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Record jump in manufacturing PMI boosts sterling

UK Manufacturing PMI rose to 53.3 in August, up from 48.3 in July (which was its lowest level since February 2013 as Brexit uncertainty knocked sentiment in the sector). The pound rose one cent against the dollar on the back of the news.

The five point month-on-month jump in the Markit PMI was the joint biggest rise in the index’s 25 year history.

New export business increased during August, thanks to weaker sterling. However the flip side is that input price inflation rose to a five year high. Output prices also rose at the fastest pace for five years in August, suggesting inflationary pressures are starting to build in the system.

Manufacturing is clearly an important component of the UK economy, but the services industry makes up the lion’s share- data on this sector comes out next week.

Laith Khalaf, Senior Analyst, Hargreaves Lansdown:

‘The latest figures from the manufacturing sector add to a growing picture of improved sentiment since the immediate aftermath of the referendum. We’re by no means out of the woods economically speaking, and of course challenges remain, but it certainly seems that companies and consumers alike are carrying on with business as usual now the referendum is disappearing into the rear view mirror. There’s still a long way to go until Britain leaves the EU, and in the meantime businesses still need to make money, so they can’t just sit on their hands.

The sharp improvement in sentiment does cast some doubt over whether the Bank of England needed to cut interest rates at the beginning of August, though this is a bit of a chicken and egg situation, and no doubt the central bank would claim its stimulus package is partly responsible for the rebound in confidence. However the gathering pile of robust economic data might start to dissuade policymakers from any further monetary easing.

The August manufacturing data also suggests inflationary pressure is starting to build in the system, as a weaker pound feeds through into higher prices. That’s going to put cash savers in the unenviable position of getting no return on their cash, while watching the cost of goods rise.’


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