If things work in reality as they do in theory, then the pound should rise sharply this evening, as data out today seems to indicate that the US economy slumped sharply in August, while the UK picked up nicely
It always helps to compare like with like. Yesterday revealed the latest purchasing managers index tracking UK services, and the index rose, indeed it was the sharpest rise in the index in its 20-year history, although not enough to totally reverse July’s record fall. Then today, the latest purchasing managers index cover US nonmanufacturing was out, and this time it fell very sharply.
The US index, from the Institute of Supply Management (ISM), fell from 55.5 in July to 51.4. Okay, the index was still above the critical no change level of 50, but even so, it was the lowest reading in six years.
There is something odd going on in the US. Last week, the surveys were good, consumer confidence surged, US consumer spending was up, the job reports out on Friday was not as good as expected, but even so pointed to an increase of 151,000 in non-farm payrolls. What with the Fed hinting recently that a rate hike is imminent, the markets started bracing themselves for an increase in US interest rates – maybe this month.
In theory, that would be bad – or good, depending on your perspective – for sterling. If US rates rise, but UK rates either stay firm or fall, money should flow from the UK to the US, pushing down on sterling. That the pound did not fall on these developments was largely due to a degree of cynicism among the markets on whether the Fed would really carry out its threat.
Things all changed this week, firstly with the purchasing managers index tracking US manufacturing – which fell to a level consistent with contraction, and now the index for nonmanufacturing.
Paul Ashworth, Chief US Economist at Capital Economics, said: "This makes us very nervous for the third quarter. Growth might still be strong. There are good reasons to believe it will be, such as the rebound in mining-related investment and the strength of exports. Nevertheless, if the Fed is uncertain about the near-term outlook for economic growth, it would make a lot more sense to wait a few months before hiking interest rates."
But the Purchasing Managers Index covering UK services rose to 52.9, from 47.4 the month before. This was very much part of the trend, with similar surveys, but tracking construction and manufacturing also rising on the month before.
Up until very recently, the general assumption was that Q3 would be good for the US, and a struggle for the UK, but the latest purchasing managers indexes hang a large question mark over this narrative.
And that is why, the pound should rise against the dollar – and if you are reading this article some time into the author’s future – say the evening of September 6, or the following morning, you can judge whether that is right.