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Pound remains under pressure on softer manufacturing data

DailyFX Forex Fundamentals 09-01-04

By Kathy Lien, Chief Strategist of

· Headline number of US ISM manufacturing survey disappoints
· Pound remains under pressure on softer manufacturing data
· Comments from SNB Roth raises case for September rate hike


Today we saw evidence of a slowdown in the global manufacturing sector. Although the US captured the limelight, it is not the only country whose manufacturing sector is growing at a slower pace. This morning, the UK, the Eurozone, Germany, France, Italy and Switzerland all reported slower growth. Unsurprisingly, at this point, the manufacturing sector has been weighed down by the concern over the impact of oil prices. However despite the slowdown, it is the important to note that the manufacturing sector surveys are all above 50 indicating that overall, firms are still reporting increasing activity. Therefore it is still too early to become overly concerned. Meanwhile retail sales in Germany were mixed. On a monthly basis sales increased 0.9%, but on an annualized basis, sales fell –0.9%. This is a fairly volatile number and the market gives it minimal weight. Tomorrow though, Germany will be releasing its more important unemployment figures. The number of unemployed individuals continues to grow and with benign growth, this trend is expected to continue. Given the higher cost for oil, producer prices due tomorrow, are expected to accelerate in the Eurozone during the month of July. The ECB is also expected to keep rates unchanged at their monetary policy meeting.


The US Institute of Supply Management’s factory index declined from 62.0 to 59.0 in August. This is the first time in 9 months that the index has fallen below 60. The index is still in expansionary territory and we are finally seeing signs of cooling in the sector after it hit a peak back in January. The prices paid component accelerated to 81.5 from 77. The much awaited employment index fell from 57.3 to 55.7, indicating that across the nation, manufacturers are still hiring, which should provide a modest boost for August payrolls. Although we do expect a rebound in payrolls, the market’s current 150k estimate still seems overly optimistic. The biggest argument for a rebound in payrolls is that 325-350k jobless claims are consistent with 150K-payroll growth in 2004. However, based upon our observations, there are only 4 data sets used for the above argument, which hardly makes a trend. Prior to 2004, the most recent time payrolls were above 150k was in 2000 and during that year, we had 6 months of payrolls that were above 150k which corresponded with claims generally below 300k. Top that off with the possible decline in payrolls as a result of Hurricane Charley and you have a much higher likelihood that we will see another disappointment for the dollar. In Switzerland, there has recently been a lot of talk of a possible rate hike this month. In a speech this morning, SNB President Roth confirmed the central bank’s intention to normalize rates. Adding to the case for a rate hike, CPI accelerated by a more than expected 0.4% in the month of August.


Aside from crimping spending and house prices, the Bank of England’s monetary policy tightening has now also slowed the manufacturing sector. The Chartered Institute of Purchasing and Supply’s purchasing managers index fell from 56.3 to 53.1 during the month of August. The move lower in the index was much deeper than expected and underscores the impact of the drop in consumer spending as evidenced in yesterday’s retail trade survey. According to the Nationwide House prices report, we see further evidence that house price acceleration slowed significantly in August. On a monthly basis, prices increased only 0.1%, compared to 2.1% in the previous month. At the peak of the housing market boom, house prices accelerated 3.3% in April 2002.


The Japanese yen sold off against the dollar today as oil prices increased over 4%, which is the largest rise since June. Today is definitely a sore day for oil with a fire in an Iraqi pipeline, a hostage situation in Russia and US weekly inventories reporting a sharp decline in stockpiles despite higher OPEC oil production. According to the Nihon Keizai Shimbun prices for Japan-bound crude oil hit a record high in August. Based upon the report, the higher procurement costs for oil refiners mean that consumers may begin to see higher prices for gasoline and other petrochemical products in late September, when those shipments start arriving in Japan.


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