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Jamie Jemmeson
February 22, 2022

UK PMI Data Supports the Case for Hiking Rates

Sterling Remains Under Pressure Amidst Risk Off Tone

Yesterday economic data continued to suggest that the UK can weather the upcoming interest rate hikes. UK business activity expanded at its fastest pace for eight months in February as the Omicron wave faded and consumers headed out to spend on travel and leisure. Data showed that private sector business activity has grown for 12 months in a row, with the Flash UK Composite Output Index registering at 60.2, up from 54.2 in January. A reading above 50 indicates an expansion in activity.

Businesses were at their most optimistic for the year ahead since May when the economy was reopening from lockdown. The survey pointed to the fastest rate of job creation since October, also driven by the service economy, with demand for business services increasing alongside higher leisure spending. The positive economic activity is likely to tick the boxes for Bank of England (BoE) policymakers for March.

Looking to the day ahead, the CBI Industrial Orders is set for release this morning with the market looking for more positive signs of growth. In addition, the market will look to see if the BoE Deputy Governor David Ramsden provides any clues on future policy actions as he is due to speak at the National Farmers’ Union Conference.

Is a German Recession on the Horizon? 

German Flash Manufacturing PMI declined to 58.5 for February from 59.8 previously, demonstrating that the pace of manufacturing growth within the European powerhouse is slowing. Conversely, the service sector index rebounded to 56.6 from 52.2 in January, significantly exceeding the 53.2 expected reading.

Staying within Germany, PPI month-on-month otherwise described as factory-gate inflation, surged 25% in January versus the year before marking its fastest pace in the post-war era. As expected, surging energy costs were cited as the main driver.

Bundesbank, the German Central Bank, warned that German output may have declined noticeably in Q1 2022, following a 0.7% decline in Q4 2021 citing fears that Europe’s largest economy is entering a technical recession. The Bank noted the outbreak of the Omicron variant across Europe hampered activity significantly with both manufacturing and services sectors hit by restrictions and supply chain disruptions.

Finally, European economic growth surged to a five-month high according to the IHS Markit survey, handing a boost to Europe as the continent started easing COVID-19 restrictions. The Flash Services PMI figure significantly exceeded the forecast, reading 55.8 in February versus an expectation of 52.3 and a previous figure of 51.1. Conversely, Manufacturing PMI marginally declined to 58.4 versus 58.7 previously.

Looking ahead at today, the German IFO Business Climate is due this morning and expected to show an increase in the index from 95.7 to 96.4. Elsewhere, markets will continue to monitor the escalating tensions in Ukraine following President Putin’s move to recognise rebel regions as independent states with the provision of additional troops within those regions. We could expect further risk-off movements, possibly hampering the Euro as investors move to safe-haven currencies like the US Dollar.

Greenback Supported on Geopolitical Tensions and Inflation Risks

The Dollar was well supported on Monday amid growing safe-haven demand as investors looked to hedge against geopolitical concerns and inflation risks. It was a quiet day on the economic calendar due to the US bank holiday, however market focus turned to rising Russia-Ukraine tensions, which saw US Treasury yields move sharply lower and investors are predicting that other government bond markets are expected to follow amid safe-haven trading. Tensions escalated further on Monday after President Putin recognised the independence of two breakaway regions in eastern Ukraine, ordering forces into the area.

Meanwhile, Federal Reserve (Fed) Governor Michelle Bowman indicated that a 50-basis point at the Fed March meeting could be a possibility if PCE inflation, which is set for release later this week comes in above expectations.

Looking ahead to today in the US, the PMI data will be released today due to yesterday’s US bank holiday. It’s expected that services activity will have increased for the months as the impact of the Omicron variant reduces and manufacturing is expected to reflect an improvement.

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