Manufacturing Slowdown Set to Continue

The euro struggles as Germany slows, while sterling holds firm and the dollar rallies on month-end demand, ahead of today’s key manufacturing PMIs

Previous Day's Market Highlights

Monday proved to be a disappointing month-end for the euro, as the common currency sunk to a fresh 28-month low, below the $1.09 handle, with concerns over the German economy and month-end dollar demand exerting pressure.  News from the euro area's largest economy shows no signs of improving, with Reuters reporting that several economic institutes had lowered their growth expectations for the year, sparking further concerns that the manufacturing slowdown may be spilling-over into other sectors of the economy. As sluggish growth persists, September's inflation figures were surprisingly benign, showing CPI at just 1.2% YoY, and flat on a monthly basis. Such a sluggish pace of price increases provides further evidence for the necessity of the ECB's September stimulus package, in addition to the requirement for fiscal stimulus to take some of the burden off the ECB. President Draghi struck a similar tone on Monday, repeating that the monetary policy will work more slowly, and with more side effects, in the absence of fiscal loosening. All of these factors combined drove the common currency to a 0.3% loss over the course of the day, having staged a mini-recovery in late-afternoon trading.

Meanwhile, sterling briefly stepped off the Brexit merry-go-round, largely ignoring continued rumours of a 'Rebel Alliance' plan to oust PM Johnson, and instead focusing on better than expected GDP data. Final figures for the second quarter showed a modest upward revision to the data, with YoY growth now pinned at 1.3%, while QoQ data continued to point to a contraction of 0.2%. Nonetheless, the UK economy is expected to avoid a technical recession in Q3, with pre-Brexit stockpiling set to somewhat underpin growth. Over the course of the day, pound settled 0.2% higher against the dollar, and 0.5% higher against the euro. The dollar also gained ground, with the greenback experiencing significant month-end demand; largely as a result of portfolio rebalancing and settlement of quarterly tax payments. The dollar gained 0.3% against a basket of peers, briefly touching its highest levels in more than 2 years.

Turning to the antipodeans; the Kiwi dollar struggled, dipping 0.55% against its US counterpart after September's business confidence index fell to -53.3 - a more than 11-year low - which raises the chances of the RBNZ easing policy further. Overnight, as expected, the RBA announced a further 25bps rate cut, bringing interest rates to a fresh record-low of 0.75%, and raising the chances of unconventional policy measures being introduced in the future. The Aussie dollar has shed 0.4% overnight.

Away from FX, equity markets on both sides of the Atlantic ended the third quarter with solid gains after the US ruled out placing restrictions on investment in China. The pan-European Stoxx 600 closed 0.35% higher, while the US benchmark S&P 500 added 0.5%. The S&P is now up 19% YTD, the best such performance heading into Q4 since 1997. Finally, oil prices slid after disappointing Chinese data sparked concerns over future demand. Global benchmark Brent settled 1.9% lower, while US WTI crude lost 3.3%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1285 1.1381 1.1092 2.54%
GBP/USD 1.2290 1.2583 1.2233 2.78%
EUR/USD 1.0890 1.1110 1.0885 2.03%
GBP/AUD 1.8290 1.8496 1.7937 3.02%
GBP/NZD 1.9695 2.0003 1.9113 4.45%
GBP/CAD 1.6285 1.6691 1.6105 3.51%

Today's Market Highlights

October begins with the usual round of manufacturing PMI surveys in focus, with the data expected to show activity in the production sector continuing to slow around the world. The busy slate of surveys begins with September's final data from the eurozone,  expected to confirm the sector contracting for an 8th consecutive month, with the index expected at a near 8-year low of 45.6. Following this, PMI figures from the UK are also set to show the sector remaining in contraction, with the index expected at a dismal 47.0. The PMIs continue throughout the afternoon, with Canadian data expected to hover just above the 50.0 boundary between expansion and contraction, and US ISM figures expected to recover from last month's decline and print 50.0. Any pick-up in the survey measures should, however, be taken with a pinch of salt, with the global manufacturing economy not yet out of the woods, and running the risk of a further slowdown should trade tensions continue to escalate.

Elsewhere today, this morning's eurozone CPI figures are expected to show the pace of price increases remaining sluggish, further evidencing the need for both ultra-accommodative monetary policy and fiscal stimulus. Headline CPI is expected at 1.0% YoY for a third straight month, while core CPI, which excludes food and energy prices, is also set to read 1.0% YoY, which would represent a 3-month high. Nonetheless, inflation remains some distance below the ECB's 'close to but below' 2% target, giving little reason for euro strength. Also in focus today will be results of the latest GDT dairy price auction, important for the kiwi dollar, along with July’s Canadian GDP data, and US construction spending figures. 

Turning to monetary policy, today sees a busy central bank speaking calendar. In the European session, an address from RBA Governor Lowe will be closely examined for further clarity on this morning's policy decision. Meanwhile, during the afternoon session, investors will pay close attention to a host of FOMC speakers, including Vice Chair Clarida, Board Member Bowman, and dovish voter Bullard to try and gauge the policy outlook more clearly.

Looking more broadly, the same over-arching themes will continue to dominate the market in the month ahead; namely escalating US-China trade tensions, ongoing Brexit-related uncertainties and concerns over tensions in the Middle East. An in-depth October outlook can be accessed here.

Today's Economic Calendar

Time Currency Release Consensus Previous
9.00am EUR Final Manufacturing PMI (Sep) 45.6 45.6
9.30am GBP Manufacturing PMI (Sep) 47.0 47.4
10.00am EUR Flash CPI (YoY - Sep) 1.0% 1.0%
10.00am EUR Flash Core CPI (YoY - Sep) 1.0% 0.9%
13.30pm CAD GDP (MoM - Jul) 0.0% 0.2%
15.00pm USD ISM Manufacturing PMI (Sep) 50.0 49.1