Brexit uncertainty continues, UK PMIs in focus

Today's news headlines:

Tuesday - Eurozone unemployment expected to remain unchanged at 7.8%. The ECB has high expectations that growth in the labour market will fuel inflation.

Wednesday - Brexit uncertainty may have pushed the UK services sector into contraction for the first time since 2006.

Friday - Amid signs that the US economy is slowing, employment and average wage growth are set for release.

Monday

The UK Manufacturing Purchasing Managers’ Index (PMI) for March starts the week with concern building over the UK economy as Brexit fears bite. Anything above the break-even point of 50.0 would be seen as acceptable given the current economic backdrop. However, some forecasts suggest a print as low as 49.5 might be seen, which would make for the weakest reading in almost three years and likely do little to support the Pound.

February’s US Retail Sales reading is expected today, and a decline is forecast. Expectations are for the year-on-year figure to fall from 2.3% to 2.1%, something which would underline the challenges faced by the US economy right now. However, a modest dip may have little impact on the US Dollar, so long as the Federal Reserve remains committed to holding rates steady for most of the year.

US Manufacturing PMI for March could impress today. Having peaked above 60.0 in August, the reading has been trending lower since. However, failure to beat February’s 54.2 reading is unexpected to help the US Dollar in the short-term.

Tuesday

Eurozone unemployment numbers are set for publication, with forecasts expecting a rate of 7.8%, unchanged for the third month running. Given European Central Bank (ECB) Chief Mario Draghi’s emphasis on employment as a key driver of inflation, any deterioration in the headline rate is likely to initiate a bout of selling for the Euro.

US Durable Goods Orders for February are predicted to come in negative for the first time since October last year, although the forecasted decline is expected to be modest. Given the weak Manufacturing PMI print for February, the market should accommodate the anticipated -1.2% without too much impact on the Dollar.

Wednesday

The UK Services PMI may have narrowly avoided falling below the break-even 50.0 mark twice in recent months, but the March figure looks set to disappoint as Brexit uncertainty rattles the economy.  A reading of 49.9 is forecast, which would put the UK’s dominant services sector into contraction for the first time in almost three years. Given the far bigger issue of Brexit in determining the country’s fortunes, Sterling may be able to ride out a reading that’s close to parity. However, anything much below this would likely leave the Pound exposed.

Eurozone Retail Sales for February are due, with forecasts for a month-on-month decline of 0.6%, against January’s uptick of 1.3%. The ECB is pinning its hopes of an eventual rate hike on inflation fuelled by better-paid consumers, so even a modest decline is likely to upset this theme. The divergence between the ECB’s stance over monetary policy and what is dictated by the underlying market will have the potential to see further Euro selling, even from these relatively depressed levels.

Today’s ADP Payrolls for March is expected near last month’s 183,000 print. However, this would be significantly lower than the 300,000 reading seen in January and would serve to underscore the slowing domestic US economy. As has been noted, the Federal Reserve looks as if it may be the last major central bank to capitulate and loosen monetary policy.

Thursday

German Factory Orders for February are expected to return to growth at 1.5% after January’s print of -2.6%. Again, an expansion would help support Mario Draghi’s claims that the EU economy remains on track.

Friday

The UK’s Halifax House Price index for March is set for release with the year-on-year figure expected to fall from 2.8% to 1.5%.  An ongoing shortage of housing stock and ready availability of mortgages is arguably boosting a figure that should be depressed by Brexit uncertainty.

US employment data from the government is released today. The Non-Farm Payrolls figure typically dominates the headlines, but it’s arguably the wage growth data that is of more significance right now. Despite US unemployment being close to ‘frictional’—those between jobs or leaving education push up the total unemployment count—the sluggish improvement in pay cheques is causing concern. Average Hourly Earnings in February rose by 0.4%, but 0.3% is forecast for March.  At full employment, a continued growth in US wages is key to a sustained monetary policy and strong Dollar prospects.