Summary:
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UK Services PMI: 48.9 vs 51.0 exp. 51.3 prior
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Lowest print since the August 2016 release
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GBP remains fairly well supported after May’s change of tack
According to a widely viewed survey, activity in the UK services sector has fallen to its lowest level in over 2 ½ years, with the PMI for March coming in at 48.9. This is a notable miss on the consensus expectation and comes just a day after the construction sector equivalent showed a second consecutive sub 50 print, marking contraction territory. The manufacturing PMI for last month showed a big beat, but once record levels of stockpiling is taken into account this also looks not too healthy. These surveys are seen as key leading indicators and taken together they suggest that the UK economy is slowing with Brexit uncertainty clearly taking its toll. In terms of market reaction the pound has pulled back off its highest level in almost a week against the US dollar near the $1.32 mark, but the currency remains fairly well supported after the latest twist in the Brexit saga.
If the recent rise in manufacturing is discounted due to it being largely driven by stockpiling on Brexit fears (something which is negative and unsustainable) the outlook for the UK economy doesn’t look too good. Brexit uncertainty clearly taking its toll Source: XTB Macrobond
Tories split as PM moves towards softer Brexit approach
The latest Brexit developments have boosted the pound, with sterling making steady gains after Theresa May announced a softer approach on Tuesday evening. The move to seek cross-party compromise and seek an extension to the 12th April Article 50 deadline has seen the PM further open up cracks in the conservative party and alienate the hard Brexiteer wing including the ERG. From the perspective of the markets the news has been warmly welcomed as it reduces the chances of a no-deal Brexit at the end of next week, but here is some speculation that this could be a trap. There is a school of thought that what this ultimately will mean is that May 22nd becomes a final and unmovable deadline for Brexit, given that once the April 12th deadline has been passed participation in EU elections can be effectively ruled out.
PM May could be plotting this eventuality and a failure to make a breakthrough in cross-party talks would then leave parliament back in a position where they are forced to choose between her deal and no-deal. Given the staggering levels of ineptitude on show in dealing with Brexit so far, this train of thought may be giving them far too much credit, but as we’ve seen time and time again in recent months the government's ability to surprise remains undiminished.
The pound remains well supported despite the awful data, with the market far more interested in the latest Brexit developments than economic releases at present. Price is back above the 1.3145 level that had offered resistance and could now provide support. Source: xStation
