The devil’s in the detail of positive data

Philip Salter
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GIVEN the rarity of positive data gracing the markets these days, yesterday’s Markit/CIPS manufacturing PMI headline activity statistics for September came as a welcome surprise – the forecast was for 48.6, which would have indicated further contraction, but the results pointed to an expansionary 51.1. However, champagne corks should remain firmly in bottles, as this is likely to be a blip in a downward trend.

In the context of this week, Will Hedden of IG Markets thinks these results are significant. He finds it encouraging that they are ahead of Germany, and the Eurozone – where many members showed a retraction. It might even impact on the way that the MPC leans on Thursday. Angus Campbell of London Capital Group agrees that these figures give “a glimmer of hope to the prospect that we can avoid another recession.” However, he thinks it could be a temporary expansion, due principally to a backlog in products from previous months and some promotional measures. As such, he doesn’t expect future months to show such buoyant expansion. For Spreadco’s Ian O’Sullivan: “It is the first increase since January and we will have to see what the follow through is in the coming months before deciding whether the UK economy is on the road to recovery.”

Beneath the positive headline figure, the decline in exports concern experts. UK economist at Capital Economics Samuel Tombs notes “the fall in export orders balance from 47.0 to 45.0 left it at its lowest since May 2009.” Adding that “at that level, it points to a quarterly drop in the volume of manufactured goods exports of around 5 per cent.” Michael Hewson of CMC Markets describes these figures as the cloud in the silver lining, given Europe is our biggest export market and its ongoing problems. Kelly Forrest, senior economist at the Construction Products Association calls “the marked deterioration in exports is a real cause for concern”.

For direct exposure to manufacturing, Hedden says IG’s sector bet on the FTSE 350 aerospace and defence sector would garner exposure. Trading its two biggest components – BAE Systems and Rolls-Royce – also makes sense, as Hedden says “they are also both FTSE 100 stalwarts and are thus heavily traded and highly liquid.” With markets as petulant as a toddler in a supermarket, there will be plenty of opportunities ahead to ride the tantrums of the swinging sentiments of these volatile markets.

As important as manufacturing is to the UK, “it is the services sector which is the real key to the British economy though,” according to Campbell. These figures will be released on Wednesday and expected to show a small expansion. But if Europe continues to stop buying from us, their crisis will become the UK’s.