The UK has had a week filled with a variety of economic news, including a decline in the Manufacturing sector, a rise in services, and a jump in inflation to 9.4 percent. Inflation has been creeping higher and the FTSE 100 futures are flat to lower on Wednesday. Despite these numbers, the currency did not react much to the economic news UK. Rather, investors focused on developments in Europe.
Manufacturing activity contracted for the first time since May of 2020
The Manufacturing Activity Index fell for the fourth month in a row in July, marking the biggest contraction in the industry since May 2020. The decline was primarily driven by the pronounced weakness of the services sector, which sank to its lowest level since May 2020 at 47.0. The manufacturing index also suffered, dropping to 52.3 from 52.7. The two indexes grew at their slowest pace since May 2020, despite a higher level of work-in-processing. Economists surveyed by Reuters had expected the indexes to be flat or slightly positive.
The decline in factory activity in the eurozone was particularly large, highlighting the impact of inflation and rising prices on the manufacturing sector. In contrast, India and Russia saw their manufacturing activity rise a bit in July. In the eurozone, however, weak demand and high prices led factories to keep unsold products on hand. The decline in the manufacturing PMI came as a surprise to the market, but it did not signal a downward trend.
The shift from manufacturing to services was another factor in the contraction of factory activity. As interest rates rise, more consumers are turning to services, which are characterized by lower prices. As a result, demand is declining, while consumer spending and building permits rise moderately. This trend is consistent with the Fed’s recent increases in policy rates, which are expected to continue in July. The benchmark overnight interest rate has been increased by 150 basis points since March.
The ISM Survey showed that the forward-looking new orders sub-index declined below 50 for the first time since May of 2020. Although backlog orders continued to accumulate, they remained below the pre-recession level, with a slight decline in outstanding business. Despite these factors, business optimism remained unchanged from its two-year low. Moreover, major retailers are reporting that they have too much merchandise to sell.
On the national level, manufacturing activity rose only modestly in July. It was 3.2 percent higher than a year ago. Meanwhile, the nondurable manufacturing index rose 0.1 percent while the other index rose 0.6 percent. The most significant gains were in motor vehicles and parts, fabricated metal products, and aerospace and miscellaneous transportation equipment. In contrast, the losses were in miscellaneous manufacturing, furniture & related products, and chemical products.
Inflation climbed to 9.4 percent in June
Inflation in the United Kingdom rose to 9.4 percent in June, a four-decade high. Meanwhile, inflation in the eurozone was at 8.9%, the highest since record-keeping began. Both are troubling numbers, as they suggest that the economy is experiencing too much price inflation.
While the headline CPI rose by 1.3% and the core CPI by 0.7%, both readings were higher than expected. Moreover, the gains in the CPI were spread across a range of categories. The high inflation readings have led traders to raise bets on how fast the Fed will raise interest rates. The probability of a full percentage point hike is higher than an even chance.
The biggest drivers of inflation in June were motor fuels and food. Motor fuel prices rose by nearly forty percent in the past year and have reached record levels. Meanwhile, food prices increased by nearly 10 percent, and prices for milk, cheese, eggs, and other foods rose by nearly 10% in a month. The underlying cause of inflation remains rising household energy bills.
Inflation is a big concern for businesses. It is already slowing down the recovery of the economy as consumers become increasingly deprived of disposable income. The British government is working together with the BoE to tackle the issue. However, the rising costs of food and petrol are not helping the economy. The government is considering further measures to address the issue. Nevertheless, the government must be aware that if these measures fail to curb inflation, it may cause further damage to the economy.
Global supply constraints are continuing to weigh on the global economy. However, early signs show that global supply bottlenecks are beginning to ease. Meanwhile, high energy prices and strong labour markets are contributing to the high global inflation rates. In the eurozone, annual headline inflation was 8.9% and core HICP was 4.0%. In the United States, annual CPI and PCE inflation were 8.8% and 9.1%, respectively.
While June’s CPI figures were disappointing, there are some good news. Travel and accommodation prices dropped just a little during the summer sales season, but are still more than 30 percent higher than they were a year ago. Meanwhile, gas prices declined from $5 per gallon in mid-June to $4.01 on Wednesday. This cheaper gas should help pull inflation down this month as well.
FTSE 100 futures are flat to lower on Wednesday
After trading 0.5% lower on Tuesday, the FTSE 100 is set to open modestly lower on Wednesday, tracking its American and European peers. Investors are jittery over the need for further monetary tightening and worries that it could damage the economy. Rising oil prices are also a worry. Meanwhile, Ofgem has announced it will raise its price cap for energy bills by 80% to PS3,549. The move follows a 54% increase in April. This represents a big increase for British households.
The FTSE 100 is set to end the session flat to lower on Wednesday, as investors focus on the upcoming corporate calendar. Major companies due to report include oil major BP, gold miner Fresnillo, pizza chain Domino’s Pizza, and builders merchant Travis Perkins. However, investors should pay attention to the wider economic picture and watch for signs of a sharper sell-off in the near term.
European stocks are mixed in Wednesday afternoon trading, as investors brace themselves for Fed comments in Jackson Hole, Wyoming. On Tuesday, Fed Chairman Jerome Powell spoke at a symposium in Wyoming, and said that the central bank would have to be aggressive in tightening monetary policy. However, he warned that this could cause pain for households and businesses alike. Meanwhile, the festering energy crisis in Europe and tight gas supplies continue to spook markets.
The FTSE 100 index may be due for a bounce this week. Currently, the price is near a strong weekly support zone, which may mean a reversal soon. Alternatively, it could break a triangle pattern, and reach levels below 7040.