollar (1.2081). The ECB board member in charge of the central bank’s market operations, Benoit Coeure, said at the weekend that he saw a “reasonable chance” bond purchases would not be extended beyond September. This was further reinforced by ECB rate-setter Ewald Nowotny as he told a German newspaper in an interview that the ECB may end its stimulus programme this year if the Eurozone economy continued to grow strongly.
The dollar sank to a three-month low as rising commodity prices reignited bets that the global reflation trade will take hold in 2018, dimming the dollar’s appeal relative to currencies of faster-growing economies. GBPUSD hit 1.3600 in the late afternoon yesterday and overnight printed a 1.3613 high. The US dollar fell against most major and emerging-market counterparts on yesterday as the Bloomberg Commodity Index reached its highest level in about 11 months. This alongside strong Chinese and European manufacturing data has not helped the dollar and could see its struggle continue. That being said, the US manufacturing PMI was released yesterday afternoon showed it had risen to 55.1 in December, the highest level since March 2015.

The day ahead

This morning Germany is set to release their unemployment rate for December, the markets are anticipating a 0.1 percentage point reduction to 5.5%. Shortly after, the UK sees the second PMI print of the week. The construction PMI is expected to show a small decline from November. A bigger-than-expected drop in the construction PMI data cannot be ruled out, given yesterday’s deceleration in the manufacturing sector activity. The construction PMI has widely shown behaviour similar to that of the manufacturing and services PMIs. This afternoon we head to the States for ISM manufacturing, the index is expected to stay in line with the previous print at 58.2. The FOMC minutes released this evening will be a major focus of the day. The Fed raised interest rates for the third time last year in December, the biggest difference this being that both Evans and Kashkari in dissented. Markets will be monitoring the language closely for clues on how many hikes we might see this year. 

Thought of the day

The New Year has arrived and Donald Trump is at it again! ‘The Donald’ has responded to Kim Jong Un’s latest threat saying he has a “much bigger and more powerful” nuclear button than his North Korean counterpart. As the saying goes… boys and their toys! As for toys in the FX space, there is an armoury of different ‘toys’ to choose from, if one considers hedging solutions items one can have some fun employing. At Investec, we have simple Spot and Forward Contracts to premium paid Vanilla Options. Further to this, we have a host of structured solutions that can either protect or outperform, or do a combination of both. Please speak to your FX dealer today to ensure you’re ready to retaliate to hidden and dormant FX (nuclear!) threats this year.

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