The pound (GBP) continued to rise on Tuesday as market sentiment has improved and the UK reported relatively better-than-expected data. The UK Office for National Statistics (ONS) reported that the labour market shed jobs for the third consecutive time in the quarter to August, but the number of jobs lost was lower than forecast. The Unemployment Rate dropped showing stable labour market conditions. UK Manufacturing PMI rose to 45.2 in October, above expectations of 45.0, but Services PMI fell to 49.2 in October. While initially the pound rose, the mixed UK business PMIs drove it lower, but it may gather its strength against both the euro and the dollar as market sentiment continues to improve.
Investors will now shift their focus towards the next Bank of England interest rate decision on the 2nd of November. The BoE is expected to keep interest rates steady at 5.25% as the economy shows further weakening signs.
UK labour market figures and PMIs
- Labour market
UK labour market figures came in better than expected and were followed by the UK PMI survey for October where the manufacturing sector recorded an improvement.
The ONS released the labour market survey which showed that the unemployment rate dropped to 4.2% in August, despite a forecast for an unchanged reading of 4.3%. The loss of jobs came in at -82K on a three-month basis in August compared with the -198K expected.
While headline numbers beat expectations, the UK labour market has loosen with less job vacancies. Vacancies in the July to September period fell to 988K, down 43K on the April to June period.
- Manufacturing and services sectors
The UK PMIs came in better than those of the Eurozone published half an hour earlier, as they showed that the slowdown in activity has accelerated.
The UK’s manufacturing PMI came in at 45.2 in October, higher than the market consensus of 44.7 and September’s figure of 44.3. The services PMI was 49.2, slightly below September’s 49.3 and the consensus of 49.3. The composite figure came in at 48.6, slightly below the anticipated 48.7 but higher than September’s 48.5 reading.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence explained that “The UK economy continued to skirt with recession in October, as the increased cost of living, higher interest rates and falling exports were widely blamed on a third month of falling output.” He added: “The overall pace of decline remains only modest, signalling a mere 0.1% quarterly rate of GDP decline, but gloom about the outlook has intensified in the uncertain economic climate, boding ill for output in the coming months. A recession, albeit only mild at present, cannot be ruled out.”
What will the BoE do?
The UK Manufacturing and Services PMI came in below the 50.0 threshold, and with labour demand having slowed down and Retail Sales contracted, economic activity has definitely weakened and would possibly hurt consumer inflation expectations.
With a lack of supportive economic indicators and BoE Governor Andrew Bailey saying that inflation will have a considerable fall next month, policymakers may decide to leave interest rates unchanged. On the other hand, some analysts have argued that with the data showing that the labour market hasn’t weakened as fast as the Bank of England might have liked, there is higher possibility of another final 25 basis point rate hike in November or December. This will support the pound.