UK: Record jump in the UK manufacturing PMI - BBH

Research Team at BBH, suggests that the biggest surprise has been the record jump in the UK manufacturing PMI to 53.3 from 48.3 as a much smaller rebound was expected in August after the Brexit shock drop in July. 

Key Quotes

“There is a linear type of thinking that appears to be driving the market's response which was to take sterling a cent higher against the dollar.  The idea is that pundits, economists. many policymakers (including the Bank of England) and investors have bought the hype about Brexit being bad for UK economy.  However, this misses the point and misunderstands an important aspect of how markets work. 

The reason the PMI jumped was driven by the decline in sterling.  It is about exports.   While the market logic of taking sterling higher on the better than expected news is understandable, from an economic point of view, it blunts a key driver. 

Two points need to be made.  First, when thinking through the impact of a shock event, investors need to consider not just the event, but the market response.  This is the kernel of truth in the self-correcting aspect of the market, which may be exaggerated by market fundamentalists.  The decline in sterling and UK interest rates will help cushion a potential economic blow, and the short-term cost of which is greater price pressures, which were also evident in the PMI report. 

Second, while some observers played up the impact of the referendum on more than market psychology, many, including ourselves, were more concerned about the implications after the divorce for the UK and the future of a medium-sized country with a large current account deficit, reliant on financial services in an era of deleveraging.   We also recognized, like many, that business decisions will take the time to filter through.  We have compared the issue to cooking frogs rather than frying bacon.  Don't be lulled to sleep by warm water.  The risks are that it will still boil. 

The immediate hurdle for sterling is near $1.3280 and then $1.3370. Given the spike up on the news, many short-term participants will watch how the pullback unfolds to help determine whether and or where to fade this bounce.   The euro fell to test GBP0.8400.  The August low was seen near GBP0.8340, which would be the next downside target.”