Figures from the ONS indicate that economic activity was hit in February amid the heavy snowfall seen towards the end of the month. Manufacturing output fell by 0.2% (mom) in February, in line with our forecast but disappointing consensus expectations for a 0.2% gain. This was the first month-on-month decline recorded in eleven months, while January’s outturn was revised down to flat (from +0.1%) such that its record nine-month streak of sequential growth has been trimmed to eight. Overall industrial production fared better, rising 0.1% (mom) as colder weather prompted households to reach for the thermostat, thereby boosting utilities output. Meanwhile, construction saw the greatest hit from the weather, with February’s decline of 1.6% (mom) building on the revised 3.1% drop seen in January. Some positive news came on the trade front with the headline goods deficit narrowing to a five-month low of £10.2bn in February (consensus and Investec -£11.9bn). Yesterday morning’s disappointing figures pulled sterling down halted sterling’s gains briefly. Shortly after NIESR released Q1 GDP figures which suggested that the UK’s growth rate had halved from 0.4% in Q4 17 to 0.2% in Q1 18. The decline was put down to bad weather with the Beast from the East causing major disruption throughout the UK.
The overnight risk-off sentiment extended into Asia, as the traders reacted to the escalating Middle East tensions over Syria, with the US-Russia on the brink of a war. Meanwhile, looming concerns over the US-China trade dispute continue to keep investors on the edge. Risk-aversion helped the US dollar regain ground across its main competitors, with the hawkish FOMC March meeting minutes also helping too. The minutes to the FOMC’s March policy meeting, at which it opted to raise the Federal funds target rate by 25bps to 1.50-1.75% were published last night. Much like the tone of the statement they showed a Committee that was broadly optimistic about the outlook for the US economy and content to continue along a gradual policy tightening path. Despite concerns over a possible trade war which the committee judged added downsides risks to the forecasts, overall the FOMC still saw the balance of risks to its projections as in line with the average of the last 20 years. Of course, developments on the trade front have moved on since the March meeting, but comments from Fed officials in that time have continued to express the view that they hope the scale of the trade dispute will recede and not materially affect US growth. The minutes also highlight the modest upgrade to medium-term projections for GDP growth, which reflected the expected boost to GDP from the Federal budget agreement enacted in February. In terms of opinion on the FOMC on the where policy should be set going forward, ‘Almost all participants agreed that it remained appropriate to follow a gradual approach to raising’ whilst ‘several’ also warned that it would likely become appropriate at some point for the Committee to set the Federal funds rate above its longer-run normal value for a time (currently 2.9%). Overall, the minutes suggest the FOMC remained happy to press ahead with its gradual tightening path, with a watching brief on trade discussions. The Fed’s ‘dot plot’ implies that it judges three hikes this year is appropriate (just, it is a high three). Given the substantial discussion over the lack of spare capacity, particularly in the labour market, the FOMC could well be persuaded on the case for four, if pay growth and inflation pressures gather steam and trade war risks to growth settle back.
The March RICS survey suggests that activity in the UK's housing market remains subdued. The headline national house price balance (i.e. the balance of surveys expecting property price rises versus price falls) remained unchanged at a joint five-year low of zero in March (consensus +2%, Investec +8%). Surveyors were similarly downbeat in their near-term expectations for national house prices, with the balance falling back to zero in March after having turned positive in February (+3%) for the first time in seven months. Activity remained sluggish with new buyer enquiries having now declined at the national level for twelve consecutive months with the balance easing to -17% from -16% in February. Meanwhile, the new instructions balance rose to -17% in March, after last month’s outturn of -23% was the lowest since July 2016 last month, with average branch inventory remaining at a record low of 42. However, a number of anecdotes point to poor weather early in the month having hit activity.
The day ahead
Today’s macro calendar is relatively light, in terms of the first-tier economic releases, but has a slew of central bankers’ speeches and events to keep the EUR, GBP traders busy. Ahead of the European open, the Bank of England MPC member Broadbent will be on the wires, speaking at the Reserve Bank of Australia, in Sydney. Later on, we have the BOE credit conditions survey and Eurozone industrial production data, followed by the European Central Bank’s (ECB) March monetary policy meeting minutes at 12:30. Meanwhile, the main event risk for the pound is likely to be the BOE Governor Carney’s speech due at 20:00 this evening.