5 October 2023: Services output still falling overall

5 October 2023: Services output still falling overall


  • Sunak scraps the rest of HS2, and declares himself “Thatcher’s heir”
  • ISM data shows a slight cooling of the economy
  • Private sector demand continues to fall
GBP – Market Commentary

Private sector consumption remains still weak

The Prime Minister shocked no one yesterday by announcing that he has decided to axe the Birmingham to Manchester phase of HS2.

Against a growing backlash from former Prime Ministers, politicians and business leaders Rishi Sunak made a vow to invest the thirty-six billion pounds that will be saved in infrastructure projects specifically tailored for the north.

In trying to explain the unexplainable Sunak said that the facts of the project had simply changed.

He announced several other initiatives that are potential vote winners, but they will all be overshadowed by the latest and possibly most decisive “volte-face” from a government that has become synonymous with such actions.

Ironically, the conference that was held in Manchester, was the first Sunak addressed as the leader and given the level of criticism over what has been termed as “abandoning the people of the north” by Manchester Mayor Andy Burnham and “simply wrong” by former Prime Minister David Cameron.

In purely economic terms axing the northern leg can easily be justified by the cost savings that will be made. But this is a huge gamble and in saying that the Government is “on track” to win next year’s election Sunak is risking a total wipeout of the gains the Conservatives made in the “Red Wall” constituencies that had voted Labour for generations and will now feel that their belief in the levelling up process has been betrayed.

The next few months will be critical as the preparations begin in earnest for the election.

Next week, the Labour Party will have the chance to respond and set its agenda when it holds its annual conference in Liverpool, a city that has seen its fair share of let-downs from Westminster.

The Public Policy Research think tank criticised the recent changes made to the “Green Agenda” by the Government saying that a huge investment opportunity and potential boost to the economy had been missed.

Yesterday’s data released showed that output from the services sector, the main driver of the economy, picked up slightly in September. It is now on the brink of a monthly expansion rising from 47.2 to 49.3. This created a positive outcome for the composite index which combines both services and manufacturing which rose to 48.5 from 46.8 previously. Both surpassed market expectations and gave a welcome boost to the economy as it enters a potentially difficult fourth quarter.

Sterling reacted positively to the data, breaking a run of daily falls, reaching 1.2177 and closing at 1.2135.

USD – Market Commentary

Private sector jobs data well below expectations

A soft landing for any economy is a challenging task to achieve but in the case of the U.S., it would be close to a miracle.

The economy is made up of so many “moving parts” that to get them all to line up is an incredible feat.

It justifies the faith shown in Jerome Powell, a life-long member of the Republican Party, by a Democrat President who has prided himself in surrounding himself with “good and talented people.”

It may very well be that the lowering of inflation that has been achieved by a long yet controlled cycle of interest rate hikes and the gradual fall in job creation is a fluke or a freak of nature.

Powell nonetheless deserves a large slice of the credit for facing up to a hostile Congress and “sticking to the principles that got him job in the first place and made him able to beguile The Senate into approving his second term.

While there are still those who believe that the economy is still staging into the chasm of a recession, the data speaks to a different path.

While inflation will continue to be well above the 2% target, it is considered that monetary policy tightening that is already in the system will bring it down, even if there are occasional “upwards reversals” caused by the recent increase in the oil price.

Powell and his colleagues look beyond the simple numbers and agree policy based on the reason for the increase, which in this case has been changes in quotas rather than increasing demand.

The jobs data this week has shown the numbers to still be moving in the right direction. The vacancies data was still a little strong for the FOMC, but that has been offset by yesterday’s publication of private sector data which showed a far bigger fall in job creation than had been expected falling to below 100k for the first time this year.

Tomorrow’s publication of the September employment report will still have a bearing on the next FOMC meeting but is only a single part of the jigsaw. Unless there is a significant rise in the headline NFP numbers or unemployment falls considerably the Fed remains on course to continue its pause in its cycle of rate increases.

The dollar index found the atmosphere above 107 a little thin yesterday and took a breather, falling to a low of 106.50 and closing at 106.54. Any correction will be seen as a buying opportunity by investors and traders while the economic news remains positive.

EUR – Market Commentary

Slight improvement to final services output data

Contrary to what is being seen on the other side of the Atlantic, the pan-Eurozone economic data that is being published for output and activity depicts an economy that is in decline as inflation remains uncomfortably high.

The data is not so bad as to demonstrate that interest rates have reached a level where they are restricting growth yet but will continue to be in decline while the ECB remains hawkish and has a “hiking bias.”

Look at individual nations, there are pockets of growth to be seen as some economies are reacting well to the final exit from the clutches of the Pandemic. Spain is a prime example of this as its tourism sector has seen a colossal improvement this year, while Greece has made huge strikes forward in reforming its public sector.

Italy on the other hand, continues to run a large growing budget deficit due in no small part to its burgeoning public sector. One thing in its favour has been the election of a hard right Prime Minister who has shown considerable restraint in creating policies that had the potential to split the country.

Germany, France, and the Benelux countries are struggling to make any headway at all and with Germany having just emerged from a shallow recession and facing another this quarter, the rest of this once powerful group will likely follow.

A chink of light was noticeable from the output data that was released yesterday. Eurozone wide services output was marginally revised up from 48.4 to 48.7, when the market had expected a significant adjustment.

Overall, the output data that has been released this week has pointed to an overall contraction for the economy for the new quarter which is not helped by the ECB giving no indication that it is going to end its cycle of rate hikes. This is despite several members of the Governing Council commenting that are close to their peak.

Despite the fall in the value of the euro that has declined from a high of 1.1275 to 1.0450 in the past six months or so, ECB President Lagarde is still promoting it as an alternative reserve currency to the dollar. She warned yesterday that the dollar’s status should not be taken for granted by the market.

It is clear however, that if the Eurozone does not have a unified fiscal policy to support monetary union, the Euro will not be taken seriously as a contender for reserve status.

The common currency benefited from the dollar taking a breather yesterday. It reached a high of 1.0529 and closed at 1.0524.

Have a great day!

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Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.