Market News & Insights
2 November 2016

Sterling boosts the manufacturing sector but is also stoking the inflation flames

Last week’s Q3 GDP update showed that the manufacturing sector was a drag on growth, contracting by 0.4% over the quarter to September. Over the period, the Purchasing Managers’ Index averaged 51.2 so yesterday’s release which came in at 54.3 indicates that production should be a supporting factor for growth into year end. Sterling’s 18% fall will have played a role here in boosting activity, however the weaker pound is a double edged sword as the PMI data also showed that input costs have risen to a 69 month high. The last time sterling fell so far was in 2008/09 and inflation subsequently peaked at 3.7% in 2011. While inflation is only currently at 1% y/y, this is already its highest level for 2 years and the PMI data show that this figure is clearly on an upward trajectory. Tomorrow’s release of the Bank of England’s Quarterly Inflation Report provides the market with a timely opportunity to get an insight into the Bank’s latest thinking on both growth and inflation. Given the significance of this release, sterling should trade within tight ranges for today’s session.

Other currencies to keep a weather eye on are the Mexican peso and the Swiss Franc. Recent polls suggest that the political risk has risen as the gap between Clinton and Trump has narrowed in the wake of last week’s announcement that the FBI are re-investigating Clinton’s emails, with at least one poll showing that Trump has taken a slight lead in the Presidential race. Given Trump’s anti-trade stance, the peso is being seen by many as a risk barometer and the currency fell another 1.7% yesterday and is back at levels last seen in early October.  Given the political risk in the US and UK, it is not surprising that the Swiss Franc has benefited from safe haven flows. After removing the hard floor at EURCHF 1.20 in January 2015, there is a view that the Swiss authorities have a soft floor at 1.08, a level that has broadly held since July. EURCHF traded through this floor yesterday closing at 1.0782 and has traded as low as 1.0750 already this morning. With the US presidential election less than a week away, markets may well test the resolve of the Swiss National Bank to defend this level over the coming days.