Positive UK PMI surveys suggest UK economy bounced back in Q1

PMI surveys suggest that the UK’s service sector could bounce back in January, after dismal retail sales at the end of last year. The service sector PMI rose to 53.8 up from 53.4 last month, the manufacturing survey also came in stronger than expected at 47.3, although that is still deep in contraction territory. The UK is bucking the European trend, and sentiment in the UK is generally stronger than in Europe, especially in the service sector, which is important for the UK’s GDP.

There are growing signs that the UK could have entered a mild technical recession in Q4, however, today’s PMI data suggests that the UK’s economy bounced back at the start of this year, which is positive for the pound in the short term. GBP/USD has had a decent bounce on Wednesday, and is currently trading above $1.2760, after rising more than 0.6% vs. the USD. $1.28 remains key resistance in the immediate term and is a stumbling block ahead of the key $1.30 level.

It’s been a strong open for European markets, although some early gains have faded as Europe’s PMI surveys came in weaker than expected for the start of the year. The service sector PMI reports were weak across Europe, although the manufacturing surveys saw a pickup in sentiment at the start of the year. The composite survey for the Eurozone was 47.9, which is deep ion contraction territory, and suggests that Europe’s economy got off to a bad start in 2024.

The limitations of PMI surveys, and why Lagarde needs to keep her promise on rate cuts

PMI surveys are the first piece of the growth puzzle that we get every month, but it’s worth remembering that these are sentiment surveys not actual economic data. A diminishing number of people are asked how they feel about certain economic elements, and these feelings are measured. Hence the UK’s service sector PMI for December did not pick up the weakness in retail sales last month. Added to this, investors should not panic at the negative sentiment recorded in Europe. As UBS economists have noted, a bad news story is often more powerful than a good news story. This means that the PMI surveys, while important, are not usually a meaningful driver of asset prices, for good reason. If the Eurozone economy is facing a recession this year, as many expect, then the ECB can ride to the rescue, and they have room to cut interest rates. Christine Lagarde all but committed to a summer rate cut in Davos last week. If she doesn’t stick to the same message at her press conference tomorrow, then the market will likely punish European asset prices, and the euro could rally.

Beijing takes action

China was given a boost by the announcement of a cut to the reserve requirement ratio by the PBOC, which will come into force early next month. The Hang Seng rallied more than 3.5% on the back of this news, and comes after gains on Tuesday. The Chinese authorities are taking steps to boost the stock market, including the RRR cut and the announcement of a fund to use offshore funds to buy up onshore equities. This has boosted Chinese and Hong Kong share prices and investor sentiment as it could be a precursor to Beijing also taking steps to add stimulus to the economy in the coming months.

Trump moves step closer to Republican nomination

Donald Trump easily won the New Hampshire primary overnight; the latest results suggest that he won 54.9% of the votes, with Nikki Haley on 43.2%. Although Haley has said she will continue to fight on, it looks like an uphill struggle for her. Although Trump still has many delegates to win over before he can secure the nomination, the Wall Street Journal have reported that only once in 50 years has the eventual Republican nominee won both leadoff states, President Gerald Ford in 1976. At this early stage, there is a sense of inevitability that the Presidential race will be another Biden/ Trump runoff.

The economic impact of the Republican primary

While we wait for the next Presidential election, there is a risk that the effectiveness of the Biden regime will fade. This comes at an important time for geopolitics, with wars in Ukraine, Gaza and Yemen, along with the attacks on commercial vessels in the Red Sea.  It’s difficult to see how the US could broker a two-state solution for Palestine if momentum remains with Trump. If Trump wins the Presidency, he is expected to turn towards Israel, which could further erode Biden’s credibility in the Middle East in the coming months. From an economics standpoint, Trump has returned to his chaotic and impulsive style, and said he would impose a 10% tariff on all imports, trade with China is also likely to be disrupted, which could impact global growth. If, as looks likely, Trump does win the nomination, then it is hard to make predictions about what his Presidency would look like, as his chaotic style makes predictions difficult. This could cause volatility to spike as we lead up to the election in November.

The markets might not be taking too much notice of the Republican primary, or they may be warming to Trump. Either way, S&P 500 futures are pointing to a positive open for US stocks, and the index is set to make another record high. Likewise, Treasury yields are also lower. Netflix is expected to extend its gains on Wednesday after reporting much stronger than expected subscriber growth for Q1.

The AI boom continues

The chip boom continues, as ASML, the highly sophisticated Dutch chip-making giant, reported that it had tripled its orders in Q4 relative to Q3, as demand for its sought-after ultraviolet machines soared. The value of orders soared to EUR 9.19bn, analysts had expected orders of EUR 3.6bn. This tells us two things: firstly, that the AI boom continues, and the fact that cyclical chip equipment makers are seeing a boom in demand is a sign that the global economy is showing signs of strength and there is broad demand for AI products throughout the global economy. This is another sign that companies are spending capital on AI functionality, which could pay off down the line. Secondly, it tells us that analysts have missed this boom, and we should expect a wave of upward revisions to earnings estimates.

40% of ASML’s sales came from China, as companies rushed through orders before new Dutch export rules come into force later this month. These new rules, under pressure from the US, are designed to curb exports of cutting-edge technology to China. Interestingly, the company said on Wednesday that the export restrictions to China would not impact its financial outlook, as demand for its most sophisticated machinery comes from elsewhere. Its share price had reached a record high on Tuesday, and there have been further gains on Wednesday as the market cheers these strong results.